Forms of Business Organization

From a legal point of view, there are four types of businesses:

1. Sole proprietorships;
2. Partnerships;
3. Corporations; and
4. Co-operatives.
A brief description of each type is followed by a summary of their advantages and disadvantages. For specific
information on how or where to register or incorporate a business, contact your local Canada Business service
centre.
Sole Proprietorships
This is the simplest way to set up a business. A sole proprietor is fully responsible for all debts and obligations
related to his or her business. A creditor with a claim against a sole proprietor has a right against all of his or her
assets, whether business or personal. This is known as unlimited liability.
This type of business comes under provincial jurisdiction. If the proprietor chooses to carry on a business under
a name other than his/her own, he/she must register with the province. Your business name registration, or
renewal of registration, will be valid for a certain number of years. Call your local Canada Business service
centre to determine when business name registrations need to be renewed in your jurisdiction.
If a sole proprietor establishes a business in his/her own name, without adding any other words, it is not
necessary to register the business.
Partnerships
A partnership is an agreement in which two or more persons combine their resources in a business. In order to
establish the terms of the business and to protect partners/shareholders in the event of disagreement or
dissolution of the business, a partnership/shareholders agreement should be drawn up with the assistance of a
lawyer. Partners share in the profits according to the terms of their agreement.
General Partnership
All members share the management of the business and each is personally liable for all the debts and
obligations of the business. This means that each partner is responsible for and must assume the consequences
of the actions of the other partner(s).
Limited Partnership
Some members are general partners who control and manage the business and may be entitled to a greater share
of the profits, while other partners are limited and contribute only capital. Limited partners take no part in
control or management and are liable for debts to a specified extent only. A legal document, outlining specific
requirements, must be drawn up for a limited partnership.
Corporations
A corporation is a legal entity that is separate from its owners, the shareholders. No shareholder of a corporation
is personally liable for the debts, obligations or acts of the corporation. This type of business can be
incorporated at either the federal or provincial level.
A corporation is identified by the terms "Limited", "Ltd.", "Incorporated", "Inc.", "Corporation", or "Corp.".
Whatever the term, it must appear with the corporate name on all documents, stationery, and so on, as it appears
on the incorporation document.
Private Corporation
A private corporation can be formed by one or more people. A majority of its directors must be Canadian
residents. If none of the directors reside in the province in which it does business, the corporation must appoint
a Power of Attorney who reside in the province. A private corporation cannot sell shares or securities to the
general public.
Public Corporation
A "public corporation" is one that issues securities for public distribution. Besides filing incorporation
documents, a public corporation must file a prospectus with the appropriate Securities Commission in the
province, must employ outside auditors and must distribute semi-annual financial statements.
Federal Corporations
Private and public corporations may be incorporated federally under the Canada Corporations Act. A firm
operating nationally or in several provinces may find this advantageous. A federally incorporated business must
still register in each province in which it does business.
Cooperatives
A co-operative is a corporation organized and controlled by its members, who pool resources to provide
themselves and their patrons with goods, services, or other benefits. A cooperative business structure provides:
democratic control based on one member one vote;
open and voluntary membership;
patronage dividends.
ADVANTAGES AND DISADVANTAGES OF EACH FORM OF BUSINESS
ORGANIZATION
Sole Proprietorship
Advantages
relatively low start-up costs;
greatest freedom from regulation;
owner in direct control of decision making;
minimal working capital required;
tax advantages to owner;
all profits to owner.
Disadvantages
unlimited liability;
lack of continuity in business organization in
absence of owner;
difficulty raising capital.
Partnership
Advantages
ease of formation;
relatively low start-up costs;
Disadvantages
unlimited liability;
lack of continuity;
additional sources of investment capital;
possible tax advantages;
limited regulation;
broader management base.
divided authority;
difficulty raising additional capital;
hard to find suitable partners;
possible development of conflict between partners.
Corporation
Advantages
limited liability;
specialized management;
ownership is transferable;
continuous existence;
separate legal entity;
possible tax advantage;
easier to raise capital.
Disadvantages
closely regulated;
most expensive form to organize;
charter restrictions;
extensive record keeping necessary;
double taxation of dividends;
possible development of conflict between
shareholders and executives.
Co-operatives
Advantages
owned and controlled by members;
democratic control (i.e. one member, one
vote);
limited liability;
profit distribution (surplus earnings) to
members in proportion to use of service;
surplus may be allocated in shares or cash.
Disadvantages
possibility development of conflict between
members;
longer decision-making process;
participation of members required for success;
extensive record keeping necessary;
less incentive to invest additional capital.
Prepared by: Government of Saskatchewan


