BUSINESS ORGANIZATIONS

I. BUSINESS ORGANIZATIONS UNDER PHILIPPINE LAW

Business organizations in the Philippines are primarily governed by the Revised Corporation Code of the Philippines (Republic Act No. 11232), the Civil Code of the Philippines, and other relevant special laws like the Partnership Law and Cooperative Code. These laws lay out the structures, formation, governance, and obligations of various business organizations.

A. Types of Business Organizations

  1. Sole Proprietorship

    • A business owned and operated by a single individual.
    • The owner has unlimited liability, meaning personal assets can be used to pay off debts and liabilities of the business.
    • Formation: Requires registration with the Department of Trade and Industry (DTI), Bureau of Internal Revenue (BIR), and possibly the local government (for permits and licenses).
    • Taxation: Sole proprietors are subject to income tax under the National Internal Revenue Code (NIRC) and may also be required to pay value-added tax (VAT) if applicable.

  2. Partnership

    • Governed by the Civil Code of the Philippines.
    • Formed by two or more persons who agree to contribute money, property, or industry to a common fund, with the intention of sharing profits.
    • Types:
      • General Partnership: Partners have unlimited liability.
      • Limited Partnership: At least one partner has unlimited liability, while the other(s) may have limited liability to the extent of their contribution.
    • Registration: Partnerships are registered with the Securities and Exchange Commission (SEC).
    • Taxation: Subject to a corporate income tax rate similar to corporations.

  3. Corporation

    • Governed by the Revised Corporation Code.
    • A legal entity separate from its owners, formed by at least two incorporators.
    • Owners (shareholders) have limited liability; liability is limited to the extent of their capital contribution.
    • One-Person Corporation (OPC): A special type of corporation with only one incorporator (under the Revised Corporation Code).
    • Types:
      • Stock Corporation: Has shareholders and issues shares of stock.
      • Non-stock Corporation: No shares of stock; typically organized for charitable, educational, or religious purposes.
    • Registration: Corporations must register with the SEC.
    • Taxation: Corporations are subject to corporate income tax, and dividends distributed to shareholders are also taxed.

  4. Cooperative

    • Governed by the Cooperative Code of the Philippines (Republic Act No. 9520).
    • An organization owned and operated by its members, with the purpose of mutual benefit.
    • Registration: Cooperatives are registered with the Cooperative Development Authority (CDA).
    • Taxation: Cooperatives enjoy tax exemptions under certain conditions, particularly if they meet the requirements of being a duly-registered cooperative engaged in non-profit activities.

B. Formation and Registration of Business Organizations

  1. Sole Proprietorship

    • Register the business name with the DTI.
    • Obtain necessary permits and licenses from the local government unit (LGU).
    • Secure a Tax Identification Number (TIN) from the BIR.

  2. Partnership

    • Draft and execute a Partnership Agreement.
    • Register the partnership with the SEC, providing details on the partners, contributions, and other required information.
    • Secure a TIN from the BIR.
    • Obtain business permits and licenses from the LGU.

  3. Corporation

    • Prepare and file the Articles of Incorporation and By-laws with the SEC.
    • OPC: Submit the required documents for a One-Person Corporation if only one incorporator.
    • Obtain a TIN and comply with all registration requirements with the BIR and LGU.
    • Corporations are also required to comply with the Anti-Money Laundering Act (AMLA) rules, submit annual financial statements, and undergo audits.

  4. Cooperative

    • Formulate a Cooperative Development Plan and Articles of Cooperation.
    • Register with the CDA.
    • Secure BIR registration for tax purposes, even though cooperatives enjoy certain exemptions.

C. Governance and Legal Requirements

  1. Sole Proprietorship

    • Simple governance structure, with the owner having complete control over operations.
    • However, compliance with local and national laws (e.g., labor, environmental regulations) is still required.

  2. Partnership

    • Governed by the Partnership Agreement and provisions of the Civil Code.
    • Each partner acts as an agent of the partnership, and all partners are liable for the actions of each other in the course of business.

