LETTER TO ATTORNEY

Dear Attorney,

I trust this message finds you in good health. I am a prospective entrepreneur interested in forming a corporation in the Philippines. I would like to request an introductory meeting to discuss the legal intricacies and the step-by-step process required for incorporating under Philippine law. My goal is to understand all compliance and documentary requirements, as well as any best practices you might recommend for a smooth registration experience.

Your legal expertise on this matter is greatly appreciated. I look forward to hearing from you regarding your availability. Thank you in advance for your kind assistance.

Sincerely,
A Prospective Entrepreneur

LEGAL ARTICLE ON PHILIPPINE CORPORATE LAW

When seeking to establish a corporation in the Philippines, one must carefully navigate the prevailing laws, regulations, and administrative practices. The primary legal framework governing corporate formation in the country is the Revised Corporation Code of the Philippines (Republic Act No. 11232). The following discussion covers the essential components, the types of corporations available, the registration process, compliance issues, and post-incorporation obligations. This comprehensive guide is intended to inform prospective entrepreneurs, investors, and other interested parties about the most critical aspects of incorporating in the Philippines.

1. Legal Framework: The Revised Corporation Code

Signed into law in February 2019, the Revised Corporation Code modernized the Philippines’ corporate rules. Key changes include:

One Person Corporation (OPC): The Revised Code allows a single individual to form a corporation without the need for other stockholders.
Perpetual Corporate Existence: Corporations are no longer required to limit their life span to 50 years; they may now exist perpetually unless otherwise stated in the Articles of Incorporation.
Greater Regulatory Flexibility: The Code has provisions that reduce certain documentary and compliance requirements for small corporations.

These changes aim to make corporate formation more accessible and streamline the regulatory framework.

2. Types of Corporations in the Philippines

Understanding the various types of corporations available under Philippine law is crucial:

Stock Corporation: Formed for profit, with capital stock divided into shares and distributed among shareholders.
Non-Stock Corporation: Organized principally for non-profit purposes (e.g., charitable, educational, cultural). Members do not hold shares of stock.
One Person Corporation (OPC): A single-stockholder corporation that allows individuals to limit their liability more conveniently.
Foreign-Owned Corporations: Entities majority-owned by foreign nationals. Such corporations must comply with rules set forth in the Foreign Investments Act (FIA), Anti-Dummy Law, and other relevant regulations.
Subsidiaries and Branches: Foreign corporations may either establish a subsidiary or branch in the Philippines, each subject to specific registration protocols under the Securities and Exchange Commission (SEC) and other government agencies.

3. Eligibility Requirements

While Philippine law encourages entrepreneurship, certain industries are restricted or limited to Filipino ownership under the Foreign Investment Negative List, also known as the FINL. Prospective investors should ascertain whether the intended corporate purpose is permissible for foreign ownership or if it requires special licenses. Key considerations include:

Nationality Requirements: Certain areas of economic activity (e.g., media, public utilities, or land ownership) impose strict Filipino ownership thresholds.
Capital Requirements: Some industries mandate a minimum paid-up capital for foreign-owned entities, often requiring higher capitalization compared to wholly Filipino-owned enterprises.
Professional Licensing: If the corporate business involves a regulated profession, additional requirements may include compliance with the Professional Regulation Commission (PRC) rules.

4. Steps in Incorporation

Below is an overview of the general process for registering a Philippine corporation:

Verification and Reservation of Proposed Corporate Name: Prospective incorporators must submit their chosen corporate name to the SEC to ensure it is neither identical nor confusingly similar to existing entities.
Drafting of Articles of Incorporation and By-Laws:
- Articles of Incorporation: This foundational document details the corporate name, purpose, principal office address, term of existence (if not perpetual), names of incorporators, authorized capital stock, subscription details, and other essential corporate information.
- By-Laws: These set forth the internal governance framework, such as the rules on meetings, appointment of officers, and other administrative procedures.
Subscription and Payment of Capital: Incorporators must subscribe to a portion of the authorized capital stock and pay at least the minimum paid-up capital required by law, if applicable. The most common practice is to open a bank account in the name of the corporation under incorporation, deposit the necessary capital, and obtain a certificate of deposit.
Filing with the SEC: Once the documents and supporting papers (e.g., Treasurer’s Affidavit, bank certificate of deposit, other documentary requirements) are completed, they are submitted to the SEC for review. Payment of filing fees is also required.
Issuance of Certificate of Incorporation: If the SEC finds the documents and information in order, it issues a Certificate of Incorporation, officially granting the entity its juridical personality.