Types of Business Organization
It is important that the business owner seriously considers the different forms of business organizationtypes
such as sole proprietorship, partnership, and corporation. Which organizational form is most appropriate can be
influenced by tax issues, legal issues, financial concerns, and personal concerns. For the purpose of this
overview, basic information is presented to establish a general impression of business organization.
Sole Proprietorship
A Sole Proprietorship consists of one individual doing business. Sole Proprietorships are the most numerous
form of business organization in the United States, however they account for little in the way of aggregate
business receipts.
Advantages
Ease of formation and dissolution. Establishing a sole proprietorship can be as simple as printing up
business cards or hanging a sign announcing the business. Taking work as a contract carpenter or
freelance photographer, for example, can establish a sole proprietorship. Likewise, a sole proprietorship
is equally easy to dissolve.
Typically, there are low start-up costs and low operational overhead.
Ownership of all profits.
Sole Proprietorships are typically subject to fewer regulations.
No corporate income taxes. Any income realized by a sole proprietorship is declared on the owner's
individual income tax return.

Disadvantages
Unlimited liability. Owners who organize their business as a sole proprietorship are personally
responsible for the obligations of the business, including actions of any employee representing the
business.
Limited life. In most cases, if a business owner dies, the business dies as well.
It may be difficult for an individual to raise capital. It's common for funding to be in the form of
personal savings or personal loans.
The most daunting disadvantage of organizing as a sole proprietorship is the aspect of unlimited liability. An
advantage of a sole proprietorship is filing taxes as an individual rather than paying corporate tax rates. Some
hybrid forms of business organization may be employed to take advantage of limited liability and lower tax
rates for those businesses that meet the requirements. These include S Corporations, and Limited Liability
Companies (LLC's). Where S-Corps are a Federal Entity, LLC's are regulated by the various states. LLC's give
the option for profits from the business to pass through to the owner's individual income tax return.
Partnership
A Partnership consists of two or more individuals in business together. Partnerships may be as small as mom
and pop type operations, or as large as some of the big legal or accounting firms that may have dozens of
partners. There are different types of partnershipsgeneral partnership, limited partnership, and limited liability
partnershipthe basic differences stemming around the degree of personal liability and management control.
Advantages
Synergy. There is clear potential for the enhancement of value resulting from two or more individuals
combining strengths.
Partnerships are relatively easy to form, however, considerable thought should be put into developing a
partnership agreement at the point of formation.
Partnerships may be subject to fewer regulations than corporations.
There is stronger potential of access to greater amounts of capital.
No corporate income taxes. Partnerships declare income by filing a partnership income tax return. Yet
the partnership pays no taxes when this partnership tax return is filed. Rather, the individual partners
declare their pro-rata share of the net income of the partnership on their individual income tax returns
and pay taxes at the individual income tax rate.

Disadvantages
Unlimited liability. General partners are individually responsible for the obligations of the business,
creating personal risk.
Limited life. A partnership may end upon the withdrawal or death of a partner.
There is a real possibility of disputes or conflicts between partners which could lead to dissolving the
partnership. This scenario enforces the need of a partnership agreement.
As pointed out, unlimited liability exists for partnerships just as for sole proprietorships. One way to alleviate
this risk is through Limited Liability Partnerships (LLP's). As with LLC's, LLP's may offer some tax advantages
while providing some risk protection for owners.
Corporation
Corporations are probably the dominant form of business organization in the United States. Although fewer in
number, corporations account for the lion's share of aggregate business receipts in the U.S. economy. A
corporation is a legal entity doing business, and is distinct from the individuals within the entity. Public
corporations are owned by shareholders who elect a board of directors to oversee primary responsibilities.
Along with standard, for-profit corporations, there are charitable, not-for-profit corporations.
Advantages
Unlimited commercial life. The corporation is an entity of its own and does not dissolve when
ownership changes.
Greater flexibility in raising capital through the sale of stock.
Ease of transferring ownership by selling stock.
Limited liability. This limited liability is probably the biggest advantage to organizing as a corporation.
Individual owners in corporations have limits on their personal liability. Even if a corporation is sued for
billions of dollars, individual shareholder's liability is generally limited to the value of their own stock in
the corporation.