  3. Corporation

    • Governed by a Board of Directors elected by the shareholders.
    • The corporation must hold regular and special meetings in accordance with the By-laws.
    • One-Person Corporation (OPC): The sole incorporator serves as both director and officer, simplifying governance.
    • Compliance with SEC reporting requirements (Annual Financial Statements, General Information Sheet, etc.) is mandatory.

  4. Cooperative

    • Managed by a Board of Directors elected by members.
    • Must follow the Cooperative Development Plan and adhere to CDA reporting requirements, which include annual reports and financial statements.

D. Taxation

  1. Sole Proprietorship

    • Subject to individual income tax based on graduated tax rates under the TRAIN Law (Tax Reform for Acceleration and Inclusion), ranging from 20% to 35% for individuals.
    • VAT or Percentage Tax may apply depending on the business' gross sales or receipts.

  2. Partnership

    • Partnerships are subject to corporate income tax at the rate of 25% (or 20% for smaller businesses with net taxable income not exceeding PHP 5 million and total assets not exceeding PHP 100 million).
    • Partners are taxed individually on their share of the profits.

  3. Corporation

    • Corporations pay corporate income tax based on the revised Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act:
      • 25% for regular corporations.
      • 20% for corporations with net taxable income not exceeding PHP 5 million and total assets not exceeding PHP 100 million.
    • Dividends distributed to shareholders are subject to 10% final withholding tax for domestic corporations.

  4. Cooperative

    • Cooperatives that meet the requirements under the Cooperative Code enjoy tax exemptions, particularly if their activities are directed towards mutual benefit and not for profit.
    • However, cooperatives engaging in commercial activities may be subject to tax on those operations.

E. Dissolution and Liquidation

  1. Sole Proprietorship

    • The business ceases upon the death or decision of the owner.
    • Liquidation involves settling debts and distributing remaining assets to the owner.

  2. Partnership

    • A partnership may be dissolved by:
      • Death, incapacity, or withdrawal of a partner.
      • Agreement of the partners.
      • Court decree.
    • Liquidation involves winding up the business, paying off creditors, and distributing remaining assets among partners.

  3. Corporation

    • A corporation may be dissolved through:
      • Voluntary dissolution by majority vote of the board and approval of at least two-thirds of the shareholders.
      • Involuntary dissolution by the SEC for failure to comply with legal requirements.
      • Dissolution through expiration of the corporate term, though under the Revised Corporation Code, a corporation can now exist perpetually unless the Articles of Incorporation provide otherwise.
    • Liquidation involves paying off creditors and distributing assets to shareholders.

  4. Cooperative

    • Dissolution of cooperatives follows the rules of the CDA and involves a vote of the members.
    • Liquidation must prioritize the satisfaction of liabilities before the distribution of any remaining assets to members.

II. TAXATION LAWS APPLICABLE TO BUSINESS ORGANIZATIONS

Taxation in the Philippines is primarily governed by the National Internal Revenue Code (NIRC), as amended by various tax reform laws such as the TRAIN Law and the CREATE Act. The Bureau of Internal Revenue (BIR) is responsible for administering and enforcing tax laws.

A. General Types of Taxes

  1. Income Tax

    • Applies to individuals, partnerships, and corporations.
    • Different tax rates apply based on the entity type (individual vs. corporate taxpayers).

  2. Value-Added Tax (VAT)

    • A 12% tax imposed on the sale of goods, services, or properties.
    • Required for businesses with gross annual sales or receipts exceeding PHP 3 million.

  3. Percentage Tax

    • A 3% tax imposed on businesses that do not meet the VAT threshold (gross sales below PHP 3 million).

  4. Withholding Tax

    • Businesses are required to withhold taxes on certain income payments such as compensation, dividends, and professional fees.

  5. Documentary Stamp Tax (DST)

    • A tax on certain documents, instruments, loan agreements, and transactions.

The legal and tax framework for business organizations in the Philippines is comprehensive and evolving, with recent reforms streamlining processes and offering incentives. Compliance with corporate governance and taxation requirements is crucial to avoid legal and financial consequences.

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