Dear Attorney,
I am in the process of setting up a corporation and would like to understand any potential legal concerns that I should be aware of. Specifically, I’m unsure about compliance with the Philippine Corporation Code, the necessary capital requirements, and the legal responsibilities of the directors and incorporators. Could you kindly provide insights on the most critical issues that may arise during the registration and early operational stages of a corporation? I want to avoid any pitfalls that could lead to penalties or legal complications.
Thank you in advance for your assistance.
Sincerely,
A Business Owner Preparing to Incorporate
Insights
When setting up a corporation in the Philippines, several legal concerns must be addressed to ensure compliance with both the Revised Corporation Code of the Philippines (Republic Act No. 11232) and other relevant regulations.
1. Incorporators and Directors’ Requirements
The Revised Corporation Code now allows a corporation to have a minimum of one incorporator and a maximum of 15. Incorporators can either be natural persons or juridical entities. If the incorporator is a natural person, they must be of legal age and should hold at least one share of stock in the company. For the board of directors, only a majority need to be residents of the Philippines.
A key concern for the incorporators and directors is understanding their fiduciary duties. They are expected to act in the best interest of the corporation and its shareholders. Failure to fulfill these duties can lead to personal liability, particularly in cases involving fraud or gross negligence.
2. Minimum Capital Requirements
One of the most common misconceptions about setting up a corporation is the capital requirement. Under the Revised Corporation Code, there is no longer a mandatory minimum capital stock requirement for most corporations, except as provided by specific laws or regulations for certain industries. However, corporations with foreign equity ownership may still be subject to minimum capital requirements under the Foreign Investments Act (Republic Act No. 7042), especially if engaged in certain restricted activities.
While capital stock is flexible, it is crucial to ensure that the initial capitalization is sufficient to cover startup costs and initial business operations. Additionally, the corporation must comply with the requirement of paid-up capital, which, under the law, must be at least 25% of the authorized capital stock, with at least 25% of the subscription paid at the time of incorporation.
3. Corporate Governance and Reporting Obligations
The corporation will be required to maintain strict governance procedures. This includes having bylaws that outline the internal management structure and procedures, as well as ensuring compliance with statutory requirements such as the filing of the General Information Sheet (GIS) and audited financial statements with the Securities and Exchange Commission (SEC) on an annual basis.
A failure to comply with these filing obligations can lead to penalties, suspension, or even revocation of the corporation’s registration. The directors and officers of the corporation may also be held liable for lapses in fulfilling their corporate reporting duties.
4. Corporate Liability and the Veil of Corporate Fiction
One of the most attractive features of a corporation is the limited liability of its shareholders. Under normal circumstances, shareholders are only liable to the extent of their contributions. However, it is important to note that the doctrine of "piercing the corporate veil" may apply in certain instances where the corporate structure is used to perpetrate fraud, evade obligations, or circumvent the law. In such cases, the courts may hold individual shareholders or officers personally liable for the corporation's obligations.
Directors and officers should ensure that the corporation is not merely a shell entity used for personal gain or fraudulent purposes. All corporate actions should be properly documented, and corporate accounts should not be commingled with personal assets.
5. Tax and Compliance Obligations
Corporations in the Philippines are subject to various taxes, including income tax, value-added tax (VAT), and other relevant local and national taxes. Upon registration, the corporation must secure a tax identification number (TIN) from the Bureau of Internal Revenue (BIR) and comply with regular tax filings. Failure to file returns or pay the proper taxes could result in penalties, interest, or even criminal liability for tax evasion.
Moreover, it is important to understand the tax incentives available, such as those provided under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, which may provide significant benefits to businesses, especially during the startup phase.
6. Other Legal Considerations
There are several other legal issues that could arise when setting up a corporation, including:
Foreign Ownership Restrictions: Depending on the industry, there are limits on the percentage of foreign ownership allowed under the Philippine Constitution. Foreigners are generally restricted to owning 40% of a corporation in industries considered of national interest, such as telecommunications, transportation, and natural resources.
Employment Regulations: Corporations that plan to hire employees must comply with Philippine labor laws, which include providing statutory benefits such as Social Security System (SSS), PhilHealth, and Pag-IBIG Fund contributions.
Data Privacy and Cybersecurity: If your corporation will handle personal data, compliance with the Data Privacy Act (Republic Act No. 10173) is mandatory. This includes ensuring proper data protection protocols, appointing a data protection officer, and reporting data breaches to the National Privacy Commission (NPC) when necessary.
Conclusion
Incorporating a business offers numerous advantages, such as limited liability and perpetuity. However, it also comes with responsibilities. Adherence to corporate governance principles, compliance with regulatory filings, and ensuring that the corporation is properly capitalized are essential to avoiding legal issues in the future. Failure to comply with legal obligations could expose incorporators, directors, and officers to significant risks, including personal liability in certain cases.
By consulting with legal counsel from the outset, you can ensure that the corporation is set up correctly and that all legal responsibilities are fully understood and met. This approach minimizes the potential for future disputes or penalties and provides a solid foundation for the corporation's growth and success.