Disadvantages
Regulatory restrictions. Corporations are typically more closely monitored by governmental agencies,
including federal, state, and local. Complying with regulations can be costly.
Higher organizational and operational costs. Corporations have to file articles of incorporation with the
appropriate state authorities. These legal and clerical expenses, along with other recurring operational
expenses, can contribute to budgetary challenges.
Double taxation. The possibility of double taxation arises when companies declare and pay taxes on the
net income of the corporation, which they pay through their corporate income tax returns. If the
corporation also pays out dividends to individual shareholders, those shareholders must declare that
dividend income as personal income and pay taxes at the individual income tax rates. Thus, the
possibility of double taxation.


Forms of Business Organization
(provided by the Missouri Small Business and Technology Development Centers)
One of the first decisions that you will have to make as a business owner is how the business should be
structured. All businesses must adopt some legal configuration that defines the rights and liabilities of
participants in the businesss ownership, control, personal liability, life span, and financial structure. This
decision will have long-term implications, so you may want to consult with an accountant and attorney to help
you select the form of ownership that is right for you. In making a choice, you will want to take into account
the following:
Your vision regarding the size and nature of your business.
The level of control you wish to have.
The level of structure you are willing to deal with.
The businesss vulnerability to lawsuits.
Tax implications of the different organizational structures.
Expected profit (or loss) of the business.
Whether or not you need to re-invest earnings into the business.
Your need for access to cash out of the business for yourself.
An overview of the four basic legal forms of organization: Sole Proprietorship; Partnerships; Corporations and
Limited Liability Company follows.
Sole Proprietorship
The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person,
usually the individual who has day-to-day responsibility for running the business. Sole proprietorships own all
the assets of the business and the profits generated by it. They also assume complete responsibility for any of
its liabilities or debts. In the eyes of the law and the public, you are one in the same with the business.
Advantages of a Sole Proprietorship
Easiest and least expensive form of ownership to organize.
Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see
fit.
Profits from the business flow-through directly to the owners personal tax return.
The business is easy to dissolve, if desired.
Disadvantages of a Sole Proprietorship
Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their
business and personal assets are at risk.
May be at a disadvantage in raising funds and are often limited to using funds from personal savings or
consumer loans.
May have a hard time attracting high-caliber employees, or those that are motivated by the opportunity to own
a part of the business.
Some employee benefits such as owners medical insurance premiums are not directly deductible from
business income (only partially as an adjustment to income).
Partnerships
In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does
not distinguish between the business and its owners. The Partners should have a legal agreement that sets forth
how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be
admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the
partnership when needed; Yes, its hard to think about a break-up when the business is just getting started, but
many partnerships split up at crisis times and unless there is a defined process, there will be even greater
problems. They also must decide up front how much time and capital each will contribute, etc.
Advantages of a Partnership
Partnerships are relatively easy to establish; however time should be invested in developing the partnership
agreement.
With more than one owner, the ability to raise funds may be increased.
The profits from the business flow directly through to the partners personal tax return.
Prospective employees may be attracted to the business if given the incentive to become a partner.
The business usually will benefit from partners who have complementary skills.
Disadvantages of a Partnership
Partners are jointly and individually liable for the actions of the other partners.
Profits must be shared with others.
Since decisions are shared, disagreements can occur.
Some employee benefits are not deductible from business income on tax returns.
The partnership may have a limited life; it may end upon the withdrawal or death of a partner.
Types of Partnerships that should be considered:
1. General Partnership
Partners divide responsibility for management and liability, as well as the shares of profit or loss according to
their internal agreement. Equal shares are assumed unless there is a written agreement that states differently.
2. Limited Partnership and Partnership with limited liability
Limited means that most of the partners have limited liability (to the extent of their investment) as well as
limited input regarding management decision, which generally encourages investors for short term projects, or
for investing in capital assets. This form of ownership is not often used for operating retail or service
businesses. Forming a limited partnership is more complex and formal than that of a general partnership.
3. Joint Venture
Acts like a general partnership, but is clearly for a limited period of time or a single project. If the partners in a
joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such,
and distribute accumulated partnership assets upon dissolution of the entity.

