This entry is a guest post from NVMA Consulting – which offers company registration and legal services in the Philippines. If you need help in starting a company or incorporating a corporation in the Philippines, you may e-mail NVMA at firstname.lastname@example.org or contact via phone at +639168556614.
The Philippine economy is on a roll.
From 1982 until the end of 2016, our GDP Annual Growth Rate averaged 3.68 percent.
Do you know what our average GDP was at the end of 2017?
It was 6.7 percent. Almost double of what we had for more than three decades.
Gross Domestic Product (GDP) is used by economists to measure a country’s economic progress.
Simply put, if GDP is rising, it means the economy is moving forward.
What does this mean to our fellow Filipinos? For our business-minded kababayans, they might find this the perfect time to set up their dream business.
But what does it take to set up a business in the Philippines? And are the words “business”, “company”, and “corporation” one and the same? Someone might ask, “I own a business. How does it differ from a corporation? Are their advantages?”
In casual conversation, it’s common for people to interchange these three terms when explaining a financial venture. When someone says, “I want to start a business”, “I’m setting up my own company”, or “we’re one big corporation” — you have a general idea of what they’re referring to.
However, all three have their own unique distinctions and knowing about them is important if you’re an enterprising individual.
Let’s take a quick look at their definitions:
- Business – An organization or economic system where goods and services are exchanged for one another or for money. It can be classified as privately-owned, non-profit, or state-owned.
- Company – A company is any entity that engages in business and can be a proprietorship, partnership or corporation.
- Corporation – A type of company that declares the business as a separate, legal entity guided by a group of officers known as the board of directors.
I like to link their definitions in a top-down approach where the word “Business” is on top followed by “Company” which then branches down to several types where it includes “Corporation”.
Easy enough, right? BusinessDictionary.com expounds on the difference between a company and a corporation:
“All corporations are companies, but not all companies are corporations. Company is a much broader term than Corporation, and it encompasses a lot of different types of businesses.”
Why is it important to classify their differences? Because each one of them requires different steps to set-up. And in this article, we’ll be focusing on how to register a corporation in the Philippines.
What is a Corporation?
Our definition earlier states that a Corporation is, “A separate, legal entity guided by a group of officers known as the board of directors.”
To fully grasp its meaning, we have to understand what “legal entity” means first. From the same site:
A legal entity has legal capacity to enter into agreements or contracts, assume obligations, incur and pay debts, sue and be sued in its own right, and to be held responsible for its actions.
That last line made me chuckle. “Be held responsible for its actions”.
It almost sounds like “legal entity” is an actual person.
But if you think about it, it actually does make sense to compare a corporation to an actual person to better understand its meaning. Why?
Because this line of thought gives us a glimpse of why corporations are created in the first place: Limited Liability.
Put simply, “Limited Liability” states that the owners and shareholders of the corporation are not responsible for all its debts if the company fails. The company itself, as a legal entity, is liable for the rest.
It’s as if there’s another person who can be held liable in the event the business goes bankrupt.
It allows shareholders to protect their personal assets in the event that the business fails. Or if somebody sues the company, all damages will be limited to the assets that are within the company. The suing party can’t go after the shareholders’ personal assets like their cars, homes, and other belongings.
The same cannot be said for a sole-proprietorship type of business because it does not separate the business entity from its owner. In the event the company gets sued or goes into debt, the owner is responsible for it. The creditors or suing party can go after the owner’s personal assets.
Which is why while it’s more costly and complicated to set-up, bigger businesses choose to establish a corporation in order to have this kind of protection. Let’s take a closer look at the Pros and Cons of running a corporation:
Pros of a Corporation:
- Risk and liability is limited to the corporation.
- Owners are not liable themselves.
- Founders can raise capital through issuance of stocks to shareholders
- Ownership can be transferred to different owners
- Existence of a corporation has no limits
- Acting as a legal entity means it can take legal actions like person
- A board of directors handles management of the corporation
Cons of a Corporation:
- More expensive to set up versus single proprietorship
- Requires more legal paperwork to accomplish
- Operating costs are higher
- Taxes incurred are higher
- Subject to more Government requirements and laws
Recommended Reading: 10 Best Business Books for Filipino Entrepreneurs
Steps on How to Register a Corporation
1. Reserve and register business name in SEC (Security and Exchange Commission)
- Visit SEC website or make a personal appearance at their office in Mandaluyong.
