MAP Insights
By Dean Cesar L. Villanueva
A One Person Corporation (OPC) is not required to have a minimum capital stock, whether in terms of authorized, subscribed, or paid-up, except as otherwise provided by special law.
The impetus of this rule is to encourage micro-, small- and medium-scale business enterprises (MSMEs) to take advantage of the corporate medium to pursue their businesses. In others words, the creation of the OPC is intended to help MSMEs operating under a sole proprietorship setting to be able to take advantage of some of the commercially viable features of the corporate medium (i.e., strong juridical personality and limited liability). An OPC is intended to be an “incorporated sole proprietorship” for the benefit of the small businessmen.
However, as will be discussed here, the removal of the cap on the maximum capitalization and prohibition of having more than one OPC for the same individual, which were originally found in the congressional bills, makes the OPC more attractive to big businessmen, or even to large corporate enterprises on the lookout for special purpose vehicles (SPV).
a. Classification of Shares in an OPC. Since the only limitation for the OPC is to have a single natural-person stockholder, that would mean that there can be several classifications of shares under the AOI (common and preferred shares), all of which are to be issued to the Single Stockholder.
However, there may not be commercial value in having several classes of shares in an OPC setting, other than using the OPC status as an interim state prior to having the shares distributed later on to other investors. What would be the effect of such scheme?
b. Effect of Lack of Maximum Capital for OPCs. Although the underlying rationale for setting-up of the OPC under the Revised Corporation Code (RCC) was to benefit MSMEs so that their sole proprietors can duly incorporate their businesses to take advantage of the attributes of a corporation, the lack of a statutory-mandated maximum capital stock to segregate the use of OPCs for MSMEs only, means that even big businessmen are lawfully authorized to exploit the medium of OPC to pursue their business interests.
In fact, even corporations and partnerships, operating through a trustee-natural person, are authorized under Section 116 to incorporate their business endeavors which are not vested with public interests through the trustee acting as the Single Stockholder.
One can also visualize a situation where large corporations, through the medium of a trust constituted in one of their officers/directors, could use an OPC to hold on to valuable property, or even a business enterprise, to achieve certain commercial purposes.
c. Effect of Not Prohibiting a Single Stockholder from Organizing More Than One OPC. The non-adoption of the prohibition in the Senate bill for a Single Stockholder to organize more than just one OPC, also means that big businessmen can organize as many OPCs as they may want, to incorporate separately as many business or properties they may have, and being able to take advantage of the lower income tax rate covering corporations (currently at 30%) from the higher rate (35%) covering high net income businesses (in excess of P8 million) applicable to sole proprietorships.
d. Effect of Lack of Statutory Grant to the OPC as a “Pass-Through Medium” for Tax Purposes. In foreign jurisdictions on which the system was patterned after, an OPC is statutorily classified as a “pass-through vehicle.” As such, an OPC is taxable as a separate corporate taxpayer and all its incomes cannot be passed-through and considered to be the income of the stockholder who can become personally taxable for such income together with other incomes earned in his personal capacity.
An example of a pass-through medium in our jurisdiction are general professional partnerships which are not taxed separately as corporate taxpayers, and all income is deemed distributed to the partners who must declare the same as part of their personal income subject to income tax.
Therefore, an OPC currently is considered to be a corporate taxpayer and subject to the current income tax rate of 30%. Under our current tax regime, MSMEs whose annual net taxable income does not exceed P8 million would have no commercial motivation to incorporate their businesses into an OPC, since they are subject to the lower individual income tax rates of:
• 0% — at not more than P250,000
• 15% — at not more than P400,000
• 20% — at not more than P800,000
• 25% — at not more than P2 million
• 30% — at not more than P8 million
Only when the net taxable income of an MSME exceeds P8 million, would it be subject to a higher rate of 35% as an individual taxpayer, which is higher than the corporate income tax rate of 30%.
REGISTRATION PROCESSES
FOR OPCS
a. Articles of Incorporation. In addition to the same requirements as those provided for ordinary stock corporations, the articles of incorporation of an OPC must provide for the following:
a.) Corporate Name: The letters “OPC” must be clearly indicated either below or at the end of its corporate name;
b.) OPC Under the Name of the Estate/Trustee: If the stockholder is a trust or an estate, the name, nationality, and residence of the trustee, administrator, executor, guardian, conservator, custodian, or other person exercising fiduciary duties, together with the proof of such authority to act on behalf of the trust or estate; and
c.) Nominee/Alternate Nominee: Names, nationality, residences of the Nominee and Alternate Nominee, and the extent, coverage and limitation of the authority.
Under Section 120, an OPC must use the name “OPC” in describing the corporate name, and it is required to “indicate the letters ‘OPC’ either below or at the end of its corporate name.”