Corporations
A Corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity,
separate and apart from those who own it. A Corporation can be taxed; it can be sued; it can enter into
contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of
directors to oversee the major policies and decisions. The corporation has a life of its own and does not
dissolve when ownership changes.
Advantages of a Corporation
Shareholders have limited liability for the corporations debts or judgments against the corporation.
Generally, shareholders can only be held accountable for their investment in stock of the company. (Note
however, that officers can be held personally liable for their actions, such as the failure to withhold and pay
employment taxes.
Corporations can raise additional funds through the sale of stock.
A Corporation may deduct the cost of benefits it provides to officers and employees.
Can elect S Corporation status if certain requirements are met. This election enables company to be taxed
similar to a partnership.
Disadvantages of a Corporation
The process of incorporation requires more time and money than other forms of organization.
Corporations are monitored by federal, state and some local agencies, and as a result may have more
paperwork to comply with regulations.
Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from
business income; thus this income can be taxed twice.
Subchapter S Corporation
A tax election only; this election enables the shareholder to treat the earnings and profits as distributions, and
have them pass through directly to their personal tax return. The catch here is that the shareholder, if working
for the company, and if there is a profit, must pay his/herself wages, and it must meet standards of reasonable
compensation. This can vary by geographical region as well as occupation, but the basic rule is to pay yourself
what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the
IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on
the total amount.
Limited Liability Company (LLC)
The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is
designed to provide limited liability features of a corporation and the tax efficiencies and operational flexibility
of a partnership. Formation is more complex and formal than that of a general partnership.
The owners are members, and the duration of the LLC is usually determined when the organization papers are
filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLCs
must not have more than two of the four characteristics that define corporations: Limited liability to the extent
of assets; continuity of life; centralization of management; and free transferability of ownership interests.
Federal Tax Forms for LLC
Taxed as a partnership in most cases; corporation forms must be used if there are more than 2 of the 4 corporate
characteristics, as described above.
In summary, deciding the form of ownership that best suits your business venture should be given careful
consideration. Use your key advisors to assist you in the process.
Source: Kenner & Speck, LC

