Imagine you’ve recently started selling shirts with elaborate designs.
One day you’re making a couple of hundred pesos hand-dyeing shirts then by some stroke of luck, (hard work, and perseverance) you find yourself with more customers you can deal with.
Keeping up with everything gets difficult and you notice you’re losing opportunities and potential customers. Personally handling customers while trying to keep all your papers in check becomes a task greater than one person can do. Not to mention how it’s starting to strain your personal time.
Does this strike a chord with you?
When you start a small business, your default business structure would naturally be a sole proprietorship. Sole proprietorship’s mean you have complete control over your business, and that your personal and business income aren’t seen as separate. This means that, yes, it’s easier to file the meager paperwork. But it also comes with its own set of limitations.
One of the most concerning setbacks of sole proprietorships is that you are held personally liable for your business deals. If the problematic customer in our story decided to sue you, or if your business suffered an outstanding loss, you (and your personal estates) are held personally responsible. Options for expansion is also limited, as investors generally favor more formal business structures. A sole proprietorship also means it’s mostly just you running the show, which calls into question how effectively you can manage your time without losing potential profit.
Your business structure has to evolve as your business grows. In our little thought experiment, we see how an outdated business structure can hinder not just the growth of your business, but also your personal well-being. All you want to do is to make cool shirts, a little cash, and maybe someone’s day! But trying to keep things together by micromanaging can leave you feeling winded and unhappy with what’s supposed to be your passion.
So what are your other options?
Sole proprietorship
The Good
• Limited paperwork and minimal to no requirements needed to be met
• Full control of all business operations
The Bad
• Owner is personally liable for all risks and liabilities the business takes; there is no separation
• Comparatively limited avenues for growing the business
• Credibility and trust in the business’s brand takes longer to build
Partnership
The Good
• Less liability compared to sole proprietorship; the partners share the liability
The Bad
• More liability compared to a corporation; one partner is still held personally liable
• A partnership’s income is split equally between the partners unless arrangements have been made beforehand. This may be a source of strife for those who think their partners aren’t shouldering as much work as the other.
• Transfer of ownership is restricted
Corporation
The Good
• Protection of assets; owners are not held personally liable for the business’s risks and liabilities
• Indefinite existence; the business can easily be run by different owners after the founders have passed
• Management of business operation can be shared, not just shouldered by one person
• Corporations are seen as more legitimate, making it easier to look for expansion opportunities for the business (i.e. looking for investors, building credibility, etc.)
• Better tax management
The Bad
• Setting up a corporation can cost more at the beginning when compared to a sole proprietorship
• Heavier paperwork to be filed and requirements to meet when compared to a sole proprietorship
A partnership is a step towards splitting the liability between the partners but ultimately doesn’t have the protection of a corporation, all while introducing more red tape than it’s worth. While limited liability corporations (LLCs) don’t exist in the Philippines, registering as a corporation will make you seen as a separate entity from your business, and your only liability depends on your share capital.
Things to Consider Before Making the Jump
Company Size
One of the most important things to remember about business development is making sure you grow your business at the right pace. Look for signs it’s time to change your business structure, but don’t force it if your business isn’t ready yet. Instead, take note of what entrepreneurs fail to plan for and make a solid game plan.
Requirements
It never hurts to know more about what you’re getting into. Whether you’re eager to make that jump or you just want to see your options. From registering as a corporation to assigning shares, the internet is here and willing to inform you of everything you need to know about changing your business structure.
Delegation
Now, if the climb from a small business to a corporation sounds daunting to you, never fear! The age-old solution to business management is this: to delegate tasks that hinder your productivity to someone else.
If you’re handling marketing, finance, and operations mostly on your own, you’ll eventually come to a simple truth: that you can’t do everything alone. Each of these takes skills that most people get a degree for, so you can bet that learning to do all of these things at once will not only take time and drain you, but you’ll eventually come back to the important question of “why am I doing this?”
Leave the paperwork to someone else and focus on doing what you love. With services like Full Suite, you can have someone else bother with the business permits, accounting, and intellectual property. All with people who are ready to skip the jargon and explain your situation to you clearly, and whose transparency is guaranteed. So why not try it out and get back to what you love!