Should you become an OPC?

Will a company save tax?

A common line at seller meetups: "Incorporate, it's only 20%." A sole proprietor's rates climb to 30% and 35%, so it sounds right.

Let's test it on one business, in the calculator: ₱1.5 million in sales a year, ₱1.2 million of costs, ₱300,000 of profit. Every seller here earns 20% profit on sales. Income tax is charged on the profit.

As a sole proprietor

The profit is taxed in slices. The first ₱250,000 is tax-free; the next ₱50,000 is taxed at 15%: ₱7,500.

Not registered for VAT (value-added tax), she also pays 3% percentage tax on sales, ₱45,000. Total: ₱52,500. (The 8% option would cost more here, ₱100,000.)

As a company

A company, such as a One Person Corporation (OPC), gets no tax-free slice: 20% of all ₱300,000 is ₱60,000, plus the same 3%. Total: ₱105,000, twice the sole proprietor's.

At this size, the sole proprietor clearly wins.

₱3 million, right at the line

Profit: ₱600,000. Sole proprietor ₱152,500; company ₱210,000.

Past this point both register for VAT. VAT is the same either way, so the calculator leaves it out and compares income tax only.

₱8 million: almost even

Profit: ₱1.6 million. The sole proprietor is now in the 25% bracket: ₱302,500. The company: ₱320,000.

The gap has nearly closed.

₱12 million: the company wins

Profit: ₱2.4 million. Graduated rates reach 30% here: ₱522,500. The company's flat 20%: ₱480,000.

At a 20% margin, the crossover is around ₱1.95 million of profit. Below it, the sole proprietor pays less.

What "up to 35%" really means

You'll read that sole proprietors pay "up to 35%". That's the top rate, and it applies only to the part of profit above ₱8 million. Each rate taxes only its own slice: the first ₱250,000 at 0%, the next slice at 15%, then 20%, 25%, 30%.

The sole proprietor's column shows the slices, each with its rate and tax. At ₱45 million in sales and ₱9 million of profit, only the last ₱1 million is taxed at 35%. The total, ₱2,552,500, is about 28% of profit. The company pays 25% here, because its profit is above ₱5 million.

The catch: taking the money out

A company's profit belongs to the company. When Carla pays it to herself as dividends, another 10% is withheld.

Same ₱12 million, profit paid out: the company's total becomes ₱672,000, now ₱149,500 more than the sole proprietor. A company saves tax only on profit kept in the business, to buy stock or grow.

What the calculator leaves out

Running a company costs more: filings with the Securities and Exchange Commission (SEC), a fuller set of books, often an audit. From its fourth year, a company may also owe a 2% minimum tax on gross income if that's higher than its 20%.

A sole proprietor may instead claim a flat 40% deduction without receipts. Your accountant can run your real numbers.

And remember why most people incorporate: limited liability (Lesson 1.3), not tax.

Pop Quiz: your numbers

Move the sliders: your yearly sales, your profit margin, and whether you'd take the profit out. Watch which side wins, and by how much.

Try a thin margin, like 8%, and a fat one, like 35%. The crossover moves a lot.