Changing a Corporation to a Sole Proprietorship in the Philippines: A Complete Legal Guide

Converting a Philippine stock corporation into a sole proprietorship (SP) is not a “name change” or a simple amendment. In Philippine law, a corporation and a sole proprietorship are distinct legal forms. There is no direct statutory conversion from a corporation to an SP. What actually happens in practice is a legal exit and restart:

Wind up and dissolve the corporation, and
Register a new sole proprietorship (owned by an individual, using that person’s TIN).

This article explains the why, what, and how—covering corporate law, contract and labor issues, tax, permits, and practical sequencing—so you can plan a clean, compliant transition.

1) Corporation vs. Sole Proprietorship — Key Legal Differences

Juridical personality
- Corporation: Separate juridical person created by law; can own property, sue/be sued, survive changes in ownership.
- Sole proprietorship: No separate juridical personality; the business is inseparable from the owner (a natural person).
Liability
- Corporation: Shareholders generally enjoy limited liability (subject to piercing doctrines).
- Sole proprietorship: Unlimited personal liability of the owner.
Ownership/continuity
- Corporation: Ownership is by shares; the entity continues despite shareholder changes.
- SP: Ownership is personal; the business begins and ends with the proprietor.
Regulators & registrations
- Corporation: Registered with SEC, then BIR/LGUs and others.
- SP: Business name with DTI, then BIR/LGUs and others; uses the individual owner’s TIN.

2) Can You “Convert”? The Short Answer

No direct conversion. Philippine law provides paths to reclassify corporate forms (e.g., ordinary stock corporation ⇄ One Person Corporation), but not to convert a corporation into an SP.
The workable path is:
- (A) Corporate dissolution and liquidation, and
- (B) Fresh SP registration, optionally accompanied by asset/business transfer from the corporation to the proprietor (before or during liquidation), subject to taxes, consents, and permits.

Alternative to consider: If your goal is “single owner with limited liability,” evaluate switching to a One Person Corporation (OPC) instead of dissolving. An OPC keeps corporate personality and often avoids large-scale retitling and contract novations.

3) Roadmap Overview (Sequence & Dependencies)

Phase 0 — Strategy & Diligence (2–6 weeks typical)

Map assets, contracts, debts, licenses, employees, tax exposures.
Decide which assets and contracts will move to the SP (and how).
Identify consents (landlords, lenders, key customers/suppliers), lien releases, and regulatory approvals.
Choose timing (e.g., end of a tax quarter) to reduce compliance friction.

Phase 1 — Corporation Exit

Board & shareholders’ approvals (voluntary dissolution and liquidation plan).
Creditors’ treatment (settlement or assumption/novation; publish notices where required).
Liquidation (collect receivables, settle liabilities, dispose/assign assets).
Regulatory offboarding in sequence:
- SEC dissolution approval (after publication/notice periods, if applicable).
- BIR audit/clearance for closure; cancel ATP/e-invoicing enrollment if any; close books.
- LGU: retire business permit; settle local taxes; secure closure certificate.
- SSS, PhilHealth, Pag-IBIG: update employer closure; complete remittances.
- Other sectoral regulators (FDA, DICT, LTFRB, DOE, BSP, etc.), if applicable.

Phase 2 — SP Launch

DTI business name registration (must differ from existing protected corporate names/marks).
BIR registration (Form 1901) under the individual TIN; choose tax regime (graduated vs. 8%/percentage tax, VAT if applicable); register books; invoices/receipts.
LGU permits (barangay, mayor’s, occupancy/fire safety); zoning/clearances.
SSS/PhilHealth/Pag-IBIG employer registration (as sole proprietor) if hiring.
Operational continuity: open bank accounts; merchant accounts; update e-invoicing or OR systems; data privacy filings/registrations if needed.

4) Corporate Dissolution & Liquidation — Legal Mechanics

Voluntary dissolution (with or without creditors):
- With creditors: requires notice to creditors, publication, and opportunity to object; the SEC will scrutinize the liquidation plan.
- Without creditors: simpler route, but you must still attest to that status and comply with SEC procedures.
Liquidators: By default, the board of directors becomes trustees for creditors and shareholders during winding-up, unless the shareholders appoint specific liquidators.
Liquidation tasks:
- Settle liabilities (taxes, loans, payables); terminate/settle employment (see Labor section).
- Dispose or assign assets: sale to third parties or assignment to the owner who will operate the SP (subject to taxes and consents).
- Distribute residual assets to shareholders (as liquidating dividends) after all obligations are settled.
SEC endgame: File liquidation reports, proofs of publication, tax clearance(s), and other required forms; upon approval, SEC issues a Certificate of Dissolution.

