07 Feb
Business

How To Properly Close A Business And Avoid Penalties

Business closure in the Philippines entails the need to secure clearances from different government agencies, including the Securities and Exchange Commission (SEC), Bureau of Internal Revenue (BIR), Local Government Unit (LGU), and other regulatory agencies such as DOLE, SSS, PhilHealth, and Pag-IBIG.

Never assume that non-operation will automatically relieve an owner from regulatory compliance because failure to properly close a business can result in penalties for unprocessed tax filings, business permits and licenses, reportorial requirements, mandatory contributions, etc. Worse, it can expose the owners to potential lawsuits!

So if you ever find the need to close your business, here’s a quick guide to help you with the entire process.

Q: Where do I go to officially close my business?

The process of officially closing a business in the Philippines involves many government agencies, including: SEC, BIR, LGU, and DOLE/SSS/PhilHealth/Pag-IBIG.

Q: HOW DO I CLOSE MY BUSINESS WITH THE DOLE/SSS/PHILHEALTH/PAG-IBIG?

You have to first give a written notice to your employees and DOLE at least one month prior to the intended date of closure.

Next, you must notify SSS, PhilHealth, and Pag-IBIG of the closure to stop the company’s obligations as a contributing employer.

Here are the usual requirements:

Q: What is the process in LGU and what do I bring?

You have to start by submitting your requirements to the Barangay Hall of your business location. After paying the fees, await the release of your Barangay Clearance and Certificate of Closure. 

The next step is to head to the City Hall of your business location to submit the requirements, pay the fees, and await the release of your Certificate of Closure.

Here are the usual requirements:

Note that procedure and requirements among LGUs may vary so be sure to confirm with your LGU first.

Without proper business closure, a company will have to continue securing its annual permits and ancillary clearances. Failure to do so will result to penalties prescribed by these LGUs.

Q: What is the process in BIR and what do I bring?

This is more challenging. There are more requirements and the process is much longer with the BIR, but you have to go through it regardless to avoid open cases and legally stop filing tax returns. 

Note that the penalty for unfiled NIL tax returns could reach up to P25,000/calendar year in addition to any tax deficiency if any. These open cases do not prescribe and will continue to accumulate until settled.

Revenue Memorandum Circular No. 57-20201 prescribes the updated policy and revised checklist of documentary requirements for business closure and TIN cancellation in the BIR.

To start, you have to bring your requirements to the regional district office (RDO) of the place where your business is located and to apply for the cancellation of your business TIN. After obtaining clearance from all section of the RDO, BIR will conduct a tax audit on your operations to identify any unsettled open cases and tax liabilities. Should there be any tax deficiencies found, you have to settle them and pay for the closure fees before you can claim your Tax Clearance Certificate.

Here are the usual requirements:

  • Request-letter for business closure BIR Form 1905
  • List of ending inventory of goods, supplies, including capital good
  • Inventory of unused official receipts and sales invoices
  • Unused sales invoices/official receipts and all other accounting forms (These will destroyed before BIR personnel and officials.)

For those transacting through a representative:

  • Board Resolution or Secretary’s Certificate
  • SPA

After securing the Tax Clearance Certificate, you can now head to SEC or DTI depending on what business organization you are.

Q: What is the process in DTI and what do I bring?

Sole proprietorships can head to DTI to cancel their business name in a few easy steps: submit requirements, pay fees and claim Certificate of Cancellation.

The usual requirements include:

  • BN-Related Application Form
  • One (1) Valid ID of the BNR owner 
  • Affidavit of Cancellation that BNR owner gave notice, has no intent to defraud creditors or subsisting financial obligation. 
  • SPA/Board Resolution for representatives

Q: What is the process in SEC and what do I bring?

Corporations and partnerships can then apply with SEC to get a Certificate of Dissolution.

SEC Memorandum Circular No. 5, Series of 20222 provides for the revised guidelines on corporate dissolution. The process and requirements vary depending on the mode of dissolution. Generally, the process can be summarized in a few steps:

  1. Secure clearance/s from other regulatory agencies of the business (i.e. FDA, PEZA, BOI etc.)
  2. Submit the requirements and follow up status
  3. Pay the assessment
  4. Claim Certificate of Dissolution

Note that SEC MC No. 5 also allows Dissolution by Shortening Corporate Term pursuant to Section 136 of the Revised Corporation Code. Here, the company’s Articles of Incorporation is amended to reflect the date of the shortened term and upon its expiration, the corporation is deemed dissolved. 

