Do you have a side business? Maybe an online business using Facebook marketplace or some other platform? Are you wondering if it's time to level up your online business by forming a company?
The pandemic has destroyed a lot of jobs, but it's also created a lot of entrepreneurs and opportunities. Many of us have decided to take action by having a side business to augment or even replace our salaries. But when it starts to work, how do you know that it's time to level up?
Our question today comes from Chesca. And she asks
"Attorney, my online reselling business is starting to do well. My friends tell me that the best thing to do now is to turn my business into a company for legal protection. How do I know it's the right time to form a company? Is the company the best way to do business?
If you're in the same position as Chesca, stick around because we have some tips for you.
This episode is brought to you by The Business Structure, a workshop that teaches entrepreneurs and business owners the different types of business vehicles available. It provides the pros and cons of each vehicle so that they can choose the best one for their business model. Reach your success with the right business vehicle. Go to info.legalguide.ph/business to learn more.
Let’s talk about putting up a company
Welcome to Legal Guide Philippines, where we simplify the law to help you make better choices. I'm Atty. Ramon Ramirez and I are with my partner Atty. Erwin Zagala. So today we're talking about leveling up your side business. A lot of us think that the next logical step is to register a company or register something with the government, but how do I know it's the right time to form a company?
What are the things to consider before doing this? So let's start with what the law says about this. Atty. Ramon, When does the law require us to formally set up a company? Right. Well, the short answer is, it doesn't. The law doesn't say, okay, at this point, you should start your company. No, there's no threshold. When it is time to take your business to the next level or form a company or whatever is what we call a "business decision". So that decision has to be made by the entrepreneur or the businessman.
As opposed to a "legal decision"? Yes. So now why is this? Well, this is because the law was designed to give as much leeway as possible to the entrepreneur. So leeway to determine how to structure their business. But even if it doesn't say explicitly, there are some factors that you can look into, to help you make that decision. Now, there are four factors at Atty. Erwin, that we've identified. There could be more, but these are the ones that we want to focus on.
The WHO of the company
The first factor is to think about is "the who". Who are the people involved in your team, producing and delivering the product or service that you sell? Who is in the business basically, are you in the business by yourself, or do you have partners? Now, if you have partners, what kind of partners do you have?
Do they contribute money that could be a partner? Or do they contribute work and expertise or both money and work and expertise? And this happens a lot. You see this a lot. Are they in the business just because they're part of the family or part of your group of friends? And in case there's no contribution, that's not an ideal partner. And, you know, Atty. Ramon, I have a great answer for those kinds of partners. What is that? "Who U?"
To the one with no contribution. I used to be like that in high school or college. I used to be part of the group and I just bought them snacks or something. So when you're putting up a business, our advice is to be very particular about who you let in your group. Yeah. Now, if you have partners, and I mean "real partners", this is a pretty good indication that you may want to take your business to the next level and explore the most appropriate business vehicle or structure for you.
Okay. But if you're doing the business by yourself, then you may have a lot more thinking to do. Okay, so that's the first WHO. Another "who" to consider is employees. Do you have employees or do you do it by yourself? Running a business guys is hard enough as it is.
As an entrepreneur, I'm sure you guys can relate. You have to wear many hats. You have to wear a marketing hat. You have to wear the production hat and the operations hat. Now, if you register a company or whatever entity, you will have the added responsibility of giving regular reports to the government.
So it would really help you out if you already have a strategically positioned employee or employees to help you with the responsibilities of marketing, production, and operations. Now, the last who to consider is outside services. If you don't have enough employees yet, you may have to use outside services. Or what we call outsourcing.
So ask yourself, do you have access to quality outside services that can help you run the business? Now, guys, I mentioned the word quality, not just outside services, but quality outside services. Now, these will normally be who? Maybe your accountant, your bookkeepers, legal team, or various kinds of consultants. Okay, so that is the first factor.
