How to Form a Private Company for Residential and Commercial Real Estate Transactions

How to Form a Private Company for Residential and Commercial Real Estate Transactions in the Philippines
(Legal Article – For General Information Only; Not Legal Advice)

I. Introduction

Real estate is a robust sector in the Philippine economy, providing a wide range of opportunities in both residential and commercial transactions. Whether you aim to be a property developer, a brokerage firm, or a property management company, forming a private company is typically the starting point to legally operate and protect yourself and your investment. This article provides an overview of the legal considerations, registration processes, and key regulations for forming a private company in the Philippines that engages in residential and commercial real estate transactions.

II. Choosing the Appropriate Business Structure

Before registering a company, you must determine the legal structure most suitable for your intended real estate activities. Each structure has varying implications on liability, ownership, and governance.

  1. Sole Proprietorship

    • Definition: A business owned by a single individual who has full control and responsibility.
    • Advantages: Easiest and least expensive structure to register; full control over decision-making.
    • Disadvantages: Unlimited personal liability; the owner’s personal assets can be used to satisfy business obligations.
    • Applicability to Real Estate: A sole proprietor can engage in real estate brokerage, leasing, or small-scale development; however, large-scale projects or property acquisitions might require more substantial capital and legal protections.

  2. Partnership

    • Definition: A business organization formed by two or more persons who agree to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.
    • Advantages: Shared capital and broader skill sets; relatively straightforward registration.
    • Disadvantages: Partners are jointly and severally liable; potential internal disputes if the partnership agreement is not comprehensive.

  3. Corporation

    • Definition: A juridical entity established under the Corporation Code of the Philippines (Republic Act No. 11232, the Revised Corporation Code). It is separate and distinct from its stockholders.
    • Advantages: Limited liability for shareholders; perpetual existence (unless the articles of incorporation state otherwise); potential to raise capital by issuing shares.
    • Disadvantages: More complex registration requirements; higher maintenance costs (e.g., compliance with the Securities and Exchange Commission or “SEC” reporting).
    • Types:
      • Stock Corporation: Has capital stock divided into shares and is authorized to distribute dividends to its shareholders.
      • Non-Stock Corporation: Created primarily for charitable, educational, cultural, or similar purposes without the intention of profit distribution. (Less common for real estate businesses.)
      • One Person Corporation (OPC): A corporation with a single stockholder, introduced by the Revised Corporation Code. It combines the benefits of limited liability with the simplicity of having one person in control.

III. Foreign Ownership Restrictions in Real Estate

Under the Philippine Constitution and various real estate laws, direct ownership of land is generally reserved for Filipino citizens or Philippine-owned entities (i.e., at least 60% Filipino-owned). For corporations wishing to acquire land, the rule is that the corporation must be at least 60% owned by Filipino citizens.

  • Key Takeaway: If you plan to form a real estate company with foreign investors, you must ensure compliance with the 60-40 rule in favor of Filipino citizens if land ownership is involved. Foreign nationals and foreign corporations may engage in long-term leases and condominium units (subject to the Condominium Act) but face strict restrictions on direct land ownership.

IV. Steps to Register a Private Company

Below is a general step-by-step guide to forming a private company (corporation) intended for real estate transactions. Please note that specific procedures and requirements can change over time, so it is essential to consult the SEC and relevant authorities or legal counsel for the most up-to-date information.

  1. Name Verification and Reservation

    • Conduct a name availability search on the SEC’s online platform to ensure that your chosen company name is unique and does not conflict with existing corporations.
    • Reserve the name once you have confirmed availability.

  2. Drafting the Constitutive Documents

    • Articles of Incorporation (AOI): This document states the primary purpose of the corporation (e.g., real estate brokerage, property development, etc.), its principal office, the number of directors or trustees, and other basic details.
    • Bylaws: This outlines the internal rules and procedures, including meeting schedules, quorum requirements, duties of corporate officers, and other governance mechanisms.
    • For a One Person Corporation (OPC), you will only need an Articles of Incorporation specifying the single stockholder, nominee, and alternate nominee.