In sum, the main requirements are:

If you wish to consult our experienced team and save on potential lawsuits and issues, feel free to contact us at info@aja.law.

Prepared and written by Jann Mahinay.

FOOTNOTES

  1. Revenue Memorandum Circular No. 57-2020.
  2. SEC Memorandum Circular No. 5, Series of 2022.
GUIDE TO BUSINESS PERMIT RENEWAL AND ANNUAL TAX PAYMENT
21 Jan
Business

A Guide To Business Permit Renewal and Annual Tax Payment

DID YOU KNOW THAT LATE RENEWAL OF BUSINESS REGISTRATIONS CAN RESULT IN PENALTIES INCLUDING CONFISCATION OF ASSETS AND EVEN IMPRISONMENT1?

A business permit is a license necessary for all businesses to operate legally in the Philippines2. This is a requirement before a business begins its operations and is valid only for the year it was applied for. Thus, it must be renewed annually. Traditionally, business permits must be renewed by January 20 of every year. As such, the first month of every year is a critical period for all business owners. Operating with an expired business permit may subject you and your business to a (1) Closure Order, (2) fines amounting to twenty-five percent (25%) of the taxes/fees not paid on time and an interest rate of a maximum of two percent (2%) per month of non-payment3, (3) confiscation of assets and other penalties prescribed by your Local Government Unit (LGU).

This year, several LGUs have extended their deadline for the application for renewal of business permits without surcharges and penalties. Among these LGUs are:

  1. Makati City – 31 January 2023
  2. Muntinlupa City – 31 January 2023
  3. Cebu City – 31 January 2023
  4. Marikina City – 31 March 2023

Another registration that is required annually is the registration with the Bureau of Internal Revenue (BIR) which is due on January 31 of every year. This is a yearly tax filing requirement for all businesses which, if not done, will result in a penalty of a fine of not more than One Thousand Pesos (Php1,000.00) or imprisonment of not more than six (6) months4.

The application for renewal commonly requires one to secure several documents and information, compile the requirements and process the same manually by going to the Local Government Unit (LGU) office in person. While some LGUs have launched online platforms, the majority of LGUs still mandate the filing to be done physically. The following sections will summarize the most common requirements to be prepared for each application.

HOW CAN I RENEW MY BARANGAY BUSINESS CLEARANCE?

Business Permit Renewal typically begins with the application of a Barangay Business Clearance with the Barangay Hall having territorial jurisdiction over the registered address of the business. Present the original and a photocopy of all requirements to the Barangay Hall. Each Barangay may have its own variations on the specific requirements; however, these are the most common requirements:

  1. Application Form
  2. Barangay Business Permit for the previous year
  3. Official Receipt for the previous year
  4. Latest Cedula or Community Tax Certificate
  5. Payment of Fee

The processing time for this varies from LGU to LGU which usually ranges from one (1) day to one (1) week. Also, note that the closer to the deadline for renewal of the application is, the longer the lines are which may equate to a longer processing time for the permit.

WHAT SHOULD I BRING FOR MY MAYOR’S PERMIT RENEWAL?

After the issuance of the Barangay Business Clearance, one can begin applying for the renewal of the Business Permit from the Mayor’s Office. Unless exempt, registered businesses in the Philippines must renew their respective business permits each year within their local Municipality or City hall. The most common requirements for the application for business permit renewal are as follows:

  1. Application Form
  2. Barangay Business Clearance for the Current year
  3. Mayor’s Permit for the previous year
  4. Official Receipt for the Mayor’s Permit for the previous year
  5. Audited Financial Statement /Income Tax Return/Monthly or quarterly Value Added Tax Returns or Affidavit of No Operations, if your business did not operate in the previous year
  6. Notarized Contract of Lease if renting
  7. Comprehensive General Liability Insurance
  8. Community Tax Certificate/Cedula
  9. Payment of Fees (Local Business Tax, Mayor’s Permit Fee, Sanitary Inspection Fee, and other fees as may be imposed by your LGU)

Check with your local Municipality or City the specific requirements and verify any additional requirements which may be required by reason of the nature of your business

The application for business permit renewal must be submitted on or before 20 January of each year. The deadline applies notwithstanding the date of your business registration with Department of Trade and Industry (DTI) or Securities and Exchange Commission (SEC). 