1.2 Forms of Business Organization




Large firms in the United States, such as Ford and Microsoft, are almost all organized as corporations. We
examine the three different legal forms of business organizationsole proprietorship, partnership, and
corporationto see why this is so. Each form has distinct advantages and disadvantages for the life of the
business, the ability of the business to raise cash, and taxes. A key observation is that as a firm grows, the
advantages of the corporate form may come to outweigh the disadvantages.
SOLE PROPRIETORSHIP
A sole proprietorship is a business owned by one person. This is the simplest type of business to start and
is the least regulated form of organization. Depending on where you live, you might be able to start a
proprietorship by doing little more than getting a business license and opening your doors. For this reason,
there are more proprietorships than any other type of business, and many businesses that later become
large corporations start out as small proprietorships.
sole proprietorship
The owner of a sole proprietorship keeps all the profits. That's the good news. The bad news is that the
owner has unlimited liability for business debts. This means that creditors can look beyond business assets
to the proprietor's personal assets for payment. Similarly, there is no distinction between personal and
business income, so all business income is taxed as personal income.
The life of a sole proprietorship is limited to the owner's life span, and the amount of equity that can be
raised is limited to the amount of the proprietor's personal wealth. This limitation often means that the
business is unable to exploit new opportunities because of insufficient capital. Ownership of a sole
proprietorship may be difficult to transfer because this transfer requires the sale of the entire business to a
new owner.
PARTNERSHIP
A partnership is similar to a proprietorship except that there are two or more owners (partners). In a
general partnership, all the partners share in gains or losses, and all have unlimited liability for all
partnership debts, not just some particular share. The way partnership gains (and losses) are divided is
described in the partnership agreement. This agreement can be an informal oral agreement, such as let's
start a lawn mowing business, or a lengthy, formal written document.
partnership
In a limited partnership, one or more general partners will run the business and have unlimited liability,
but there will be one or more limited partners who will not actively participate in the business. A limited
partner's liability for business debts is limited to the amount that partner contributes to the partnership.
This form of organization is common in real estate ventures, for example.
The advantages and disadvantages of a partnership are basically the same as those of a proprietorship.
Partnerships based on a relatively informal agreement are easy and inexpensive to form. General partners
have unlimited liability for partnership debts, and the partnership terminates when a general partner
wishes to sell out or dies. All income is taxed as personal income to the partners, and the amount of equity
that can be raised is limited to the partners' combined wealth. Ownership of a general partnership is not
easily transferred because a transfer requires that a new partnership be formed. A limited partner's interest
can be sold without dissolving the partnership, but finding a buyer may be difficult.
Because a partner in a general partnership can be held responsible for all partnership debts, having a
written agreement is very important. Failure to spell out the rights and duties of the partners frequently
leads to misunderstandings later on. Also, if you are a limited partner, you must not become deeply
involved in business decisions unless you are willing to assume the obligations of a general partner. The
reason is that if things go badly, you may be deemed to be a general partner even though you say you are a
limited partner.
Based on our discussion, the primary disadvantages of sole proprietorships and partnerships as forms of
business organization are (1) unlimited liability for business debts on the part of the owners, (2) limited
life of the business, and (3) difficulty of transferring ownership. These three disadvantages add up to a
single, central problem: the ability of such businesses to grow can be seriously limited by an inability to
raise cash for investment.
CORPORATION
The corporation is the most important form (in terms of size) of business organization in the United States.
A corporation is a legal person separate and distinct from its owners, and it has many of the rights,
duties, and privileges of an actual person. Corporations can borrow money and own property, can sue and
be sued, and can enter into contracts. A corporation can even be a general partner or a limited partner in a
partnership, and a corporation can own stock in another corporation.
corporation
Not surprisingly, starting a corporation is somewhat more complicated than starting the other forms of
business organization. Forming a corporation involves preparing articles of incorporation (or a charter)
and a set of bylaws. The articles of incorporation must contain a number of things, including the
corporation's name, its intended life (which can be forever), its business purpose, and the number of shares
that can be issued. This information must normally be supplied to the state in which the firm will be
incorporated. For most legal purposes, the corporation is a resident of that state.
The bylaws are rules describing how the corporation regulates its existence. For example, the bylaws
describe how directors are elected. These bylaws may be a simple statement of a few rules and procedures,
or they may be quite extensive for a large corporation. The bylaws may be amended or extended from
time to time by the stockholders.
In a large corporation, the stockholders and the managers are usually separate groups. The stockholders
elect the board of directors, who then select the managers. Managers are charged with running the
corporation's affairs in the stockholders' interests. In principle, stockholders control the corporation
because they elect the directors.
As a result of the separation of ownership and management, the corporate form has several advantages.
Ownership (represented by shares of stock) can be readily transferred, and the life of the corporation is
therefore not limited. The corporation borrows money in its own name. As a result, the stockholders in a
corporation have limited liability for corporate debts. The most they can lose is what they have invested.
The relative ease of transferring ownership, the limited liability for business debts, and the unlimited life
of the business are why the corporate form is superior for raising cash. If a corporation needs new equity,
for example, it can sell new shares of stock and attract new investors. Apple Computer is an example.
Apple was a pioneer in the personal computer business. As demand for its products exploded, Apple had
to convert to the corporate form of organization to raise the capital needed to fund growth and new
product development. The number of owners can be huge; larger corporations have many thousands or
even millions of stockholders. For example, in 2006, General Electric Corporation (better known as GE)
had about 4 million stockholders and about 10 billion shares outstanding. In such cases, ownership can
change continuously without affecting the continuity of the business.
The corporate form has a significant disadvantage. Because a corporation is a legal person, it must pay
taxes. Moreover, money paid out to stockholders in the form of dividends is taxed again as income to
those stockholders. This is double taxation, meaning that corporate profits are taxed twice: at the corporate
level when they are earned and again at the personal level when they are paid out.
1

Today, all 50 states have enacted laws allowing for the creation of a relatively new form of business
organization, the limited liability company (LLC). The goal of this entity is to operate and be taxed like a
partnership but retain limited liability for owners, so an LLC is essentially a hybrid of partnership and
corporation. Although states have differing definitions for LLCs, the more important scorekeeper is the
Internal Revenue Service (IRS). The IRS will consider an LLC a corporation, thereby subjecting it to
double taxation, unless it meets certain specific criteria. In essence, an LLC cannot be too corporationlike,
or it will be treated as one by the IRS. LLCs have become common. For example, Goldman, Sachs and
Co., one of Wall Street's last remaining partnerships, decided to convert from a private partnership to an
LLC (it later went public, becoming a publicly held corporation). Large accounting firms and law firms
by the score have converted to LLCs.
As the discussion in this section illustrates, the need of large businesses for outside investors and creditors
is such that the corporate form will generally be the best for such firms. We focus on corporations in the
chapters ahead because of the importance of the corporate form in the U.S. economy and world
economies. Also, a few important financial management issues, such as dividend policy, are unique to
corporations. However, businesses of all types and sizes need financial management, so the majority of
the subjects we discuss bear on any form of business.
A CORPORATION BY ANOTHER NAME
The corporate form of organization has many variations around the world. The exact laws and regulations
differ from country to country, of course, but the essential features of public ownership and limited
liability remain. These firms are often called joint stock companies, public limited companies, or limited
liability companies, depending on the specific nature of the firm and the country of origin.