  3. Subscription and Payment of Capital

    • The incorporators or stockholders must subscribe to the corporation’s shares.
    • Under the Revised Corporation Code, the minimum subscription requirement has been eased, but companies are still generally required to have a sufficient authorized capital stock to carry out their real estate-related purpose.
    • You must typically deposit a portion of the paid-up capital (at least 25% of the subscribed capital stock) in a bank, then secure a bank certificate to show proof of the deposit, if applicable.

  4. Filing with the Securities and Exchange Commission (SEC)

    • Submit the proposed name, Articles of Incorporation, Bylaws (for regular corporations), Treasurer’s Affidavit, bank certificate of deposit, and other SEC-required documents.
    • Pay the filing and registration fees.
    • Once approved, the SEC will issue the Certificate of Incorporation (and Certificate of Filing of Bylaws, if applicable), which legally brings the corporation into existence.

  5. Post-Registration Steps

    • BIR Registration: Secure a Tax Identification Number (TIN) for the corporation and register your business books of account and official receipts/invoices.
    • Local Government Unit (LGU) Permits: Obtain the Mayor’s Permit (or Business Permit) from the city or municipality where your principal office is located. You will need to submit your SEC documents, lease contract (or proof of ownership of office space), barangay clearance, and other LGU-specific requirements.
    • Other Government Agencies:
      • Register with the Social Security System (SSS), Philippine Health Insurance Corporation (PhilHealth), and Home Development Mutual Fund (Pag-IBIG) for employees’ mandatory benefits.
      • If you plan to engage in property development, secure necessary permits from the Department of Human Settlements and Urban Development (DHSUD), previously HLURB.
      • For brokerage activities, a licensed real estate broker must be in your company, registered with the Professional Regulation Commission (PRC).

V. Real Estate Broker Licensing Requirements

The Real Estate Service Act (Republic Act No. 9646) requires that any individual or entity practicing real estate brokerage, appraisals, or consultancy must be duly licensed or must hire duly licensed professionals. Key points:

  1. Licensed Real Estate Brokers

    • An individual must pass the PRC-administered real estate broker examination and obtain a PRC license.
    • If the company’s main line of business is real estate brokerage, it must have at least one licensed real estate broker.

  2. Corporate License

    • The SEC requires that the corporation state its primary or secondary purpose for real estate brokerage if that is part of its business.
    • The company’s designated licensed broker(s) must register with the PRC and represent the corporate entity in transactions.

  3. Continuous Professional Development (CPD)

    • Licensed brokers must comply with CPD requirements to renew their licenses and keep them in good standing.

VI. Compliance with the Department of Human Settlements and Urban Development (DHSUD)

For property developers or companies that plan to engage in selling subdivision lots and condominium units, additional registration and licensing from DHSUD are crucial:

  1. Developer’s License to Sell

    • Before marketing any residential subdivision or condominium project, the developer must obtain a License to Sell from the DHSUD.
    • Requirements typically include the project’s development permits, master plans, and proof of financial capability.

  2. Advertisements and Contract to Sell

    • DHSUD regulates real estate advertising to ensure fair marketing practices.
    • Standard contract templates or key legal clauses must be compliant with the relevant laws and DHSUD guidelines.

VII. Capitalization and Financial Considerations

Real estate transactions often involve large sums of money. Corporations engaging in property development or large-scale brokerage should ensure they have the appropriate capitalization:

  1. Authorized Capital Stock (ACS)

    • The Articles of Incorporation must reflect an ACS commensurate with the scale of the real estate projects you intend to undertake.
    • The bigger the projects, the larger the required capital. Investors often scrutinize the ACS before investing.

  2. Banking and Financing

    • Real estate companies typically maintain relationships with banks for financing projects or client financing facilities (e.g., in-house financing or tie-ups with banks for end-user financing).