5) Transferring the Business to the Sole Proprietorship

There are three common paths (often used in combination):

Asset sale/assignment from corporation to the individual proprietor
- What moves: equipment, inventory, IP, domain names, customer lists, contracts (with consent), permits (where transferrable), and possibly goodwill.
- Consents: Most contracts require assignor/assignee + counterparty consent (formal novation). Leases and bank facilities nearly always require landlord/lender approvals.
- Taxes: Potential VAT on sale of ordinary assets and income tax on gains at the corporate level; documentary stamp taxes (DST) on certain instruments; real property may trigger 6% capital gains tax if capital asset (or regular income tax & VAT if ordinary asset). Motor vehicles require LTO transfer fees; real property requires local transfer taxes and BIR/Registry of Deeds processes.
Share transfer + subsequent liquidation
- Less useful for ending with an SP because even if one person acquires all shares, the result is still a corporation (or you may convert to OPC, but not to SP). To become an SP you will still liquidate or keep the corporation dormant (not recommended without ongoing compliance).
Business-as-going-concern transfer
- A structured sale of “all or substantially all” assets, employees, and operations. Analyze VAT and withholding implications carefully; ensure employee continuity mechanics are lawful (see below).

Practical tip: Draft a Master Plan of Transfer: list each asset/contract, assign a transfer method (assignment, bill of sale, deed of sale, deed of assignment of IP, domain transfer, data-sharing addendum, etc.), identify taxes/fees, and track counterparties’ signatures.

6) Contracts, Debts, Leases, and Licenses

Debts & security interests: You cannot “push” liabilities to the SP without creditor consent. Use assumption of obligations + creditor novation or settle the debts in liquidation. Obtain release and cancellation of liens (e.g., chattel mortgages).
Leases: Landlords typically require consent and may re-underwrite the sole proprietor.
Customer/supplier contracts: Many contain anti-assignment clauses; prepare novation agreements and updated vendor/customer onboarding for the SP.
Permits/licenses: Some are non-transferable—you must apply anew in the SP’s name. Time your dissolution so permits don’t lapse before the SP is ready.
Intellectual property: Execute assignments for trademarks, copyrights, patents, software, and domain names; record with IPOPHL where appropriate.

7) Employees & Labor Compliance

Closure or transfer triggers Labor Code obligations:
- If the corporation closes or undertakes retrenchment, comply with notice periods to employees and DOLE, pay separation pay where required, settle 13th month, final pay, unused leave (per policy), and issue certificates of employment.
- If employees are re-hired by the SP, document the termination with the corporation and new employment contracts with the SP. Prior tenure does not automatically carry over unless expressly recognized. Avoid sham closures—ensure the legal basis aligns with actual operations.
Statutory remittances: Ensure SSS, PhilHealth, and Pag-IBIG contributions are fully remitted up to the last payroll cycle of the corporation and then re-register the SP as a new employer.

8) Tax Playbook (High-Level)

Always obtain professional tax advice tailored to your fact pattern; the following are common lanes, not a substitute for a formal ruling.

At the corporate level (on the way out):

Income tax on gains from asset sales; Minimum Corporate Income Tax considerations (if applicable to your period).
VAT (12%) on sales of ordinary assets in the ordinary course (unless exempt). Disposal of capital assets by a VAT-registered entity can still have VAT implications—classify assets correctly.
Real property:
- If classified as capital asset: usually 6% Capital Gains Tax on gross selling price or fair market value (whichever is higher).
- If ordinary asset: subject to income tax on net gain and VAT (if applicable).
Shares of stock (if used in any internal rearrangement):
- Unlisted domestic shares: capital gains tax on net gain (common rate is 15%).
- Listed shares: subject to stock transaction tax on gross (not typical in a conversion context).
DST on deeds of sale/assignment; local transfer taxes for real property.

At the sole proprietor level (starting up):

BIR registration (Form 1901) under the individual TIN; register books and invoicing.
Tax regime:
- Graduated income tax rates with percentage tax (if non-VAT and above threshold for exemption), or
- 8% income tax on gross in lieu of percentage tax and graduated rates (subject to eligibility and thresholds), or
- VAT registration (mandatory if over threshold; optional if strategically beneficial).
Withholding & compliance: Register as withholding agent if hiring or paying certain suppliers; enroll in eFPS/eBIR/eInvoice systems as required.

Clearances you’ll likely need for corporate closure:

BIR tax clearance for business closure (cancellation of registration, ATP, e-invoicing enrollment).
LGU tax clearance (settlement of business taxes and fees).
SEC acceptance of dissolution (often requires tax and publication proofs).