We are not quite sure what legal ends are sought to be achieved by such a requirement; and, more importantly, what would be the legal consequences in the event of failure to comply.
In the Law on Partnerships, where the default rule is “Unlimited Liability to the Partners,” in the case of a Limited Partnership, the partnership name must prominently display the situation that it is a “Limited Partnership,” otherwise partnership creditors shall have a right to run after the separate properties of the limited partners.
Except for the administrative sanctions that the Securities and Exchange Commission (SEC) may impose, there seems to be no other adverse legal consequences when an OPC operates or transacts business not indicating clearly that it is an OPC.
b. Term of Existence. Under the OPC Guidelines, the term of existence of an OPC shall be perpetual. In other words, the SEC does not seem to want to grant an option to the OPC to adopt a definite term of existence under its articles of incorporation.
The Guidelines provide that in case of the trust or estate that has been constituted into the OPC, its term of existence shall be co-terminous with the existence of the trust or estate, under the following terms:
a.) OPC Under the Name of the Estate: May be dissolved upon proof of partition, such as order of partition issued by the courts in case of judicial settlement and Deed of Extrajudicial Settlement in case of summary settlement of the estate.
b.) OPC under the Name of Trustee: May be dissolved upon proof of termination of the trust.
c. Bylaws. One of the advantages of an OPC arrangement over an ordinary corporation is that an OPC is not required to submit and file corporate bylaws.
ORGANIZATION OF THE OPC
In an OPC, the Single Stockholder must be the sole Director (i.e., the agency that exercises business judgment) and the President (i.e., the agency that exercises the management prerogatives) of the OPC.
Like in the case of the sole proprietor, the Single Stockholder embodies the corporate powers and prerogatives in pursuing the business enterprise of the OPC. It is such a feature, together with the fact that the OPC possesses a separate juridical personality, that personifies the OPC arrangement as truly “an incorporated sole proprietorship.”
The Single Stockholder can also designate himself as the Treasurer, but then he must submit a bond to the SEC to faithfully administer the OPC’s funds and to disburse and invest the same according to the articles of incorporation.
The Single Stockholder cannot designate himself as the Corporate Secretary because of the distinct function of such office in the OPC arrangement. In addition to the functions designated by the OPC, the functions of the OPC Corporate Secretary are as follows:
• Be responsible for maintaining the Minutes Book and/or records of the OPC;
• Notify the Nominee or Alternate Nominee, within five days of the occurrence, of the death or incapacity of the Single Stockholder
• Notify the SEC, within five days of such occurrence, of the death or incapacity of the Single Stockholder, stating in such notice the names, residence addresses, and contact details of all known heirs; and
• Call the Nominee or Alternate Nominee and the known legal heirs to a meeting and advise the legal heirs with regard to, among others, the election of a new director, amendment of the articles of incorporation, and other ancillary and/or consequential matters.
The OPC’s articles of incorporation must properly designate a Nominee, as well as an Alternate Nominee, who shall, in the event of Single Stockholder’s death or incapacity, take his place as director and manage the corporation’s affairs.
MANAGEMENT OF THE OPC
The management of the business affairs of an OPC have been made simple under the Revised Corporation Code.
a. Minutes Book. An OPC shall maintain a Minutes Book which shall contain all actions, decisions, and resolutions taken by the OPC.
b. Records in Lieu of Meetings. When action is needed on any matter, it shall be sufficient to prepare a written resolution, signed and dated by the Single Stockholder, and recorded in the Minutes Book. The date of recording in the Minutes Book shall be deemed to be the date of the meeting for all purposes under this Code.
Section 161 makes criminally punishable the “unjustified failure or refusal by the corporation, or by those responsible for keeping and maintaining corporate records, to comply with Sections… 128.”
c. Reportorial Requirement. The OPC shall submit to the SEC within the prescribed period, the following:
(i) Annual Financial Statements audited by an independent CPA; Provided, if the total assets or total liabilities are less than P600,000, the financial statements shall be certified under oath by the Treasurer and the President;
(ii) Report containing explanations or comments by the President on every qualification, reservation, or adverse remark or disclaimer made by the auditor in the latter’s report;
(iii) Disclosure of all self-dealings and related party transactions entered into between the OPC and the Single Stockholder; and
(iv) Other reports as the SEC may require.
For purposes hereof, the fiscal year of an OPC shall be that set forth in the AOI; in the absence thereof, the calendar year.
d. Delinquent Status. The SEC may place the OPC under delinquent status should it fail to submit the reportorial requirements three times, consecutively or intermittently, within a five-year period.
The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP.
Cesar L. Villanueva is Chair of the MAP Corporate Governance Committee, the Founding Partner of the Villanueva Gabionza & Dy Law Offices, and the former Chair of the Governance Commission for GOCCs (GCG).
