Jul 19, 2014

Professional or Sole Proprietor: What's the Difference?

If you're a freelancer registering your business to the Philippine Bureau of Internal Revenue (BIR) for the first time, one question invariably comes up: should I register as a professional or as a sole proprietor?

Even if your profession does not require a license, you can register as a professional. And even a licensed professional can register as a sole proprietor. Hence the confusion.

To find answers, I interviewed a few accountants whose job it is to handle people's taxes and registrations. Here's what I found:

Registration Process

Sole proprietor registration takes patience
To register as sole proprietor, you need to
To secure a municipal permit, you may (depending on your municipality) be required to have
  • a fire extinguisher, 
  • business insurance, 
  • the written permission of your neighbors, 
  • etc. 
The plea that your "office" is just a laptop will fall on deaf ears. Government bureaucracy has little room for flexibility.

And, of course, you need to have a tax identification number (TIN).

To register as a professional, you don't need DTI registration. Municipal requirements, if any, are far less stringent than those for sole proprietors. But of course, you will still need a TIN.

Municipal Permit Fees

Sole proprietor's wallet after municipal permit renewal
Sole proprietors need to renew their barangay and municipal permit annually. Barangay permits cost around P500. Municipal permit is generally computed at 2% of your gross sales based on your issued official receipts. (If you earn P100,000 annually, you'll need to pay P2,000 at permit renewal time.)

On the other hand, professionals only need to pay for professional tax receipt (PTR), usually amounting to P500.

BIR-required Books

The BIR these days has a nagging distrust of professionals. So in addition to the three ledgers/journals that all self-employed individuals need to consistently fill out, professionals also have an appointment book they need to register with the BIR and keep updated.

Sole proprietors are not required to have this appointment book.

Reporting of Employee Wages

Professionals work alone. If you plan to take on employees or get freelance help, you should register as a sole proprietor so you can report their wages as part of your expenses.

Possibility of Income Tax Exemption

http://www.nanaynotebook.com/2013/03/bmbe-certified.html
The lovely law you will never hear about in a BIR seminar
Sole proprietors with assets totaling less than P3 million have the option to apply for income tax exemption under the BMBE law, or RA 9178. (Click on the links to learn more about BMBE in Real Life and BMBE Certification.)

Professionals cannot apply as a BMBE.

If you are approved as a BMBE, you could save much more than the difference between your municipal fee renewal and a professional's PTR fees. Compare:


BMBE 
Sole Prop
Professional
Gross sales
P200,000.00
P200,000.00
Optional standard
deduction
– 80,000.00
– 80,000.00
Net sales
120,000.00
120,000
Personal exemption
– 50,000.00
– 50,000.00
Total taxable income
70,000.00
70,000.00
Income tax due
0.00*
*BMBE income tax rate
8,500.00*
Municipal fees
4,000.000
*2% of gross sales
500.00
*PTR fee
TOTAL ANNUAL FEE
(income tax due + municipal fees)
P4,000.00
P9,000.00

Percentage Taxes, Annual Registration Fees, and Official Receipts

Whether you register as a sole proprietor or a professional, you will be required to 
  • pay monthly percentage taxes, which is 3% of previous month's receipts;
  • pay an annual registration fee of P500, due January 31; and
  • issue official receipts printed by a BIR-accredited printer, not just any ordinary printing house.

Which option did I choose? 

I registered as a sole proprietor under the trade name Escrive Writing and Editing. Sole proprietorship works for me because I was approved as a BMBE. 

But if I weren't a BMBE, I would probably find a professional registration more advantageous, despite the additional book I would have to fill out.


   
The Nanay Notebook is written by Blessie Adlaon, a work-at-home and homeschooling mom of four. Check out our About page to know more about this blog's author and our policies on advertising, press releases, and reposting.

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