9) Government Touchpoints & Paperwork (Checklist)

Corporate Exit

Board & shareholders’ resolutions (dissolution; appointment of liquidator; approval of asset transfers).
Notices to creditors; publication (if required).
Deeds: asset sale bills of sale; real property deeds; IP assignments; assumption/novation agreements.
BIR:
- Inventory of unused invoices/receipts; cancel ATP; final returns; request audit/clearance.
- Capital gains/VAT/income tax filings for transfers, plus DST.
LGU: retirement of business permit; closure inspection(s).
SEC: dissolution forms, affidavits, and liquidation reports.
SSS/PhilHealth/Pag-IBIG: employer account closure.

SP Launch

DTI business name certificate.
BIR: Form 1901; books; official receipts/sales invoices; registration fee and certification.
LGU: barangay clearance; mayor’s permit; fire safety; sanitation; signages.
SSS/PhilHealth/Pag-IBIG: new employer enrollment.
Data privacy: assess need for registration/notification and data sharing agreements if personal data flows from the corporation to the SP.

10) Timing & Sequencing (to Preserve Continuity)

Run in parallel tracks: While processing corporate dissolution (which takes time), prepare SP registrations so they activate near the handover date.
Cutover weekend: Choose a low-traffic period to flip invoicing, bank accounts, and POS systems.
Communications: Inform customers, suppliers, and banks of the change-in-entity (with new TIN, pay-to details, and OR/Invoice series) to avoid receivables going to the defunct corporation.

11) Banking, Finance & Security Interests

Open new SP bank accounts; update merchant acquirers and payment gateways.
If existing loans are to be continued, obtain lender consent for assumption/novation or refinance into the proprietor’s name.
Release or re-register liens (e.g., chattel mortgages) to reflect the new ownership.

12) Compliance Pitfalls to Avoid

Operating the SP using the corporation’s old invoices (void ORs/SIs lead to disallowances and penalties).
Skipping novations (counterparties can refuse performance if you assign without consent).
Leaving “dormant” corporations without compliance (penalties escalate; SEC revival rules are strict).
Using the same “company name”: A DTI business name cannot be identical to an existing corporate name that could cause confusion; plan a compliant branding update (and transfer trademarks properly).
Labor shortcuts: Silent transfers of employees without proper termination/re-hire paperwork and DOLE notifications risk claims.

13) Templates & Clauses (Outline Starters)

Board Resolution (Voluntary Dissolution; Appointment of Liquidator; Approval of Asset Sale/Assignment).
Notice to Creditors and Affidavit of Publication.
Deed of Absolute Sale / Deed of Assignment (movables, intangibles, IP).
Assumption and Novation Agreement (with creditor/landlord/customer).
Employment Separation Agreement and New Employment Contract (for SP).
Data Sharing Agreement (for customer lists and HR data migration).
LGU retirement forms, BIR closure letters, and BIR Form 1901 for SP.

(Use counsel-reviewed versions; tailor for industry and regulator.)

14) Frequently Asked Questions

Q: Can I keep the same TIN?

The corporation’s TIN is retired with the entity. The SP uses the individual owner’s TIN. They are different.

Q: Can I keep my contracts unchanged?

Not automatically. Most require consent/novation to substitute the SP for the corporation.

Q: Must I pay separation pay if I rehire everyone in the SP?

It depends on the basis for corporate closure and your documented process. Even if rehiring, you typically terminate corporate employment properly; separation pay obligations arise based on Labor Code grounds invoked and company policy/CBAs.

Q: Is there a tax-efficient way to transfer?

Sometimes. Options include transferring only necessary assets, careful classification of assets (ordinary vs. capital), and timing disposals. Consider rulings where appropriate.

Q: What if I just want “one owner but still limited liability”?

Evaluate OPC conversion rather than dissolving to SP.

15) Action Plan (One-Page)

Feasibility & mapping: asset/contract/debt/employee/tax inventory.
Choose path: OPC (if limited liability desired) or dissolve → SP.
Secure consents: landlords, lenders, key counterparties.
Draft documents: board/shareholder approvals; transfer instruments; labor packets.
File: SEC dissolution track; BIR closure; LGU retirement; SSS/PhilHealth/Pag-IBIG closure.
Register SP: DTI → BIR (1901) → LGU → SSS/PhilHealth/Pag-IBIG.
Cutover: invoices, bank/merchant, e-invoicing, communications.
Post-cutover: finalize liquidation reports; secure SEC Certificate of Dissolution; archive records.

Final Notes

Treat this as a project with a written timeline, responsibility matrix, and a transfer ledger.
Engage Philippine counsel and a tax adviser early—especially for asset classification, VAT exposure, and labor structuring.
Keep meticulous records; corporate books and tax documents must be retained for statutory periods even after dissolution.

With the right preparation and sequencing, transitioning from a corporation to a sole proprietorship in the Philippines can be executed cleanly—preserving customers and operations while keeping regulators, counterparties, and employees properly aligned.