The WHAT of the company
The second factor is "The WHAT". What are your transactions and what is the level of risk in your transactions? Now, all businesses involve some level of risk. And as the saying goes, the more risks, the more rewards. And the less risk, the fewer rewards. That's why bank interest is so low because they're very safe. That's true. But if the risk in your transactions is low, then maybe it might not make sense to form a company yet.
On the other hand, if the risks are at a level where maybe you could use your car or your home, or even possibly your life savings. Then maybe it's time to start planning and explore forming a company. And this is because a company or a Corporation, as we call it in the Philippines, will be able to give you more protection to the entrepreneur. So when the level of legal exposure is rising, that's a good time to start thinking about the company Atty. Ramon? Yes. Now, as a side note, the level of transactions, or, let's say, the monetary value of your transactions, or like the revenues and expenses.
These can also determine the taxes that need to be paid by the business. So depending on your situation, starting a company may or may not be a good idea. To help you evaluate the tax angle, you may want to consult with your trustee accountant, or maybe even a tax lawyer. Okay, so that is factor number two. Now we go to the third factor.
The WHY of the company
What is the third factor Atty? Erwin? That is "the WHY". Why are you doing the business that you're in? Are you doing it only as a sideline or a side hustle? Or are you in this for the long haul? Is it temporary or permanent? Are you looking to replace your employment income or make it your main source of income?
So we need to determine these things. It's important to answer this question, because obviously, if it's just mere side hustle, then maybe the hassle of setting up a company or an entity and maintaining it, is not worth it. It's no joke, guys, to maintain a company.
It's even less of a joke to be on the government's radar because now you'll be required to submit regular reports. And you might, at some point, it might even be audited. It's not a joke. But if your intention is long-term and you want to grow your business and have it eventually replace your job income, then it's probably a good indication that we need to take it to the next level and maybe start a new company or an entity. Right?
Now, the last factor is "the how". How am I going to get there? How am I going to level up? Or even more specifically, which vehicle can I use to level up my business? Again, this is a business decision, how will you take advantage of it? Just to give you a quick overview, there are several basic vehicles that a business can use.
There's a sole proprietorship, the partnership, and the corporation or loosely called the company. In a nutshell, sole proprietorship just to give you an idea it's basically you're by yourself. You're by yourself, you're doing the business, you own the business, you own the assets of the business.
And the personality of the business and you, it's the same. In a partnership, it gets a little more, now you have team members, you have a partner from the word at least two people, two or more people forming a partnership, putting together their resources, like their money and their expertise together, and they do business together. It's pretty much like our partnership Atty. Erwin. In our law practice, Legal Access Law Offices.
Well, we have a partnership. Okay. And then lastly, there's what you call a Corporation. I think this is the most known. This is the most popular kind of business vehicle. The corporation used to be formed by a minimum of five people. Now, with the new law, you can form a corporation by yourself as well.
It's what you call a one-person OPC Corporation. Okay. Now, each of these vehicles will have its own pros and cons. It's important to have a good understanding of the characteristics of these vehicles to see which is the most appropriate for you. Now, if you would like to know more about these vehicles, where can they go Atty Erwin? They can go to info.legalguide.ph/business.
Recap
So Atty. Ramon, let's do a recap. We covered a lot of things. First off is the WHO? Who are the people around you? Who is included in the business? You have to be able to determine that and choose carefully.
Next is the WHAT. What is the level of your risk and your transactions? Very important for you to be aware of the level of legal exposure because that will determine the perfect business structure for you. Right.
The third is, Why are you doing this? What's your purpose? Is this just a side hustle or a long term? If it's for the long term, you might want to put in very deep foundations to sustain the growth of your business. And finally, we talked about the HOW. How are you going to get there? What kind of business structure will you be utilizing for your purposes?
Additional Resources
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One last thing, guys, we do our best to encourage entrepreneurs and support them. And why is this? Well, you may not realize it, but by putting up a healthy and well-structured business, you're not only helping yourself, there's actually a ripple effect going on. You're helping your customers with your goods and services, and you're creating employment opportunities for future employees. Now, by making your corner of the world a better place, you contribute to a stronger world.
So wasn't that simple? Now go make better choices!
