Dear Attorney,

We are writing to seek your expert advice regarding the establishment of a business in the Philippines. My partner and I are planning to venture into the property investment industry, focusing on buying properties or land, rebuilding or improving them, and subsequently reselling them. We would like your guidance on the most suitable business structure for our endeavor, considering the legal and financial implications involved.

Could you kindly provide us with detailed information about the various business structures in the Philippines, their advantages and disadvantages, and any pertinent legal considerations that we need to take into account for our specific line of business? Your insights will greatly assist us in making informed decisions.

We look forward to your valuable advice.

Sincerely,
A Prospective Entrepreneur

Legal Considerations for Setting Up a Property Investment Company in the Philippines

I. Overview of Business Structures in the Philippines

The Philippine legal system provides several options for structuring a business. The appropriate choice depends on factors such as ownership, taxation, liability, and operational goals. Below are the key business structures to consider:

Sole Proprietorship
- Definition: A business owned by a single individual.
- Key Features:
  - Simple and inexpensive to set up.
  - The owner has full control of operations.
- Advantages:
  - Easiest structure to establish.
  - Minimal regulatory requirements.
- Disadvantages:
  - Unlimited liability: Personal assets may be used to settle business debts.
  - Limited capital: Restricted to the owner's resources and credit capacity.
- Suitability: This structure is less ideal for property ventures due to the high financial risks and capital requirements involved.
Partnership
- Definition: An agreement between two or more individuals to operate a business and share its profits.
- Key Features:
  - Governed by the Civil Code of the Philippines.
  - Can be general or limited partnerships.
- Advantages:
  - Pooling of resources and expertise.
  - Flexibility in terms of management.
- Disadvantages:
  - Partners in a general partnership have unlimited liability.
  - Complexities in managing and dissolving the partnership.
- Suitability: A partnership might work if you and your partner can clearly define roles and responsibilities, but its liability risks could be a concern.
Corporation
- Definition: A legal entity separate from its shareholders, governed by the Revised Corporation Code (Republic Act No. 11232).
- Key Features:
  - Ownership is divided into shares of stock.
  - Limited liability: Shareholders are only liable to the extent of their shareholdings.
  - Requires a minimum of two incorporators (though a One Person Corporation is possible for single owners).
- Advantages:
  - Limited liability.
  - Perpetual existence under the Revised Corporation Code.
  - Easier to raise capital through the issuance of shares.
- Disadvantages:
  - More complex and expensive to establish and maintain.
  - Requires compliance with regulatory bodies such as the Securities and Exchange Commission (SEC).
- Suitability: For property investment and reselling, a corporation is highly recommended due to its capacity to raise significant capital and shield owners from unlimited liability.
One Person Corporation (OPC)
- Definition: A corporation with a single stockholder, introduced by the Revised Corporation Code.
- Key Features:
  - The sole stockholder serves as both owner and director.
- Advantages:
  - Limited liability.
  - Simplified structure compared to traditional corporations.
- Disadvantages:
  - Restrictions on the types of businesses that can operate as an OPC.
  - Regulatory compliance requirements.
- Suitability: Suitable if only one person intends to manage the business.

II. Foreign Ownership Restrictions

Under the Philippine Constitution and the Foreign Investments Act (RA 7042, as amended), certain restrictions apply to foreign ownership of land and real property. These include:

Foreigners are prohibited from owning land but may own buildings and improvements.
Ownership of companies engaged in real estate is generally restricted to 40% for foreign investors, with 60% reserved for Filipino citizens.

III. Licensing and Regulatory Requirements

Before commencing operations, your company must secure the necessary permits and licenses:

SEC Registration: For partnerships and corporations.
Mayor’s Permit and Business Permit: Issued by the local government unit (LGU) where your business will operate.
Bureau of Internal Revenue (BIR) Registration: For tax compliance and issuance of official receipts.
Philippine Contractors Accreditation Board (PCAB) License: If construction is a component of your business.

IV. Tax Implications

The applicable taxes for your property business depend on its structure and transactions:

Income Tax:
- Corporations are subject to a 25% regular corporate income tax (RCIT) or an optional 1% under certain conditions until June 30, 2023.
- Sole proprietorships and partnerships are subject to graduated income tax rates ranging from 20% to 35%.
Value-Added Tax (VAT):
- Applicable to sales exceeding PHP 3 million annually.
- Standard rate: 12%.
Real Estate Taxes:
- Local property taxes for owned properties.

V. Special Considerations for Property Ventures

Due Diligence:
- Verify land titles with the Land Registration Authority (LRA).
- Ensure properties are free of encumbrances.
Environmental Compliance: Obtain environmental clearance certificates if applicable.
Zoning Laws: Ensure the intended use of the property complies with local zoning ordinances.

VI. Recommendations

Based on your stated business goals, the most suitable structure would likely be a corporation due to its ability to accommodate larger capital investments, provide limited liability protection, and facilitate business continuity. If either of you intends to manage the venture independently, an OPC may also be an option.

It is also advisable to engage the services of a real estate lawyer and accountant to navigate regulatory requirements and ensure compliance with tax obligations.

Final Note: Please consult a qualified attorney for personalized legal advice tailored to your specific circumstances.