Overview of Domestic Corporations in the Philippines

In the Philippines, a legal business entity could come in many forms – sole proprietorship, partnership, corporations. Small business operations and start-ups are normally undertaken through a sole proprietorship. Partnerships could either be an ordinary business partnership that may engage in such activities registered to do so, or a general professional partnership for the practice of a common profession like that of certified public accountants for the conduct of statutory audit and other accounting services (e.g. GPP & Co., CPAs), lawyers under the Integrated Bar of the Philippines, engineers, and the likes. Corporations could be domestic or foreign corporations depending on where the same is registered and existing.

In this article, let us share you an overview of domestic corporations in the Philippines. A corporation registered and existing under the laws of the Philippines is referred to as a domestic corporation. Company registration or incorporation is necessary to establish a domestic corporation based on specific requirements of the Securities and Exchange Commission (SEC). Once approved, a Certificate of Registrations (COR) will be issued and the date specified therein is the date such corporation has come to legally exist. Upon registration,  a domestic corporation becomes an entity separate and distinct from the owners thereof.

Nature of operation

A domestic corporation is registered to undertake specific business operation or operations. It can only engage in such business operations stated in the primary purpose and or secondary purpose of its articles of incorporation (AOI). It cannot engage in any and all business operations that is not within its purposes, otherwise, it will do the so called “ultra vires” acts.  They may not necessarily illegal, but, since they are not allowed to be done by a corporation.

Example, if its purpose is manufacturing of papers, then, it may not engage in manufacture of soft drink as they are unrelated.

In your establishing a domestic corporation, the nature of operation would dictate the necessary requirements for its registration or operation. Some operations require specific amount of capitalization, secondary licenses prior to operations, and foreign ownership limitations.

Corporate name

Corporate name is what distinguishes a corporation from the other. As a rule, you can use any name that is not confusingly similar to a name of another legal entity already registered and protected by law. Likewise, you cannot use corporate names with bad words in it. Prior to SEC registration, you will have to reserve your intended corporate name and you can do it online through the SEC online system – SEC i-view. To complete the reservation, you will have to pay a minimal amount of P40.00 per 30 days up to 90 days subject to renewal.

For business advantage, you may conceptualize a name that the public may hardly forget because it would associate with the service or products your corporation will engage. If you can have the best one, then, it may make you immortal while your corporation lives after your death.

Ownership

To register a domestic corporation, you will need at least five (5) to fifteen (15) natural persons of legal age who will form a corporation. Your ownership in a corporation would be based on your subscription of the shares of stock. Ownership need not be equal among the owners, you could own say 99%, while the other four (4) shares with the remaining 1%. You could even just provide them one (1) share each and the rest under your name based on your arrangements with them.

Foreign investors and foreign corporations could own a domestic corporation to some extent allowed depending on the nature of operations. Example, they could own up to 40% of the domestic corporation. In an export oriented enterprise, they could own 100% under certain conditions.

Capitalization

Believe it or not, you can register a simple domestic corporation 100% Filipino owned with a minimum paid-up capitalization of P5,000.00 contrary to the common notion that corporations require huge capitalization. As a rule, 25% of the authorized capitalization must be subscribed, and 25% of such subscription must be paid-up. Authorized capitalization declared in the Articles of Incorporation is the maximum amount that the domestic corporation could have throughout its existence. It could be increased upon approval of the SEC of an application for increase of authorized capitalization.

Some industries are required to maintain a certain minimum amount of paid-up capitalization like lending investors, banks, insurance companies, overseas manpower companies, and other corporations highly regulated.

Registrations

As stated above, the domestic corporation starts its legal business entity upon the date specified by the SEC. However, SEC approval is simply the start of other registrations with various other government agencies. SEC will assign a tax identification number (TIN) on the upper right most of the Certificate of Registration (COR), but, still you have to formally register such TIN with the Bureau of Internal Revenue (BIR) along with the registration of books of accounts, and authority to print for official receipts or invoices. You will also have to register your domestic corporation with the Social Security System (SSS), Home Development Mutual Fund (HDMF or Pag-ibig), and Philippine Health Insurance Corporation (PHIC) for the mandatory social, housing, and health benefits of your employees. For the local license prior to operation, you also need to secure a business permit with the City or Municipality of location. For those operations requiring secondary license, you will also have to secure the secondary license prior to operation.

 Taxation

As a legal business entity separate and distinct from the owners, a domestic corporation is taxed on its own. For doing a business, it will be subject to monthly and/or quarterly value added tax (VAT) or monthly other percentage tax (OPT or non-VAT). In other words, because a domestic corporation does business, it will be required to pay business taxes – VAT or OPT. It shall likewise be subject to income tax based on its operational income at the rate of 30% based on the taxable net income. Other taxes may likewise apply to certain transactions like documentary stamp tax (DST) on issuance of shares, lease agreements; withholding taxes on income payments like 5% on rental, 5-32% withholding tax on compensation. For further readings on income taxation, please read this article on income taxation of corporations in the Philippines.

We suggest that you familiarize yourself with the applicable taxes to your domestic corporation that you may avoid unnecessary penalties – 25% surcharge, 20% interest, and compromise penalties of P200 to P50,000.00. There could be many ways to learn tax compliance or you may simply hire a good bookkeeper for the purpose.

Distribution of income to owners

In a sole proprietorship, income of the sole proprietorship automatically accrues to that of the owner in its entirety. In a partnership, the income of the partnership is automatically divided to the partners based on their profit sharing ratio. In a domestic corporation, it is different. The income is distributed in the form of dividends – cash or property or stock or in any other form of dividend upon the discretion of the board of directors (BOD). After income tax profit of the corporation is initially accumulated in the Retained Earnings account and the BOD will determine when and how much it will distribute based on the free retained earnings.

In short, the income distributed is net of income taxes. You can be an employee of your domestic corporation as an officer and you can provide a reasonable salary and other benefits. Likewise, you can receive some amount as compensation for services as a director receiving directors fees and per diems.

• Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.

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