- Complete and sign all required documents: Articles of Incorporation, By-Laws, Treasurer’s Affidavit, Joint Affidavit of Two Incorporators. All documents need to be notarized (more on this below).
2. Acquire Barangay Clearance
- Visit the Barangay where your business is located and request for clearance.
- Submit the following together with your Barangay clearance: Certificate of Business Registration from SEC, Two (2) Valid IDs, Proof of Address (Contract of Lease or Certificate of Land Title)
3. Acquire Business Permit from Mayor’s Office
- Visit the municipal office where your business is located and request for a business permit form.
- Submit the following together with your completed Business Permit: Certificate of Business Registration from SEC, Two (2) Valid IDs, Proof of Address (Contract of Lease or Certificate of Land Title), Barangay Clearance.
4. Register with BIR (Bureau of Internal Revenue)
- Visit the Regional District Office that covers your business location
- Request for a copy of BIR Form 1903 — Application for Registration of Partnership or Corporation
- Submit the following together with your completed Business Permit: Certificate of Business Registration from SEC, Two (2) Valid IDs, Proof of Address (Contract of Lease or Certificate of Land Title), Barangay Clearance, Business Permit from Mayor’s office
- Pay all applicable fees and register your book of accounts and receipts
- Claim your Certificate of Registration
Full List of Requirements & Documents needed for SEC
The incorporation process is lodged with the Securities & Exchange Commission (SEC).
The following requirements/documents must be submitted with the SEC:
1. Name Reservation/Verification Slip
2. Cover Sheet
3. Articles of Incorporation
4. Corporate By-laws
5. Registration Data Sheet
6. Registration Data Sheet (CAPITAL STOCK / INCORPORATORS /DIRECTORS / OFFICERS INFORMATION)
7. Affidavit of Undertaking to Change Corporate Name
8. Treasurer’s Affidavit stating the amount of the shares of stock subscribed and the amount of the subscription price which has been paid-in to him as Treasurer-in-Trust of the proposed corporation. He should likewise certify that at least twenty-five percent (25%) of the authorized capital stock has been subscribed, and at least twenty-five percent (25%) of the amount subscribed has been paid-in to him for the benefit and to the credit of the corporation.
9. Bank Certificate
Anent the documents, the following information must be supplied to adequately fill out the necessary documents for submission with the SEC:
1. Corporate Name (The last part must end with Inc., Incorporated, Corporation or Corp.)
2. Purpose of the Corporation
3. Address of the Corporation
4. Telephone Number
5. Value of each share (This is usually P100.00 for 1 share)
6. Authorized capital (Total number of shares of the Corporation)
7. Subscribed capital (Number of shares to be subscribed by the incorporators. This cannot be less than 25% of the authorized capital)
8. Paid-up capital (Number of shares paid by the incorporators. This cannot be less than 25% of the paid-up capital)
9. Name and Branch of Bank where the paid-up capital amount will be deposited
10. Incorporators (Name, nationality, address, birthday, Tax Identification Number, Community Tax Certificate Number or Passport Number)
11. Shares of the Incorporators (number of subscribed shares, number of shares paid and percentage of ownership)
12. Number of Directors and their names (Must be an incorporator. Not less than 5 and not more than 15 directors)
13. Name of the Chairman of the Board
14. Name of President
15. Name of Corporate Secretary
16. Name of Treasurer
17. Term of the Corporation
18. Date of annual meeting of the corporation
19. Accounting Year (Calendar Year or Fiscal Year. Calendar Year is recommended since this is used by most government agencies)
The government fees for the incorporation of a domestic corporation are as follows:
- Basic Filing Fee for the Articles of Incorporation – 1/5 of 1% of the authorized capital stock or the subscription price of the subscribed capital stock
- Legal Research– 1% of the filing fee
- Examining and Filing Fee for the By-Laws
The first step would be to reserve your corporate name either online or personally with the SEC. Once the name is reserved, you may proceed to SEC to submit the documents listed above.