5. Key Components of the Articles of Incorporation

To avoid delays and potential rejections, the Articles of Incorporation must be prepared meticulously. Important clauses typically include:

Corporate Name: Must be distinct, not misleading, and compliant with SEC guidelines.
Principal Office Address: Specifies the location of the corporation’s headquarters, typically within the Philippines.
Corporate Purpose: Must clearly indicate the nature of the business the corporation intends to undertake. The purpose should neither be illegal nor contrary to public policy.
Term of Existence: Under the Revised Corporation Code, a corporation may have perpetual existence unless a shorter term is expressly provided.
Names and Details of Incorporators: Incorporators are those who originally form and compose the corporation. Under the previous Corporation Code, at least five incorporators were needed; the Revised Code lowered this requirement to two (and even one in the case of an OPC).
Authorized Capital Stock, Subscriptions, and Par Value: Corporations typically indicate the total capital the company can raise, how many shares are allocated, the par value per share, and how many shares are subscribed.
Treasurer-in-Trust: Identifies the individual responsible for the initial capitalization, confirming the subscription details and the deposit of funds.

6. One Person Corporation (OPC) Requirements

For entrepreneurs who wish to go solo, the OPC structure provides significant advantages. Key points include:

Sole Incorporator and Director: Only one individual is needed to form an OPC. That sole incorporator also serves as the sole director and president.
Nominee and Alternate Nominee: To ensure business continuity, an OPC must designate a nominee and an alternate nominee who will take over management in case of the incapacity or death of the single stockholder.
Simplified Corporate Governance: An OPC is exempt from certain corporate formalities like board meetings, though records of corporate decisions must still be properly maintained.

7. Foreign-Owned Corporations and Restrictions

Foreign nationals seeking to incorporate in the Philippines should pay special attention to industry limitations and capitalization requirements. In particular:

Foreign Investment Negative List (FINL): Specifies industries in which foreign equity is either prohibited or limited. Certain areas like mass media, small-scale mining, and the practice of professions are either restricted or entirely closed to foreign investors.
Paid-Up Capital Requirements: If more than 40% foreign ownership is involved, the Foreign Investments Act stipulates certain minimum capitalization rules. For example, domestic market enterprises (entities earning income primarily within the Philippines) with more than 40% foreign equity usually must have a US$200,000 minimum paid-in capital, which may be reduced to US$100,000 under certain conditions.
Anti-Dummy Law: Restricts foreigners from using local citizens as dummies in industries where foreign ownership is limited. Violations can result in criminal penalties, fines, or revocation of business permits.

8. Post-Incorporation Registrations

After securing the SEC Certificate of Incorporation, the corporation must complete several additional steps:

Local Government Unit (LGU) Registrations: Obtain a Mayor’s Permit or Business Permit from the city or municipality where the principal office is located. Additional requirements may include clearance from the fire department, sanitary permits, and other specific local fees.
Bureau of Internal Revenue (BIR) Registration: The corporation must register with the BIR to secure a Tax Identification Number (TIN), register books of account, and obtain authority to print official receipts and invoices.
Social Security System (SSS), Philippine Health Insurance Corporation (PhilHealth), and Home Development Mutual Fund (Pag-IBIG): Enrollment is mandatory if the corporation plans to hire employees.
Other Regulatory Agencies: Depending on the nature of the business (e.g., food processing, export, energy, or telecommunications), additional licenses from specialized regulatory bodies may be required.

9. Corporate Governance and Compliance

Filipino corporations must adhere to ongoing governance and compliance obligations:

Board of Directors and Corporate Officers: The Revised Corporation Code provides that a corporation must have a board of directors (unless it is an OPC). A president, treasurer, and corporate secretary are mandatory officers. The corporate secretary must be a resident and citizen of the Philippines, while the treasurer must be a resident of the country.
Regular and Special Meetings: Philippine law mandates annual stockholders’ or members’ meetings. Proper notice periods and quorum requirements must be followed.
Books and Records: Corporations must maintain a stock and transfer book (for stock corporations), minutes of meetings, and other corporate records that are accurate and updated.
Annual General Information Sheet (GIS) and Audited Financial Statements (AFS): These documents must be filed with the SEC on an annual basis. The GIS contains updated information on the corporation’s officers, stockholders, and capital structure. The AFS must be prepared by an independent Certified Public Accountant (CPA) and, in certain cases, must be audited if the corporation’s total assets or revenue exceed a specific threshold.

