Business Organizations in the Philippines

DIFFERENT BUSINESS ORGANIZATIONS IN THE PHILIPPINES

The most common forms of business organizations in the Philippines are sole proprietorship, partnership and corporation. It would be a good idea to have a glance of its structure and how they are established as one is way different from the other.

Sole Proprietorship

Sole Proprietorship is the simplest form of business organization because it is not governed by very strict regulatory laws and rules as that of a partnership or corporation. Only the provisions on civil obligations, contracts and commercial transactions govern this organization.

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 and answers all liabilities or suffers all losses but enjoys all the profits to the exclusion of others. Take note that even foreigners may put up a sole proprietorship provided that his business or industry does not fall under those which the Constitution and other laws impose restrictions and limitations in terms of ownership equity.

Even registration is very plain. A Sole Proprietorship must apply for a Business Name and such must be registered with the Department of Trade and Industry. In Metro Manila, applications should be filed in DTI-NCR. In provinces, application may be filed with the DTI extension offices.

If one plans to register his business, the following must be put in order:

• Name of your business to be registered through DTI Business Name Registration System (BNRS)
• Original & photocopy of proof of citizenship (e.g. PRC ID, birth certificate, voters ID, passport)
• Signed copy of undertaking from DTI BNRS (see #2 below)
• Payment of P300 for application (+P15 for documentary stamps)
• 2 recent identical passport sized picture (with signature of owner at the back)
• For franchise holder: photocopy of franchise agreement, each page duly certified by the franchisor or franchisee
• For franchise holder: photocopy of Business Name Certificate of franchisor

Partnership

Partnership is treated as juridical person, an artificial being created by operation of law with a legal personality separate and distinct from its members. Partnerships may either be general partnerships or limited partnerships. In general partnerships, partners have unlimited liability for the debts and obligation of the partnership. In limited partnerships, one or more general partners have unlimited liability and the limited partners have liability but only up to the amount of their capital contributions. The law only requires at least two (2) partners for a partnership to be formed. A partnership with more than three thousand pesos (P3,000.00) capital must be registered with Securities and Exchange Commission (SEC).

Partnership operates under the Civil Code of the Philippines. Even from the time of its creation, up to the time of its dissolution and liquidation, the mentioned law will always come into play to rule the partnership.

Therefore, all partnerships are required to be registered with Securities and Exchange Commission. Registration may be done by filing the Articles of Partnership which will set forth the terms and conditions mutually agreed upon by the partners. Other documents required are the following:

• Proposed Articles of Partnership
• Name Verification Slip
• Bank Certificate of Deposit)
• Alien Certificate of registration, SIRV or proof of other types of visa (in case of foreigner)
• Proof of Inward Remittance (in case of Non-Resident Aliens)

Stock Corporation

Corporations, as defined under Corporation Code of the Philippines, are artificial beings created by operation of law, having the right and succession and the powers, attributes and properties expressly authorized by law or incident to its existence. Although it is established under the Corporation Code, it is regulated by the Securities and Exchange Commission as a separate and distinct personality from that of its stockholders. The liability of the shareholders of a corporation is limited to the amount of their share capital. Corporation may consist of at least five (5) to fifteen (15) incorporators each of whom must hold at least one share and must be registered with the Securities and Exchange Commission (SEC). Minimum paid up capital must be five thousand pesos (P5,000.00).

A corporation can either be stock or non-stock. 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.

Specifically, Stock Corporation 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.

The SEC may only register the corporation if it meets the following:

• 1. Name Verification Slip.
• 2. Articles of Incorporation /li>
• 3. Treasurer’s Affidavit
• 4. Statement of assets & Liabilities executed under oath by the Treasurer of the corporation (if paid up capital consists of cash and properties
• 5. Bank certificate of deposit which must be notarized before a notary public in the place where bank signatory is assigned.
• 6. Authority to verify Bank Account
• 7. Written Undertaking to change corporate name signed by incorporator/director
• 8. Registration Data sheet
• 9. Undertaking to comply with SEC requirements
• 10. Audited financial statements of the subscribing domestic corporation for the last Fiscal/calendar year but only if subscriptions of such domestic corporations are partially paid. This will only apply if subscriber/stockholder is a corporation.
• 11. Customs Brokerage – at least two directors must be customs brokers, who must submit their respective licenses to act as a custom broker and PTR20
• 12. Management Consultancy – Personal Information Sheet of the Directors

Corporations with 60-40% Filipino Foreign Equity, 40% Foreign Equity, and Foreign Corporation will have to submit additional documents and forms as may be required by SEC.

Benefits of BOI and PEZA Registrations

COMPARISON BETWEEN THE BENEFITS PROVIDED UNDER THE BOI AND PEZA

Board of Investments and Philippine Economic Zone Authority are sectors of the Department of Trade and Industry both designed to attract foreign investors, to promote the economy and generate income for the Philippines. Registering with these sectors entitles the companies to tax incentives and other benefits.

