Register a Business Philippines: How to Choose the Right Business Structure

Many things go into consideration when you decide to start a business, including the type of business structure that you will adopt. Determining your business structure is important since it will define the costing, tax, ownership, and jurisdiction requirements of your enterprise.

Here’s an overview of the different forms of business structure to help you choose the best alternative for your company.

 

Types of Business Structures Organized under Philippine Laws

 

1. Sole Proprietorship

This is the simplest and least formal type of business structure, where a single individual has full control and authority over the business. The owner or proprietor owns all the assets of the company but is also solely responsible for all its liabilities. In other words, the owner and the business are the same entity.

Foreigners are not allowed to own a business in the Philippines solely.

Pros

• There is little paperwork needed. You only need to apply for a business name and register your business with the Department of Trade and Industry (DTI) – National Capital Region (NCR). In the provinces, application for sole proprietorships should be done with the DTI regional or provincial offices.
• Since you are the sole owner, you have complete control over business decisions. You also get to enjoy and keep all the profits from the business.

Cons

• You are personally and fully liable for your business’ debts. This means a person suing your business could make a claim against your personal
• It may be difficult for you to attract investors or capital since the sole proprietorship is closely linked to your personal

Taxes

• You use your personal tax identification number (TIN) for your proprietorship.
• The income tax of your business follows a graduated rate, meaning the higher income you make out of your business, the higher income tax you will have to pay.

 

2. Partnership

A partnership is formed when two or more individuals own the business. The Civil Code of the Philippines treats a partnership as a juridical person, which means its legal personality is separate from that of its business owners.

There are two kinds of partnership: general and limited. In a general partnership, business partners share unlimited liability for the debts and obligation of the company.

On the other hand, limited partnerships are called as such since some partners will have unlimited liability, while others will have liability equal only to the amount of their capital contribution.

If your partnership has a capital that’s worth more than P3,000.00, you will need to register it with the Securities and Exchange Commission (SEC).

The Philippines allows foreigners up to 40% of ownership in a partnership.

Pros

• It is quite easy to attract investors who will agree to pool their financial resources with you since partnerships typically involve utilization of the company’s collective assets.
• In the case of limited partnerships, there is no risk to lose your personal assets since you’re only liable up to the amount of your investment.

Cons

• You have no full control or autonomy over the business.
• General partners are liable for the business decisions and debts of other partners, putting one’s personal assets at risk.

Taxes

Partnerships are taxed just like corporations. The basic income taxes applied to partnerships and corporations include:

• Regular corporate income tax (RCIT) – Annual tax paid based on taxable income
• Minimum corporate income tax (MCIT) – Tax to be paid on the fourth taxable year of the business if the MCIT is greater than the RCIT
• Improperly accumulated earnings tax (IAET) – Tax paid if the accumulated earnings exceed 100% of the paid-in capital

 

3. Corporation

Corporations are owned by a minimum of five (5) and a maximum of 15 shareholders. Each of the incorporators must hold at least one share in the corporation, and their liability is limited only to the amount of their capital share.

In the Philippines, a corporation is treated legally as a personality separate and distinct from that of the stockholders who own the corporation. The corporation should be SEC-registered, with a minimum paid up capital of P5,000. A foreigner can have up to 40% ownership in a corporation.

 

Two Kinds of Corporation

Stock Corporation

The capital of a stock corporation is divided into shares, which are distributed to investors. In return, investors receive dividends and part of the surplus profits computed based on the number of shares they hold.

Non-stock Corporation

A non-stock corporation does not issue shares of stock to its members since the entity exists for charitable, educational, cultural, or other equivalent purposes.

 

Business Forms in the Philippines Organized under Foreign Laws

If you are a foreign company or investor, you may start a business in the Philippines through any of the following forms:

Branch Office

• It is a foreign corporation that performs business activities of its head office. The branch derives income from the Philippines as its host country.
• The minimum paid-up capital ranges from $100,000.00 – if the nature of the business involved advanced technology or the company directly employs at least 50 workers – to $200,000.00.
• A branch office has to be registered with the SEC.

Representative Office

• This type of foreign corporation serves as a liaison office between its parent company and its clients. It does not derive income from the Philippines because its business activities are limited to information dissemination, promotion of the company’s products or services, or quality control of products for export.
• A representative office in the Philippines is fully subsidized by its head office and must have an initial minimum remittance from its head office worth $30,000.00. This amount shall be used to cover operating expenses of the representative office.
• SEC registration is also necessary.

Regional Headquarters (RHQs)

• RHQs may act as companies’ supervisory, communication, and coordinating centers for their subsidiaries, affiliates, or branches in the Asia-Pacific region.
• It may also serve as an administrative branch of a multinational enterprise engaged in international trade. What RHQs cannot do is to manage any subsidiary or branch office they might have in the Philippines.
• RHQs do not earn income in the Philippines. The required annual capital needed to cover operating expenses is $50,000.00.
• RHQs have to be registered with the SEC.

Regional Operating Headquarters (ROHQs)

• ROHQs must perform for its affiliates, subsidiaries, and branches only qualifying services:
  1. General administration and planning
  2. Business planning and coordination
  3. Sourcing of raw materials
  4. Corporate finance advisory services
  5. Marketing and sales promotion
  6. Training and management of personnel
  7. Logistic services
  8. Research and development
  9. Technical support and communications
  10. Business or product development
• ROQHs derive income from performing qualifying services, which is subject to 10% tax.
• A one-time remittance of $200,000.00 is required for capital.

 

Wrapping Up

The Philippines is very welcoming to business investments. However, choosing the type of business structure for your business venture requires careful analysis and planning. You must set specific goals and determine the resources you will need.

EnterPH provides business registration service to help you stay on track of all the requirements and procedure so that your business is all set for success from the very beginning.

References:

https://businesstips.ph/types-of-business-in-the-philippines/

https://kittelsoncarpo.com/open-office-philippines/

http://www.tradechakra.com/economy/philippines/types-of-business-entities-in-240.php

https://fitzvillafuerte.com/a-guide-to-choosing-the-right-business-structure.html

https://www.morebusiness.com/types-of-corporations/

https://emerhub.com/philippines/corporate-structure-in-the-philippines/

https://www.forbes.com/sites/northwesternmutual/2017/03/01/starting-your-own-business-how-to-choose-your-structure/#6212ff4833a1

https://www.business.govt.nz/getting-started/choosing-the-right-business-structure/business-structure-overview