Upon submission of the complete requirements to your local Municipality or City Hall, the processing time for the issuance of the permit ranges from one (1) week to two (2) weeks depending on the LGU. 

HOW CAN I PAY THE ANNUAL BIR REGISTRATION FEE TO AVOID PENALTIES?

The last leg for the renewal is the renewal of the registration with the BIR. Yes, you need to renew your BIR registration annually. All businesses are required to pay the Php500.00 Annual Registration Fee (ARF) on or before 31 January of each year5.

To apply for BIR registration renewal, you can prepare BIR Form No. 0605 using the Electronic BIR Forms (eBIRForms) Package6. Fill in your BIR registration details based on your Certificate of Registration and submit the validated form. You should be able to receive an email notification from the BIR that the return has been received.

Finally, you can now pay the ARF of Php500.00 in an authorized bank or via any online facilities such as GCASH, Paymaya, DBPPay, Peso Net, Landbank, and Unionbank.7

Once the BIR Form No. 0605 has been filed and paid, it must be displayed in the business establishment or office premises together with other business licenses and permits.

Indeed, the filing for the renewal of business permits and registrations can be quite tedious and lengthy. But keep in mind that operating without legal permits could lead to closure of business, fines, and even imprisonment. Should you need guidance and/or assistance in renewing your business permits and registrations, or even applications for new business registrations, you may contact us for help.

Prepared and written by Aira Montemayor and Gerwin Ortega.

FOOTNOTES

  1. Disclaimer: The penalties vary from one LGU to another.
  2. Local Government Code, Sections 444(b)(3)(iv) and 455(b)(3)(iv)
  3. Local Government Code, Section 168.
  4. Revenue Memorandum Order (RMO) No. 7-2015 Annex A and National Internal Revenue Code, Section 275.
  5. National Internal Revenue Code, Sec. 236(B).
  6. Bureau of Internal Revenue, Electronic BIR Forms https://www.bir.gov.ph/index.php/eservices/ebirforms.html
  7. Bureau of Internal Revenue, ePay https://www.bir.gov.ph/index.php/eservices/epay.html
23 Aug
Business

Ready to be the Next Big Corporation?

Here’s what you need to know!

Are you one of the lucky ones who thrived as an entrepreneur during the pandemic?

Are you ready to launch a business idea you have been safekeeping all along?

Whether you are taking your venture to the next level or you are just getting started understanding how to get your business recognized as legit comes handy, let us walk you through it.

What are the kinds of business registrations in the Philippines?

In the Philippines, you may register your business as a sole proprietorship, partnership or corporation. Start-ups and ventures mainly owned by one person usually register as a sole proprietorship. Partnerships also has to kinds –  regular partnerships or general professional partnerships. If you are a licensed professional such as lawyer, public accountant, engineer and the likes- a general professional partnership could work for you. Let’s say you are running a retail business with a partner (there are two owners), this will fall under general partnerships, but if you are two dentists who would like to operate a clinic together, you would have to register as a general professional partnership. 

For other businesses where owners prefer to protect individual assets, work with more investors, issue shares and stocks of ownerships or if calling the business a corporation just appeals more, this is the right page and discussion.

Let’s get you started in the world of corporations!

We’ll give you an overview of getting a corporation registered legally  – where to process registration, requirements and timelines. First you need to meet the SEC.

Who is the SEC?

The government regulatory agency that registers and supervises the corporate sector or “corporations” is called the Securities Exchange Commission or SEC. This is your first friend in the government if you want to be legit.

What is the process for registration?

Step 1: Verification of corporate name with SEC via the SEC Company Registration System.

Step 2: Drafting and execution of the Articles of Incorporation with the assistance of a competent legal counsel.

Step 3: Deposit of cash received for subscribed shares of stocks in a banking institution in the name of the temporary treasurer-in-trust-for account. For some types of companies, you need the certificate confirming the successful opening of a TITF account, other types will not require this anymore.

