6 January 2021
The festivities of the holiday has stirred many to the direction of putting up small businesses. Gift sets, native ornaments, gourmet food items, and a host of other ventures showcase Filipinos’ business creativity and entrepreneurial spirit. Aside from spurring much needed economic activity, these initiatives help liven up the holiday atmosphere and create a cheerful spirit as we near the Christmas holidays.
If you are thinking of hopping into the bandwagon and starting a business, this article aims to guide you on the legal aspects to consider after coming up with your business idea, feasibility plan and capital requirements.
The first thing you need to consider is your business structure. If you want full control and direction of the business, and are starting with a small capital, it makes sense to register a sole proprietorship with the Department of Trade Industry (DTI). The advantage to a sole proprietorship is the relatively easy and straightforward registration and operational requirements. There are no shareholders to answer to and the owner may run the business as he sees fit. All profits accrue to him or her.
But with the recent amendments to the Corporation Code, full control and direction of the business by a single person can also be done by registering, instead of a sole proprietorship with DTI, a one-person corporation with the Securities and Exchange Commission (SEC). Although they appear similar, the two set-ups actually have differences.
In terms of liability, the liability of a sole proprietorship – say for example for debts to creditors, outstanding invoice to suppliers or unpaid wages of workers – are personal to the sole proprietor. S/he may be liable to the extent of his or her other personal assets although not related to the business. A one-person corporation, on the other hand, is a corporation just like any other. Hence, it has a separate juridical personality from its individual owner. Hence, the liability of the owner of the one-person corporation is limited to the extent of the assets of the corporation.
Another factor that would determine whether to register a sole proprietorship or a one-person corporation is taxes. For taxation purposes, a sole proprietorship can leverage a 40 percent optional deduction from the gross revenue or sales of the business. The owner can be subject to a smaller final tax of only eight percent if revenue does not exceed Php 3 million.
For a one-person corporation, like other corporations, the deduction is not limited to said 40 percent optional deduction, but it may also deduct the direct costs for producing the product or service. But a one- person corporation, regardless of income, is subject to corporate tax rate of 30 percent, as well as applicable Value Added Tax (VAT) or percentage tax as the case may be.
After determining the appropriate business set-up and registering the same, one must obtain a Mayor’s Permit with the locality in which the business will operate and to register the business with the Bureau of Internal Revenue (BIR) Revenue District Office (RDO) governing the intended place of business for tax purposes. For a one-person or other types of corporation, registration with the BIR RDO will involve an application for a Tax Identification number (TIN) for the corporate business entity, before proceeding with the other requirements. As discussed above, different tax treatments would apply depending on the type of business organization.
Note that regardless of the organizational structure, all online businesses or sellers are now required to register their business with BIR and are expected to pay the proper taxes. Under BIR Revenue Memorandum Circular (RMC) No. 60-2020, persons and businesses earning income and do business by way of online or digital transactions, through the use of any electronic platforms and media, and any other digital means, must be registered with the BIR in accordance with Section 236 of the Tax Code of the Philippines (as amended).
The RMC also served as a reminder to all businesses, whether newly registered or previously registered, to comply with other tax-related obligations such as: issuance of registered Sales Invoices or Official Receipts for every sale of goods or services to a customer; maintenance of registered Books of Accounts and other accounting records; withholding of taxes as applicable; and, timely filing and payment of required tax returns.
After tax registrations are covered, the new business will have to register with the Social Security System (SSS), PhilHealth, and Home Development Mutual Fund (more popularly known as PAG-IBIG) for employee benefits required by law.
It pays to know the legal requirements for doing business. There is even greater benefit and comfort in following the same. Having complied with these general requirements, the business owner can focus on the operational and financial aspects of the venture such as serving its customers, and hopefully generating enough revenue.
First published on The Daily Tribune.
For further information, please contact:
Nilo T. Divina, Managing Partner, DivinaLaw
nilo.divina@divinalaw.com