A faster way to procure the listed documents is to buy the “Green Lane Forms” from the SEC. Said forms cost Five Hundred Pesos (P500.00) and takes one to two days to process.
Other Legal Documents to consider when establishing your business:
Data Privacy – your customers are providing you with their data and using your service.
- Are you up to date in terms of implications of the recent amendment to the Privacy Act?
- Is your company compliant and operating within Philippine Law?
- And what about your Terms and Conditions of Use, does it indemnify you against misuse of your services?
- Could your company be doing more to better protect its intellectual property?
- Or could you be extracting more value from your IP?
Employment Agreement – you’ll be looking to bring on staff in the short to medium term and you’ll need an employment agreement that best protects your business.
Shareholders agreement – You need this agreement to protect your shares which are just entrusted to other shareholders.
Why is it important to have a Business License?
To receive a business license, a business must comply with all requirements of the city granting the license. Applying for a business license ensures that the new business owner’s infrastructure, plans and policies are in line with city regulations.
In addition, most cities legally require businesses to be licensed, so possessing a business license protects the owner from being shut down for having an illegal business.
Customers are often wary of new businesses. Prior to purchasing goods or services, particularly over the Internet, customers want to ensure that the business is legitimate.
If the entrepreneur displays her business license in her store or on her company website, it helps reassure customers that they are dealing with a business and not a scam artist. Other businesses the entrepreneur deals with also may need to see the business license prior to doing business.
Many cities offer to fund to new businesses, particularly start-up businesses. To qualify for funds, a business must possess a business license demonstrating that the city approves of the business venture.
From the point of view of the city issuing a license, business licenses are important because they provide a record of all businesses who may owe tax to the city.
Many cities require license holders to pay quarterly taxes on merchandise sold in order to keep the license current. From entrepreneurs’ point of view, business licenses are equally important because they allow them to easily keep up with taxes owed to the city, keeping them out of legal and financial trouble.
In addition, many businesses must pay federal and state taxes on a quarterly basis; paying city taxes to keep the license current can help remind business owners to pay other taxes due.
If an entrepreneur resells merchandise purchased elsewhere, he can get the merchandise at lower cost if he has a license. Licenses allow entrepreneurs to purchase items at the wholesale cost–the cost of producing the item–rather than at the price it sells for in stores. Entrepreneurs do not pay tax on items bought for resale; the customer pays tax when the item is resold.
Many manufacturers require entrepreneurs to show them a license prior to selling items at discounted prices. This ensures that the entrepreneur is legitimate rather than someone trying to buy items for personal use at lower prices.
What are the legal matters a Corporation must take into consideration?
The main advantage of incorporating is the protection from personal liability, but these should not be taken for granted.
Once a business is incorporated, the directors must ensure that it retains its legal status. You must keep detailed financial records and ensure that tax returns are filed fully and on time, for starters.
A business that fails to perform these legal duties risks losing its corporate status (and the protections of incorporation). A corporation that is delinquent on its taxes or otherwise out of compliance, for instance, may not be able to file a civil lawsuit or secure capital until it resolves these issues.
Depending on the business form, the certain legal formalities must be followed in order to maintain the legal status of a corporation. Once incorporated, a business’s ongoing obligations include the following:
- First Board Meeting
You will need to call and conduct an initial meeting of the board of directors or shareholders as required in the articles of incorporation. This will help set the tone and establish the direction of the new corporation.
- Successive Board Meetings
Hold future meetings at least as often as required by applicable business laws.
- Following the Articles of Incorporation
Conform all decisions and internal procedures to the outline set forth by the articles of incorporation.
- Meeting Minutes
Record all the actions and decisions of the board of directors in the corporate minute book. Minutes typically include the names of the board members and anyone else present at the meeting, with a record of reports by the officers, actions taken, etc.
- General Information Sheet
Maintain your GIS with the SEC, as required by law.
- Renewal of Business Permit
Maintain your permit by renewing quarterly (for new business) and annually on the succeeding years provided you have shifted the payment from quarter to annual.
- Licensing and Professional Standards
Some businesses must comply with licensing requirements or professional standards to preserve their status. These businesses may need to maintain further records or use special procedures or equipment based on rules for their specific industries.