  3. Taxation

    • Real estate companies are subject to regular corporate income tax, Value-Added Tax (VAT), and other transaction taxes (e.g., Documentary Stamp Tax, local transfer tax).
    • Engage the services of a tax consultant or accountant well-versed in real estate transactions for correct and efficient tax reporting.

VIII. Corporate Governance and Internal Controls

  1. Board of Directors / Officers

    • For a stock corporation (with two or more shareholders), there must be a minimum of 2 to 15 directors (all of whom must be registered owners of at least one share in the corporation).
    • The directors elect corporate officers such as the President, Treasurer, and Corporate Secretary.
    • The Corporate Secretary must be a Filipino citizen (per the Revised Corporation Code).

  2. Annual Requirements

    • Submission of General Information Sheet (GIS) to the SEC within 30 days from the annual stockholders’ meeting or the anniversary date of incorporation for OPCs.
    • Submission of Audited Financial Statements (AFS) stamped “received” by the Bureau of Internal Revenue (BIR) on or before the deadline for filing with the SEC.
    • Payment of annual registration fees with the BIR and renewal of business permits with the LGU.

  3. Anti-Money Laundering (AML) Compliance

    • Real estate transactions are considered “covered transactions” under the Anti-Money Laundering Act (AMLA), especially when dealing with large sums.
    • Compliance with Know-Your-Customer (KYC) requirements is important to avoid sanctions or penalties.

IX. Special Considerations for Commercial Real Estate

When dealing with commercial real estate:

  1. Lease Agreements

    • Commercial lease agreements may require more complex provisions than residential ones (e.g., fit-out clauses, escalation rates, renewal options).
    • Proper drafting and review by legal counsel is recommended.

  2. Zoning and Regulatory Approvals

    • Commercial properties may have more stringent zoning requirements and building permits.
    • Before acquiring or developing a commercial property, ensure that the location is zoned for commercial use.

  3. Foreign Lessees or Investors

    • Many commercial real estate ventures involve foreign investors or multinational tenants. Ensure compliance with foreign ownership and leasing rules, and consult local tax regulations on foreign-sourced income.

X. Practical Tips and Common Pitfalls

  1. Comprehensive Business Plan

    • Real estate transactions involve sizable capital outlays. Having a solid feasibility study and business plan is crucial for guiding corporate decisions.

  2. Seek Professional Counsel

    • Engage a lawyer or law firm experienced in real estate law, corporate law, and tax. A professional can help navigate regulatory requirements and draft ironclad contracts.

  3. Observe Due Diligence

    • Whether acquiring land or entering into a joint venture, thorough due diligence on titles, liens, encumbrances, zoning restrictions, and past ownership records is crucial.
    • Title verification and site inspection prevent future disputes and legal complications.

  4. Corporate Housekeeping

    • Keep the company in good standing by submitting annual filings on time.
    • Maintain organized and up-to-date corporate records, which can be inspected by the SEC or investors.

  5. Compliance with Labor Laws

    • If you hire employees (e.g., administrative staff, agents, accountants), you must comply with the Labor Code, SSS, PhilHealth, Pag-IBIG contributions, and DOLE regulations.

XI. Conclusion

Forming a private company for residential and commercial real estate transactions in the Philippines involves a multifaceted regulatory process, from choosing the right business structure and registering with the SEC to acquiring licenses from the DHSUD (for developers) and ensuring compliance with real estate brokerage laws under RA 9646. Foreign ownership restrictions and stringent zoning laws also affect how real estate enterprises operate. Throughout this entire process, it is critical to engage experienced legal and accounting professionals to ensure compliance, protect investments, and maintain long-term viability in the dynamic Philippine real estate market.

Disclaimer: This article provides general information on forming a private company for real estate transactions in the Philippines. It is not a substitute for professional legal advice. For specific guidance tailored to your particular situation, please consult a qualified attorney or relevant government agencies.

Disclaimer: This content is not legal advice and may involve AI assistance. Information may be inaccurate.

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