Pros and cons

After a long delay, the Senate has finally approved on third and final reading the Revised Corporation Code of the Philippines, amending the 38-year-old Batas Pambansa Bilang 68.

Notable among the amendments to the present law is the provision on the number of incorporators. While the old law allowed not less than five but not more the 15 incorporators to organize a corporation, Senate Bill 1280 allows even one person to create a corporation. A corporation with a single stockholder is called a One Person Corporation.

According to the bill’s authors, the amendment aims to address problems in filling up the current requirement of at least five stockholders for a corporation. The current practice, they said, is for certain investors to name even their household members and hired help as incorporators just to comply with the present rule

The proposed measure, authored and sponsored by Senate Minority Leader Franklin Drilon and co-sponsored by Senate Majority Leader Juan Miguel Zubiri, was approved with 20 affirmative votes and no negative votes and abstentions.

The question being asked now is whether this One Person Corporation is the same as a limited liability company or LLC.

It appears that it is not. An LLC in the United States is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. LLCs are hybrid entities that combine the characteristics of a corporation and a partnership or sole proprietorship.

Unlike a sole proprietorship where the liabilities of the business entity are also the liabilities of the proprietor, in the case of corporations, the liabilities of the latter being a separate juridical entity are not the liabilities of the stockholders who constitute it. Since corporations have limited liability, the assets of the stockholders cannot be seized to repay the debts attributed to the corporation.

In the case of a partnerships, only limited partners have limited liability while general partners have unlimited liability.

Another difference between our proposed One Person Corporation and the LLCs in the US is in the manner of taxation. In the US, sole proprietorships, partnerships, LLCs, and S corporations (as opposed to traditional C corporations which are taxed at the corporate level and which can have more than 100 shareholders), are pass through entities for federal income tax purposes, meaning these entities are not subject to income tax. Instead, the owners are directly taxed individually on the income that they receive. The LLCs profit or loss will be reported on an individual member’s Schedule C as if it were a sole proprietorship.

A single-member LLC, like a traditional LLC, can also choose to be taxed as a corporation or as a separate business entity. But by default, the US Internal Revenue Service classifies an LLC as either a sole proprietorship if it has only one member, or a partnership, if it has more than one.

But it is still considered a legal entity separate and distinct from its owner and therefore, the liabilities of the LLC are separate from those of the owner. At least, in this respect, they are the same as our One-Person Corporation.

I remember my professor at the University of Southern California giving this example to illustrate the advantages of a single-member LLC, which I believe also applies in the case of the proposed One-Person Corporation.

Say you are a doctor practicing your profession, and very successful financially. You own several income-generating properties, including a building. One day, a guest enters this building and slips, sustaining head injuries. The guest files a personal injury case.

If the doctor created a single-member LLC listing the building as its asset and the guest files the case against the LLC, if the LLC does not have sufficient assets to satisfy the court-awarded damages, the guest cannot go after the other assets of the doctor.

If the Senate version of the bill is passed into law (I heard that the House of Representatives has its own version of the bill), individuals with multiple assets can also create several One Person Corporations and distribute his assets among these corporations. That way, the creditors of the corporation will only be limited to the assets of the concerned corporation and cannot go after the assets of the other corporations, even though they have the same single owner.

According to Drilon, the amendment allowing corporations with single stockholders will provide an environment conducive not just for big business, but will make the corporate vehicle an appealing prospect for start-ups and entrepreneurs.

Maybe our legislators can also take a look at the taxation aspect of single member LLCs and find out if this can be made to apply to our One Person Corporation.

Not so hidden agenda

Just last week, we wrote about the many contributions of the late Filipino-Chinese businessman Wong Chu King not only to the many recipients of the foundation which his family built in his honor in the Philippines but also in Fujian Province, China. This time, in celebration of the Feast of Our Lady of Piat, the Wong Chu King Foundation, Inc. (WCKFI), a non-government organization known for its constant apostolic mission, together with the Archdiocese of Tuguegarao, completed the refurbishing of the Adoration Chapel at the Basilica Minore of Our Lady of Piat in Piat, Cagayan in commemoration of the 31st  death anniversary of Wong Chu King and WCKFI’s Founder’s Day.The newly refurbished chapel was formally turned recently and the unveiling of the marker was attended by Rev. Father Fredel Agatep, JCD, parish priest of the Basilica Minore of Our Lady of Piat; Most Rev. Sergio L. Utleg, DD, Archbishop of Tuguegarao; and WCKF officers and volunteers.