Starting a business in the Philippines can be a bit confusing because of the many legal requirements necessary before a business can operate. This article summarizes the essential legal requirements that are necessary for starting a business.
A. Register the Business Organization
The first step is to register the business with the appropriate government agency depending on the type of business organization one wants to establish.
1. Sole proprietorship—register with the Department of Trade (DTI).
A sole proprietorship is the simplest type of business organization that may be established by a person, called the sole proprietor. Unlike a partnership or corporation, which is a business organization that has a separate existence from the partners in a partnership or stockholders in a corporation, the sole proprietorship does not have a separate existence from the business owner.
In a sole proprietorship, the business is an extension of the business owner. Thus, the assets and liabilities of the sole proprietorship are considered the assets and liabilities of the business owner.
2. Partnership—register with the Securities and Exchange Commission (SEC).
A partnership is a business organization whereby two or more persons agree to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession.1
The partnership has an existence separate from that of each of the partners.2
Unlike a corporation, a partnership does not have shares of stock, which are the basis for the distribution of the profits (i.e., dividends) among the stockholders. Instead, in a partnership, the losses and profits are distributed in accordance with the agreement of the partners. If only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion. In the absence of an agreement, the share of each partner in the profits and losses shall be in proportion to what he has contributed to the partnership, but the industrial partner shall not be liable for the losses.3
As for the profits, the industrial partner shall receive such profits as may be just and equitable under the circumstances. If the industrial partner contributed capital, he shall also receive a share in the profits in proportion to his capital.4
3. Corporation—register with the SEC.
A corporation is “an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.”5
The corporation has an existence separate from that of its stockholders.
Corporations may be classified as either stock or nonstock corporations. Stock corporations have capital stock divided into shares of stock, which may be issued to the stockholders. Stock corporations are allowed to distribute dividends to the stockholders on the basis of the number of shares of stock owned by them. Nonstock corporations do not have capital stock divided into shares of stock and are not allowed to distribute dividends to the members.6
A stock corporation is the appropriate type of corporation for the purpose of operating a business.
B. Obtain a Mayor’s or Business Permit
All businesses are required to secure a mayor’s permit or business permit from the local government of the city or municipality where the business is located.
Different cities and municipalities have different registration procedures and requirements. The following are the general requirements for securing a permit for a new business:
- Application forms
- DTI registration or SEC registration, whichever is applicable
- Lease contract or title covering the property where the business is located, whichever is applicable
- Locational or zoning clearance
- Building permit and occupancy permit
- Public liability insurance
- Barangay clearance
- Fire safety certificate
Other requirements specific to the type of business to be carried out
For the specific requirements, one needs to visit the city or municipal hall of the city or municipality where the business will be established.
C. Register with the Bureau of Internal Revenue (BIR)
All businesses have to register with the BIR before the commencement of operation for taxation purposes.
The registration process involves obtaining and registering a tax identification number (TIN), obtaining BIR-registered official receipts and invoices, registering the business’s books of accounts, and paying the applicable fees.
The registration must be done at the Revenue District Office (RDO) of the BIR, which covers the registered address of the business.
For the specific requirements for BIR registration, one needs to visit the RDO that covers the registered address of the business.
D. Register with the Social Security System (SSS)
All businesses that have employees must be registered with the SSS. The registered employer will be assigned an employer number, which will be used as reference for the remittance of monthly contributions, composed of the employee’s contribution and the employer’s share.
SSS coverage is compulsory for all employees not over sixty years of age and their employers.7
An employer is any person who carries on in the Philippines any trade, business, industry, undertaking, or activity of any kind and uses the services of another person who is under his or its orders as regards the employment. Meanwhile, an employee is any person who performs services for an employer in which either mental or physical efforts or both are used and who receives compensation for such services, where there is an employer‐employee relationship.8
The SSS provides replacement income for employees in times of disability, sickness, maternity, and old age. It also provides assistance during death and for funeral expenses.
E. Register with the Philippine Health Insurance Corporation (PhilHealth)
All employers are required to register themselves and their employees with PhilHealth, the government health-care system. Upon registration, an employer shall be issued an employer number.
Under the PhilHealth system, the monthly contribution is divided equally between the employer and the employee. It is deducted and withheld automatically by the employer from the employee’s salary then remitted to PhilHealth.
F. Register with the Home Development Mutual Fund (Pag-IBIG Fund)
All employees who are or ought to be covered by the SSS are also covered by mandatory membership in the Pag-IBIG Fund.10 The Pag-IBIG Fund provides various types of housing loans to employees.
Members make their contributions to the Pag-IBIG Fund through salary deduction. The employer has the responsibility to deduct the contribution from the employee’s salary. Together with the employer’s share of the contribution, the employee contribution is remitted to the Pag-IBIG Fund on a monthly basis.
G. Importance of Securing the Legal Requirements
The above legal requirements are only the essential requirements for starting a business in the Philippines. There may be other special permits, clearances, or registrations from or with other government agencies that may be necessary, depending on the kind of business and projects a business owner plans to engage in.
It is very important to secure these essential legal requirements. The consequences of operating a business without the said legal requirements range from the closure of business, to the imposition of monetary fines, and finally, to imprisonment.
Local government units in different cities and municipalities have different penalties for businesses operating without the required mayor’s or business permit, such as surcharge and interest on the amount of fees due. However, one common penalty that may be imposed is the closure of the business. Confiscation of the business property and assets may also be done.
As for failing to register a business with the BIR, the said violation is penalized by a fine ranging from P5,000 to P20,000, imprisonment of six months to two years. There is also a compromise penalty of P2,000 to P20,000, depending on whether the business is located in a city or in a municipality.11
For failing or refusing to register the employees or to deduct contributions from the employees’ compensation and remit the same to the SSS, the penalty is either a fine (ranging from P5,000 to P20,000) or imprisonment for six years to twelve years.12
Any employer who fails or refuses to register employees with PhilHealth or to deduct contributions from the employees’ compensation or remit that same amount to PhilHealth is penalized with a fine of P5,000, multiplied by the total number of employees of the business.13
On the other hand, any employer who fails or refuses to register employees with the Pag-IBIG Fund or to collect or remit the required contributions is penalized either with a fine of not less than but not more than twice the amount involved, or imprisonment of not more than six years. The employer may be both fined and imprisoned, depending on the discretion of the court.14
1Article 1767, Civil Code of the Philippines.
2 Article 1768, ibid.
3 Article 1797, ibid.
5 Section 2, Batas Pambansa Bilang 68, otherwise known as the Corporation Code of the Philippines.
6 Section 3, ibid.
7 Section 9, Republic Act No. 1161, otherwise known as the Social Security Law, as amended by Republic Act No. 8282.
8Section 8, ibid.
9 Sections 13 and 15, Implementing Rules and Regulations of Republic Act No. 7875, otherwise known as the New National Health Insurance Act.
10Section 6, Republic Act No. 9679, otherwise known as the Home Development Mutual Fund Law of 2009.
11Section 258, Republic Act No. 8424, otherwise known as the National Internal Revenue Code of 1997.
12Section 28(e), Republic Act No. 1161, otherwise known as the Social Security Law, as amended by Republic Act No. 8282.
13 Section 44, Republic Act No. 7875, otherwise known as the National Health Insurance Act of 1995, as amended by Republic Act No. 10606
14Section 25, Republic Act No. 9679, otherwise known as the Home Development Mutual Fund Law of 2009.