Benefits enjoyed by BOI registered companies are:

• Income tax holidays for 3-8 years
• Exemption from local business taxes for a 4-6 year period
• An equity investment in a Philippine corporation

Companies opting to register with BOI in the Philippines must first comply with the following requirements:

• notarized application form
• project summary-contains activities related to those listed in the Investment Priorities plan
• feasibility report-contains projected financial statements for the next five years

PEZA, on the other hand, offers the broadest set of incentives for export-oriented enterprises locating within identified economic zones. These are:

• Offshore profit remittances, this will not be subject to remittance tax;
• Income Tax Holiday for four (4) years for Non-Pioneer IT Enterprises, or six (6) years for Pioneer IT Enterprises;
• After the ITH period, the option to pay a special 5% tax on gross income earned, in lieu of all national and local taxes, except real property taxes on land owned by developers;
• Exemption from payment of import duties and taxes on imported machinery and equipment and raw materials;
• Additional deduction equivalent to 50% of training expenses, chargeable against the 3% share of the national government in the special 5% tax on gross income;
• Permanent resident status for foreign investors with initial investments of US$ 150,000.00 or more;
• Special tax rate of 5% of gross income (measured as sales less direct costs) in lieu of all Philippine taxes after the ITH;
• Exemption from Branch Profit Remittance tax for PEZA-registered branches of foreign corporations; and
• Other incentives, as determined by the PEZA Board

Enterprises located in an ecozone, as well as the developers and operators of the zone, are entitled to these incentives available to BOI-registered enterprises, as well as to additional incentives available under the Act. Ecozones are essentially export-oriented. Enterprises located inside the zones are required to export 100% of their production but PEZA allows up to 30% of production in the Philippine domestic market.

Below are some of the required documents for obtaining PEZA registration:

• Project brief which entails the submission of additional documents to confirm the statements made therein
• Anti-graft certificate
• Board Resolution Authorizing the designation of a representative
• SEC Certificate of Registration
• Project feasibility study which includes reference documents and other information used for the study

How to Set-up a Company in the Philippines

Stock corporations in the Philippines are those characterized by the following: a) with a capital stock divided into shares among the stockholders; and b) there is a distribution of dividends based on the shares owned. Therefore, as long as the corporation meets the abovementioned requisites, it is classified as a stock corporation, regardless of size, popularity, amount of capital and other similar circumstances.

For registration of stock corporations in the Philippines, the process is two-tiered: The first tier involves preparation of documentary requirements which are as follows:

1. Articles of Incorporation
2. Name Reservation Slip
3. Bank Certificate of Deposit
4. Treasurer’s Affidavit
5. Undertaking to Change the Name of the Corporation

The second tier on the other hand, includes the registration proper at the Securities and Exchange Commission (SEC). The following is the step-by-step procedure:

Step 1. Reserve the company name. The name agreed upon by all incorporators must be reserved at the SEC or through its SEC i-Register system online.

Step 2. Preparation of documents. The articles of incorporation, bank certificate of deposit, treasurer’s affidavit and other documentary requirements must be printed out and signed by the authorized signatories.

Step 3. Submission of the documents at SEC. All documents must be submitted to the SEC for assessment and review. At this juncture, the SEC officer checks whether all formal requirements were complied with. He may also require submission of additional documents to support the application.

Step 4. Payment of the required fees. Filing fees usually depend on the outstanding capital stated in the Articles of Incorporation. Other fees to be paid include payment for the stock and transfer book.

Step 5. Issuance and release of the Certificate of Registration. This certificate is oftentimes issued weeks after the submission of all documentary requirements. The date stated in the certificate indicates the birth of the corporation.

Investing in the Philippines

Q: What are the various types of business structures in the Philippines? 

A: The various types of business or organizational structures in the Philippines are sole proprietorship, partnership, corporation, branch office, representative office, regional headquarters and regional operating headquarters.

Q: How do these business structures differ from one another? 

A: A. Business enterprises organized under Philippine Laws are:

1. Sole proprietorship is a business structure owned by an individual who has full control/authority of his own and owns all the assets, personally owes and answers all liabilities or suffers all losses and enjoys all the profits to the exclusion of others. Must apply for a Business name with the Department of Trade and Industry.

2. Partnership is treated as a artificial being having a separate legal personality from that of it’s members. It may either be general or limited. depending on the liability of partners. It consists of two or more partners. A partnership must register with the Securities Exchange Commission (SEC) with a minimum capitalization of three thousand pesos (Php3,000.00).

3. Corporation is a juridical person established under the Corporation code and is regulated by the SEC with a personality separate and distinct form that of it’s stockholders. It consists of at least 5 to 15 incorporators each of whom must hold at least one share. It must be registered with the SEC. The minimum paid-up capital is five thousand pesos (Php5,000.00).

B. Business enterprises organized under Foreign Laws are:

1. Branch Office is an extension of a foreign enterprise and has no separate and independent legal personality. It can carry out the business activities of its head office and may derive income from the Philippines. It is required to inwardly remit US$ 200,000.00 to the Philippines as its assigned capital.

2. Representative Office is one which deals directly with the clients of its parent company in the Philippines, but may not derive income from the Philippines. It undertakes activities such as information dissemination, communication center, promotion of the company’s products as well as quality control. It is required to have an initial remittance of at least US$ 30,000.00 working capital into the Philippines.