Types of Business Enterprise
There are several types of business enterprises an investor can choose from in establishing operations in
the Philippines.

Organized under Philippine Laws
1. Sole Proprietorship - is a business structure owned by an individual who has full control/authority
of its own and owns all the assets, personally owes answers all liabilities or suffers all losses but
enjoys all the profits to the exclusion of others. A sole proprietorship must apply for a business
name and be registered with the DTI-National Capital Region (NCR). In the provinces, application
may be filed with the DTI regional/provincial offices.

2. Partnership - Under the Civil Code of the Philippines, a partnership is treated as juridical person,
having a separate legal personality from that of its members. Partnerships may either be general
partnerships, where the partners have unlimited liability for the debts and obligation of the
partnership, or limited partnerships, where one or more general partners have unlimited liability
and the limited partners have liability only up to the amount of their capital contributions. It
consists of two or more partners. A partnership with more than P3,000 capital must register with
the Securities and Exchange Commission (SEC).

3. Corporation - is composed of juridical persons established under the Corporation Code and
regulated by the SEC with a personality separate and distinct from that of its stockholders. The
liability of the shareholders of a corporation is limited to the amount of their share capital. It
consists of at least five to 15 incorporators, each of whom must hold at least one share and must be
registered with the SEC. Minimum paid up capital is P5,000. A corporation can either be stock or
non-stock company regardless of nationality. Such company, if 60% Filipino-40% foreign-owned,
is considered a Filipino corporation; If more than 40% foreign-owned, it is considered a domestic
foreign-owned corporation.
Stock Corporation
This is a corporation with capital stock divided into shares and authorized to distribute to the holders of
such shares dividends or allotments of the surplus profits on the basis of the shares held.

Non-stock Corporation
This is a corporation organized principally for public purposes such as charitable, educational, cultural, or
similar purposes and does not issue shares of stock to its members.

Organized under Foreign Laws
1. Branch Office- is a foreign corporation organized and existing under foreign laws that carries out
business activities of the head office and derives income from the host country. It is required to put
up a minimum paid up capital of US$200,000, which can be reduced to US$100,000 if activity
involves advanced technology, or company employs at least 50 direct employees. Registration
with the SEC is mandatory.

2. Representative Office- is a foreign corporation organized and existing under foreign laws. It does
not derive income from the host country and is fully subsidized by its head office. It deals directly
with clients of the parent company as it undertakes such activities as information dissemination,
acts as a communication center, and promotes company products, as well as quality control of
products for export. It is required to have an initial minimum inward remittance in the amount of
US$30,000 to cover its operating expenses and must be registered with the SEC. Under Republic
Act (RA) 8756, any multinational company may establish a Regional Headquarter (RHQ) or
Regional Operating Head Quarter (ROHQ) as long as they are existing under laws other than the
Philippines, with branches, affiliates, and subsidiaries in the Asia Pacific Region and other foreign
markets.

3. Regional Headquarters (RHQs) - An RHQ undertakes activities that shall be limited to acting as
supervisory, communication, and coordinating center for its subsidiaries, affiliates, and branches in
the Asia-Pacific region. It acts as an administrative branch of a multinational company engaged in
international trade. It does not derive income from sources within the Philippines and does not
participate in any manner in the management of any subsidiary or branch office it might have in
the Philippines. Required capital is US$50,000 annually to cover operating expenses.

4. Regional Operating Headquarters (ROHQs) - An ROHQ performs the following qualifying
services to its affiliates, subsidiaries, and branches in the Philippines.
- General administration and planning
- Business planning and coordination
- Sourcing/procurement of raw materials components Corporate finance advisory services
- Marketing control and sales promotion
- Training and personnel management
- Logistic services
- Research and development (R&D) services and product development
- Technical support and communications
- Business development
- Derives income in the Philippines
- Required capital: US$200,000 - one time remittance