15 September 2023
15 September 2023
Registering a business in the Philippines can seem like a daunting task, but it is essential to ensure that the business is legitimate and compliant with local laws and regulations. Before an aspiring business owner can register his business, he needs to decide on the legal structure of the company. The most common types of business structures in the Philippines are sole proprietorship, partnership, and corporation. Each has its advantages and disadvantages, so the businessman must choose a business structure that best suits his needs.
This guide will explain the differences between sole proprietorship, corporation, and partnership, which are the three common business structures, as well as other subtypes such as associations and foundations and a special type of business structure called cooperatives. This guide will also include requirements for establishing a business, such as the documents required for their registration, and which government agency to visit to complete and submit the requirements.
A sole proprietorship is a business structure where the owner is the sole proprietor and has complete control and responsibility for the business. The owner is also personally liable for the debts and obligations of the business. This means that if the business incurs any losses or lawsuits, the owner's personal assets may be at risk.
The requirements to put up a sole proprietorship is the easiest and most affordable way to start a business because it does not require any formal registration or paperwork. To jumpstart the process of establishing one, a permit may be obtained from the Department of Trade and Industry (DTI) called a DTI Permit, with a name for the business that should be original to avoid confusion with respect to the branding of the sole proprietor's business.
DTI Registration of a sole proprietorship is already accomplished once the business name is successfully accepted by the DTI, but this is not the only requirement for a sole proprietorship to be established properly. Other permits should also be obtained as explained in Section 6.
The registration of a Sole Proprietorship is more accessible as it only requires registration before the DTI, contrary to a Corporation and a Partnership which both require SEC registration and DTI registration.
A corporation is a separate legal entity from its owners, known as shareholders. A corporation is owned by shareholders who elect a board of directors to oversee the management of the company. One of the main advantages of a corporation is that the owners are not personally liable for the debts and obligations of the business because of the separate legal personality or existence between the shareholders and the corporation. This means that the personal assets of the shareholders are protected in case of any losses or lawsuits.
A stock corporation is a type of business organization where ownership is represented by stocks or shares of the company's capital stock. This means that shareholders own a portion of the company and have a say in the company's decision-making process through voting rights. Shareholders also have the potential to receive dividends from the company's profits.
The Revised Corporation Code does not require minimum capitalization to validly register a stock corporation. However, if the corporation has minimum capitalization, meaning the incorporators invested money in the corporation in exchange for stocks or shares, there are various laws that may apply and require a certain percentage of the corporation's capital that should be owned by Filipino citizens depending on the specific industry with which the corporation is engaged in, to be legal and valid.
For example, if a corporation is an advertising company, the Foreign Investment Act requires that seventy percent (70%) of the capital thereof must be owned by Filipino Citizens and the remainder of thirty percent (30%) may be owned by foreign citizens. If this law is violated, any violating corporation may be meted with a fine or suspension, or its officers may be punished with imprisonment. The Foreign Investment Negative List may be inspected to determine the Filipino ownership requirement for corporations in a specific industry.
A stock corporation requires an Articles of Incorporation for Stock Corporations and Bylaws to be submitted to the SEC for registration. There are other forms and documents that must be filled out which may be found on the SEC Website such as a cover sheet, name verification slip, and undertaking to change the name of the corporation (to ensure that there is no similar corporate name). Other permits that should also be obtained will be explained in Section 6.
A non-stock corporation is a type of business organization that does not issue stocks or shares of ownership. Instead, it is usually formed for a specific purpose such as for charitable, educational, religious, or cultural activities. Non-stock corporations have members instead of shareholders, and these members may have voting rights to elect the board of trustees or directors.
The following are specific types of non-stock corporations that are organized depending on the purpose or objective of the organization and have specific requirements:
2.2.1.1 Foundations
These organizations are often involved in philanthropic, charitable, or socially beneficial activities. The SEC regulates them to ensure transparency and accountability in their operations which is why they should also be registered before the SEC. This kind of non-stock corporation should have a minimum contribution of One Million (PHP 1,000,000.00) Pesos for it to be validly registered before the SEC.
2.2.1.2 Associations
These organizations that are engaged in activities like charitable, religious, educational, or similar purposes may also need to register with the SEC. This registration helps monitor their compliance with legal requirements and ensures that they are operating in accordance with their stated objectives. Unlike foundations, there is no minimum contribution requirement for associations.
An association is formed by individuals or entities sharing a common interest, often related to professions or shared activities. It is governed by elected members and can generate income from membership fees and activities. On the other hand, a foundation is established for charitable, religious, educational, or similar purposes, with a focus on benefiting specific groups or communities, and it is governed by trustees or directors and is funded through endowments or donations.
A non-stock corporation including foundations and associations requires an Articles of Incorporation for Non-stock Corporations and Bylaws to be submitted to the SEC for registration. There are other forms and documents that must be filled out which may be found on the SEC Website such as a cover sheet, name verification slip, and undertaking to change the name of the corporation (to ensure that there is no similar corporate name). Other permits that should also be obtained will be explained in Section 6.
A One-Person Corporation (OPC) is a type of business structure where a single individual can form and run a corporation on their own. It is a legal entity separate from the owner, which means that the corporation can enter into contracts, own assets, and incur liabilities on its own.
There is also no minimum capitalization requirement for an OPC, however, there are certain restrictions that must be complied with under the Revised Corporation Code:
A One-Person Corporation (OPC) requires an Articles of Incorporation for One-Person Corporations and Bylaws to be submitted to the SEC for registration. There are other forms and documents that must be filled out which may be found on the SEC Website such as a cover sheet, name verification slip, and undertaking to change the name of the corporation (to ensure that there is no similar corporate name). Other permits that should also be obtained will be explained in Section 6.
