Difference between a Sole Proprietorship and a Corporation

What is the difference between a sole proprietorship and a corporation? When starting a business, it is a common dilemma for aspiring businesspeople and entrepreneurs to choose what type or form of a business they will start. Although a company or business organization can also be formed as a partnership, cooperative and other forms of businesses, single proprietorships and corporations are among the most common types of a business. To give you an idea of how the two differ from each other, the following is a list of the differences of a sole proprietorship and a corporation:

1. A sole proprietorship is owned by one natural person called proprietor or proprietress, while a corporation is owned by several persons (can be natural or juridical persons) called shareholders or stockholders. Take note that juridical persons are entities that are created by law and recognized as a legal entity – for example, the corporation, itself, is a juridical person or entity which can also be a shareholder of another corporation.

2. The proprietor and his or her proprietorship business are one and the same entity, while the corporation and its owners are separate and distinct legal entities. In the Philippines, the proprietor and his or her proprietorship business share one and the same TIN (Taxpayer’s identification Number), whereas the corporation has a separate and unique TIN from its shareholders. In other words, a proprietorship and its owner are considered the same taxpayer, while a corporation and its owners are considered separate taxpayers.

3. In the Philippines, the income tax rate of a sole proprietorship is based on a graduated tax rate, whereas a corporation is generally taxed using a fixed rate.

4. A sole proprietorship is easier and less costly to establish as a legal business than a corporation in terms of documentation and registration. In the Philippines, a corporation is required to be registered with the SEC (Securities and Exchange Commission), while a sole proprietorship business is not required to register with the commission.

5. A sole proprietorship is also easier to comply with the reportorial and other regulatory requirements compare with a corporation. Corporations are governed and regulated by the SEC and required to comply with their reportorial and other regulatory requirements, such as good corporate governance and corporate social responsibility. Corporations in the Philippines are governed by the Corporation Code of the Philippines.

6. The death of the proprietor or the owner of the proprietorship will terminate the business, while the death of a shareholder will not necessarily terminate the corporation. The shares of ownership or stock of a corporation can be assigned or transferred from one owner to another. A corporation can continue to exist until the shareholders decide to dissolve it or merge it with another corporation.

7. The proprietor is indebted up to his or her personal assets, whereas the owners or shareholders of a corporation can enjoy limited liability, that is, they are only indebted to the extent of their interest in the corporation. In other words, the creditors of a proprietorship can run after the personal assets of the proprietor, while the creditors of a corporation can only run after the corporate assets and not on the personal assets of the shareholders.

8. A corporation may attract more investors than a proprietorship since the former is more regulated, has a continuing or perpetual existence, its shares of ownership is transferable, and it has a limited liability feature.

To learn more, you may read our post about the advantages and disadvantages of forming a corporation.