3. Regional Headquarters/Regional Operating Headquarters (RHQs/ROHQs)

Any multinational company may establish an RHQ or ROHQ as long as they exist under laws other than the Philippines, with branches, affiliates and subsidiaries in the Asia Pacific Region and other foreign markets.

A regional headquarters is limited in its activities such as acting as supervisory, communication and coordinating centre for its subsidiaries, affiliates and branches in the Asia-Pacific region. It may not derive income and its operating costs must be covered by the foreign corporation. The required capital is US$50,000.00 annually to cover operating expenses.

A regional operating headquarters (ROHQ) is similar to a regional headquarters but is allowed to derive income from the Philippines, however numerous restrictions apply. The required capital is US$200,000.00 one time remittance.

Q: Where does one apply for registration of investments? 

 A: For Sole Proprietorship – submit an application together with the required documents at the  Department of Trade and Industry (DTI).

For Corporation, Partnership, Branch and Representative Offices – submit an applications together with the required documents at the Securities and Exchange Commission (SEC).

Q: Can a foreign investor be allowed to own a 100% of a business entity?

 A: Yes, one hundred percent (100%) foreign equity may be allowed in all areas of investments under the Foreign Investments Act (FIA) R. A. 7042 except those included in the Regular Foreign Investment Negative List (FINL).

Q: When can foreigners do business or invest in a domestic enterprise up to 100% of its capital?

 A: 1. Full entry of foreign investors is feasible if the proposed activity is not among those listed in the FINL;

2. When the paid-up capital for domestic market enterprise is at least US$200,000 which may be lowered to US$100,000 if the following conditions are met:

a) intoduction of advanced technology

b) employment of at least 50 direct employees.

Q: What is domestic market enterprise?

A: Domestic market enterprise shall mean an enterprise which produces goods for sale, or renders services to the domestic market entirely or if exporting a portion of its output fails to consistency export at least sixty percent (60%) thereof.

How a Foreigner Can Engage in Retail Trade in the Philippines

Can a foreigner engage in retail trade in the Philippines? The simple answer is YES but the requirements are not as simple.

Every day we get several inquiries from foreigners who came to the Philippines to introduce their businesses abroad locally. We have foreigner clients selling pharmaceuticals, cosmetics, religious items from the Dead Sea, and various other products.

They have the capital. They have the source. And they have the marketing know-how. Philippine laws, however, has set certain limitations before these foreigners can engage in retail business.

With good reason, retail trade is reserved to Filipinos. Filipinos who do not have as much capital as these foreigners have will be deprived of earning their living off their sari-sari stores.

The Bureau of Immigration has repeatedly warned foreigners to not engage in retail trade without satisfying the requirements, lest they be arrested or deported for violation retail trade and immigration laws. (December 2012, BID Bulletin)

When is a business a RETAIL business?

If one is habitually selling merchandise, commodities or goods for consumption to the general public, then he or she is engaged in a retail business as defined by law.

What is the requirement before a foreigner can engage in retail trade?

The foreigner or the corporation with a foreign equity must have a capital of not less than Two million five hundred thousand US dollars (US$2,500,000.00).

Are all retail businesses covered by the Retail Trade Liberalization Law?

Not all retain businesses are covered. There are exceptions where foreign ownership is allowed.

For one, sales by a manufacturer of products manufactured by him, when his capital does not exceed One hundred thousand pesos (P100,000.00), is not considered retail trade.

The same is true with a farmer selling the products of his farm.

Sales in restaurant operations by a hotel owner or inn-keeper, irrespective of the amount of capital, where the restaurant is incidental to the hotel business, is also exempt.

Finally, sales which are limited only to products manufactured, processed or assembled by a manufacturer through a single outlet, irrespective of capitalization, are likewise outside the coverage of the Retail Trade Liberalization Law.

If the foreigner has Two million five hundred thousand US dollars (US$2,500,000.00) capitalization, can the business be wholly foreign-owned?

If the capitalization is at least 2.5 Million dollars but not more than 7.5 Million dollars, the foreigner can own up to sixty percent (60%) of the business. If the capitalization is at least seven million five hundred dollars, then it can be wholly foreign-owned.

Also, enterprises specializing in high-end or luxury products with a paid -up capital of the equivalent in Philippine Pesos of Two hundred fifty thousand US dollars (US$250,000.00) per store may be wholly owned by foreigners.

Is the foreigner required to keep the amount of capitalization in a Philippine bank?

While the foreign investor shall be required to maintain in the Philippines the full amount of the prescribed minimum capital, it is not required to be kept in the bank. It is required to be actually used in their operations in the Philippines. Actual use of the funds will be monitored by the Securities and Exchange Commission.

So if you are a foreigner who wish to engage in retail trade in the Philippines, identify your product and your capitalization and allow us to assess your qualifications. If you want to know more about doing business in the Philippines, contact us at +632-8231090 or email Atty. Joyce Domingo at joyce@prime-business-consulting.com.

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