A corporation whether stock or non-stock requires more paperwork and formalities, such as filing articles of incorporation and holding annual shareholder meetings.
A partnership is a business structure where two or more people called the partners, share ownership of the business. The partners share the profits and losses of the business, as well as the management responsibilities. A partnership can be structured as a general partnership, where all partners share equal responsibility and liability, or a limited partnership, where there are general partners who manage the business and limited partners who are only liable for the amount of their investment.
A general partnership is a type of business structure where two or more individuals or entities agree to jointly own and operate a business for profit. In a general partnership, all partners have unlimited liability for the debts and obligations of the partnership. This means that each partner is personally responsible for the partnership's financial obligations and can be held liable for any losses or damages incurred by the business.
A general partnership requires the contribution of money, property, or a specific service by the partners into a common fund for the purpose of earning profits.
A general partnership requires an Articles of Partnership for General Partnerships and bylaws to be submitted to the SEC for registration. There are other forms and documents that must be filled out which may be found on the SEC Website such as a cover sheet, name verification slip, and undertaking to change the name of the partnership (to ensure that there is no similar partnership name). Other permits that should also be obtained will be explained in Section 6.
A limited partnership is a type of business structure where there are two types of partners: general partners and limited partners. General partners have the same unlimited liability as in a general partnership, while limited partners have limited liability and are only liable for the amount of their investment in the partnership. Limited partners typically do not participate in the management of the business and are only passive investors.
Similar to a general partnership, a limited partnership requires the contribution of money, property, or a specific service by the partners into a common fund for the purpose of earning profits, however, it is required that the limited partners should not have a hand in the management of the operations of the limited partnership.
A limited partnership requires an Articles of Partnership for Limited Partnerships and bylaws to be submitted to the SEC for registration. There are other forms and documents that must be filled out which may be found on the SEC Website such as a cover sheet, name verification slip, and undertaking to change the name of the partnership (to ensure that there is no similar partnership name). Other permits that should also be obtained will be explained in Section 6.
Partnerships are relatively easy and inexpensive to set up and maintain, but they do carry the risk of personal liability for the debts and obligations of the business.
The following are certain rules on names for Corporations and Partnerships that are required by the SEC:
An affidavit of undertaking to change name is required for corporations and partnerships to be submitted to the SEC to ensure that they will change their corporate or partnership name if it is found to be already in use or is similar to another that has been validly registered already.
Once the aspiring business owner has decided on the legal structure of his company, there is a need to choose a name that is not already in use and not the actual name of the business owner. The availability of the chosen business name can be verified on the website of the Securities and Exchange Commission (SEC) in case it is a corporation or partnership. Further, it must be noted that this rule does not apply to sole proprietorships.
A cooperative is a duly registered association of persons, with a common bond of interest, who have come and joined together to achieve their social, economic, and cultural needs and aspirations by contributing to the capital required and patronizing their products and services. This kind of business structure is most commonly formed by those who are in the marginalized sector without sufficient capital to form a business.
There are also no minimum capital requirements for a cooperative to be validly formed, however, a group of individuals must be assembled with a common bond of interest who are interested in forming the same. These individuals will then be the founding members of the cooperative.
Cooperatives in the Philippines are typically registered with the Cooperative Development Authority (CDA), not the SEC. The CDA is the government agency responsible for regulating and promoting cooperatives. A cooperative requires an Articles of Cooperation and bylaws to be submitted to the CDA for registration. There are other forms and documents that must be filled out which may be found on the CDA Website such as an economic survey, name reservation slip, surety bond of accountable officers, treasurer's affidavit, and certificate of PMEs. Other permits that should also be obtained will be explained in the following section.
Similar to sole proprietorships, partnerships, and corporations, cooperatives should also have an original name. For this purpose, the submission of a name reservation slip found on the CDA Website must be completed and submitted to the CDA.
Depending on the nature of the business, there may be a need to obtain additional permits and licenses from other government agencies, such as the Bureau of Internal Revenue (BIR), and local government units. For example, if the aspiring business owner is starting a restaurant, he needs to obtain a food service permit from the local health department.
The following are the common permits that should be obtained before starting a business and as required by the law for them to legally operate:
All businesses before they operate in the Philippines are required to register with the BIR and obtain a Tax Identification Number (TIN). This involves submitting the necessary forms and documents and paying the registration fee. There is also a need to comply with the BIR's tax requirements, such as filing monthly and annual tax returns. BIR Registration is fairly easy and one can visit his local BIR Office nearest his residence or place of business and ask for the requirements for registration and acquisition of a TIN. The BIR website may also be inspected to see what will be needed for new businesses.
This permit is issued by the local government unit where the business is located and certifies that the business has complied with local zoning and business permit requirements and is also required before operating in a certain location with a corresponding local government unit. It depends on the local government unit concerned as to what will be the requirements for the issuance of a Mayor's permit. It is best for an aspiring business owner to visit the city hall or the municipal hall near him to inquire about the steps and requirements for a Mayor's permit.
This clearance is issued by the barangay where the business is located and certifies that the business is allowed to operate in the area.
Depending on the nature of the business operations, additional permits and licenses may be required from other government agencies, such as the Food and Drug Administration (FDA), and Professional Regulation Commission (PRC). If one or all of these permits are lacking, the business establishment may be closed by order of the government authorities which is why it is important to obtain them first before operating the business. This is a way for the government to ensure that businesses are legally operating and not organized for illegal purposes.
In summary, registering a business in the Philippines involves the following:
If the requirements to register a business are completed, the operations may begin and the business owner may enjoy the many benefits that owning a business has to offer.