10. Liability and Protection for Shareholders

One of the principal reasons for forming a corporation is the limited liability accorded to shareholders. They are generally liable only up to their subscribed shares. However, certain exceptions apply:

Piercing the Corporate Veil: Courts may hold shareholders personally liable if the corporation is used for fraudulent activities, if it is undercapitalized, or if it fails to operate as a distinct legal entity.
Director and Officer Liability: Directors and officers may be held personally accountable for willful mismanagement, gross negligence, or violations of fiduciary duties.

11. Corporate Dissolution and Winding Up

While corporations in the Philippines typically enjoy perpetual existence, dissolution may be necessary under certain circumstances:

Voluntary Dissolution: Initiated by the corporation’s board of directors and stockholders following procedures laid out in the Revised Corporation Code.
Involuntary Dissolution: May be ordered by a court or the SEC for causes such as serious legal violations or insolvency.
Liquidation Process: Dissolution is followed by liquidation, wherein the corporation settles liabilities and distributes remaining assets to shareholders.

12. Strategic Considerations

When deciding to incorporate in the Philippines, prospective entrepreneurs should undertake the following:

Feasibility Study: Assess the economic viability of the intended enterprise, including potential risks and opportunities.
Tax Planning: The Philippines imposes corporate income tax on domestic corporations’ worldwide income. Tax incentives may be available if the corporation is registered with specific government agencies, such as the Philippine Economic Zone Authority (PEZA) or the Board of Investments (BOI).
Corporate Structure and Control: Determine the most favorable structure for decision-making. For multi-shareholder corporations, crafting a shareholders’ agreement is prudent to address governance and potential disputes.
Professional Assistance: Consulting reputable legal, accounting, and tax advisors is critical. Complex ventures with foreign participation demand careful coordination to ensure compliance with various laws and regulations.

13. Common Pitfalls and Best Practices

Inadequate Capitalization: Under-funding your corporation may prompt regulators to question its legitimacy.
Name Conflicts: Failure to conduct a thorough search for the proposed corporate name may result in rejection or conflict with existing businesses.
Failure to Comply with Mandatory Filings: Neglecting to submit annual reports, audited financial statements, or the General Information Sheet can lead to fines, penalties, or revocation of corporate registration.
Unclear Corporate Purpose: A vaguely defined or overly broad purpose might trigger additional scrutiny from regulators.

14. Preparing for an Introductory Meeting with a Lawyer

Prior to meeting with a lawyer to discuss your incorporation plans:

Compile Preliminary Information: Prepare details on the proposed business nature, estimated capitalization, and projected ownership structure (including nationality of investors, if any).
Assess Potential Regulatory Hurdles: Identify if the business falls under any restricted category or requires specialized permits.
Outline Future Growth Strategy: Anticipate expansions or additional business lines to incorporate them into the corporate purpose from the outset.
List Specific Questions: Develop a list of concerns on taxation, licensing, foreign equity restrictions, and legal compliance to maximize the value of the consultation.

15. Conclusion

Establishing a corporation in the Philippines can be an advantageous move for entrepreneurs and investors aiming to tap into the country’s dynamic economy. The Revised Corporation Code has introduced critical reforms that simplify the incorporation process and reduce red tape, making it more accessible to both Filipino nationals and foreign investors. Nonetheless, compliance with legal formalities and regulatory requirements remains paramount. Thoroughly understanding the legal framework—and seeking expert legal counsel—helps ensure a successful and compliant corporate launch.

By carefully following the prescribed steps—from verifying the corporate name to securing relevant clearances post-incorporation—prospective corporations can secure a stable foundation for growth. Additionally, ongoing compliance through timely filing of required reports and proper governance underscores the commitment to responsible business operations. Ultimately, incorporating in the Philippines offers distinct opportunities for entrepreneurs ready to navigate and uphold the nation’s legal and regulatory landscape.

Disclaimer: This article is provided for informational purposes only and does not constitute legal advice. Prospective entrepreneurs and investors should consult a qualified legal professional to address specific concerns and ensure compliance with applicable Philippine laws and regulations.