Step 4: Filling of the Articles of Incorporation with  the SEC together with the following:

  • Personal information sheet of the incorporators which is autogenerated after completing the SEC Company Registration System
  • Company By-Laws

Step 5: Payment of filing and publication fees. A payment form is generated after completing the SEC Company Registration System; the payment may be settled through the online payment portal that has been created to add convenience for new registrations.

“Sounds complicated, do I need to do all these by myself?”

Sure, you may! Looking at the steps, you may assume that anyone who knows how to comply with instructions could process this. BUT! Having an expert, like a lawyer with the right expertise and rigorous experience could be a lifesaver! Someone with experience can quickly prepare the requirements, foresee possible challenges, and address them even before going to the SEC. An experienced lawyer can save you from unnecessary (and possibly expenses!)  going back-and-forth with the SEC. Count the time and resources you can save. Hiring experts would actually save you time and money, as you skip the trial-and-error of a D-I-Y registration and ensure a more efficient experience overall.

Generally, what are the kinds of corporations? There are two:  Domestic and Foreign.

A domestic corporation is a corporation that is registered and existing under Philippine laws. A common misconception is that it cannot be domestic if owners are foreign. But this is not the case, because a domestic corporation can be Filipino-owned or foreign-owned. If more than 40% of the shareholders of the corporation are foreigners- then it is a foreign-owned corporation. So yes, you may have foreigners as owners of domestic corporations, which means you are also free to get shareholders from outside the country. In addition, the foreign owners do not need to be living in the Philippines to own and contribute to the corporation, but all documents need to be originally signed so if you have foreign owners, expect to be going through a lot of overseas mailing and coordination with the consular offices where the foreign owners are from.

If you are registering as a domestic corporation, the next step is to identify the class of the corporation, which will determine  the specific requirements that need to be prepared. Here is a list of domestic corporation classes:

  1. One Person Corporation

A One Person Corporation (OPC) is a corporation composed of a single stockholder who may be a natural person, whether a Filipino or a foreigner, a trust or an estate.

  1. Stock Corporation

Stock corporations, with two or more shareholders, are the most common corporate vehicle for persons establishing their businesses for profit. A stock corporation’s capital is divided into shares of stock representing proportional ownership of the corporation. Stock corporations may offer these shares of stock to the public and may distribute the surplus profits of the corporation to its shareholders.

  1. Nonstock Corporation

Nonstock corporations are created primarily for public good and welfare such as for charitable, religious, educational and social civic purposes. It does not issue shares of stock to its members and cannot distribute any profits to its members.

The second kind, foreign corporation, is a corporation formed, organized or existing under laws other than those of the Philippines. Imagine a business that started in another country and  ventures into the Philippines as part of its expansion. When that company  enters the Philippines, they are considered foreign corporations.

A foreign corporation may structure its organization by: incorporating a domestic corporation, registering a Branch Office, registering a Representative Office, registering a Regional/Area Headquarters, or registering a Regional Operating Headquarters. The path to your registration will depend on the route you’ll take as a foreign corporation.

How long is the business registration process?

A realistic timeline for the process of incorporation is two weeks to one month. We need to get all documents ready and submitted to the SEC, then our two weeks to one month countdown starts. If you have signatories who are outside the Philippines, additional time should be alloted. Documents would have to be sent to them for their original signature, then the Philippine consular office has to authenticate the documents before getting them back to the Philippines for submission with the SEC.

Once you have registered with the SEC, what’s next?

What’s next is the other government agencies! Baranggay and city level permits have to be processed. Depending on which city you’ll register, the documents and timeline may vary. Once these permits are done, we can proceed with the process with the Bureau of Internal Revenue (BIR). It will be a different ballgame once we’re in this step, and would call for a separate discussion.

“These all sound complicated!” If you’re fresh from your pandemic business’ success and this step overwhelms you, we understand. If you started with the mindset, “start small” and the thought of consulting or hiring a lawyer intimidates you, remember- there is no harm in just asking. More often than not, lawyers are more than happy to provide free initial consultation to assess your needs before you commit to anything, we highly suggest you drop us a message so you can get a picture of how we can help you. You’d even be surprised that fees are actually not as scary or heavy as you think.

The next steps to continue growing your  business can be a much easier and peaceful process by letting experts take care of the “complicated” parts, this way, you can focus on utilizing your resources to build your business and grow your sales and revenues.