Obtain tax identification numbers for the business, and file necessary tax returns annually.
Issue shares of stock as mandated by the articles of incorporation and securities laws.
Establish and maintain corporate books and records, including accounting ledgers, shareholder records, and corporate minute books.
Failure to Follow Legal Procedures of a Corporation
A failure to honor these and other corporate obligations can result in personal liability for directors, officers, or shareholders for business obligations and debts. Because of these harsh consequences and because the specific legal requirements vary depending on the business’s location and form, businesses should seek professional legal assistance.
In many states, this suspension or revocation of corporate status is referred to as a “loss of good standing.”
Generally speaking, a company that fails to follow the legal corporate procedures may face the following consequences:
- Personal liability for the acts of the company
- Inability to file a civil lawsuit
- Tax liens (nonpayment of tax obligations)
- Difficulty securing capital investments or loans (see: where to get loans)
- Fines and other penalties
Get Help Complying with Your Corporation’s Legal Requirements
Organizing your business as a corporation provides many advantages over other legal structures, mainly having to do with taxes and protection from personal liability. But once you incorporate, it’s important that you follow certain procedures in order to maintain these protections. Corporate officers are busy running their business.
Tips on Running Your Corporation
Here’s a rundown of who plays what roles in a corporation:
Board of directors:
The original directors are designated in the Articles of Incorporation, which is the document filed with the state to legally form the entity.
Directors oversee the officers of the company and assure that it operates according to law and corporate procedures. Directors have a fiduciary duty to the corporation to act in the corporation’s best interest, not to their own best interest, among other legal duties.
These duties are to protect the shareholders’ investments in the corporation. Investors often want at least one representative on the board of directors, since the board formally controls the decisions of the company.
However, sometimes investors avoid having any directors and arrange other contractual alternatives in order to avoid the fiduciary duty requirements to act for the benefit of the corporation rather than themselves.
The board of directors appoints and may fire the corporation’s officers, who are responsible for the day-to-day operations of the company.
Shareholders are people who’ve been granted stock by the corporation in exchange for money paid or services performed for the corporation.
The shareholders meet annually, at the corporation’s annual meeting, to elect the board of directors. Shareholders are not financially liable for the debts of the corporation and are not legally liable for any wrongdoing of the corporation.
Investors will be granted shares in exchange for their investment. Typically, they will want “preferred shares, which means that if there are minimal dividends or other negative financial events, they will have priority in getting their money over the “common stock” shareholders.
Officers typically include at least a CEO and/or president, secretary and treasurer/CFO. Officers do not have the same heightened level of fiduciary duties to the corporation that the board of directors has.
After You’ve Incorporated
Once you’re incorporated, be sure to follow the rules of incorporation. If you don’t, a court can pierce the corporate veil and hold you and the other owners personally liable for the business’s debts.
It is important to follow all the rules required by state law. You should keep accurate financial records for the corporation, showing a separation between the corporation’s income and expenses and that of the owners’.
The corporation should also issue stock, file annual reports and hold yearly meetings to elect officers and directors, even if they’re the same people as the shareholders. Be sure to keep minutes of these meetings.
On all references to your business, make certain to identify it as a corporation, using Inc. or Corp., whichever your state requires. You also want to make sure that whomever you deal with, such as your banker or clients, knows that you are an officer of a corporation.
To make sure your corporation stays on the right side of the law, heed the following guidelines:
- Call the secretary of state each year to check your corporate status.
- Put the annual meetings (shareholders’ and directors’) on tickler cards.
- Check all contracts to ensure the proper name is used in each. The signature line should read “Juan de la Cruz, President, XYZ Corp.,” never just “Juan de la Cruz.”
- Never use your name followed by “dba” (doing business as) on a contract. Renegotiate any old ones that do.
- Before undertaking any activity out of the normal course of business–like purchasing major assets–write a corporate resolution permitting it. Keep all completed forms in the corporate book.
- Never use corporate checks for personal debts and vice versa.
- Get professional advice about continued retained earnings not needed for immediate operating expenses.
If you need help in starting a company, incorporating a corporation, and identifying and complying with the legal procedures of a corporation in the Philippines, you may e-mail us at email@example.com or contact us at +639168556614.