They say that it is a good time to become an entrepreneur or start a business in the Philippines these days. I believe so too. With the economy booming and with hope in the country rising, the future is very bright for us Filipinos. A lot are thinking of starting their own businesses. No matter how small, as long as they could have something to call their own.

While the economy is good and the future is bright, a lot of people either get discouraged or end up making wrong decisions when starting their own business. They get discouraged because of the paperwork and administrative tasks needed just to get the business registered legally. Or, due to lack of information, or worse, a lot of misinformation, they end up making the wrong choices.

If you want to start your own business, there are a few questions you must ask yourself first. There are articles and infographics out there that discuss the different options you have. Here are the essentials:

What You Have To Know

 

1. Definition of Terms

Let’s first clarify some terms we are going to use in this article. It is a bit technical, so bear with me. These are necessary in order for us to understand the requirements of the law.

•  Income

¤ Money given to you as payment for services or goods.

•  Company

 

¤ A collection of individuals operating under a single entity. These can either be a Sole Proprietorship, Partnership, or a Corporation.

•  Taxes

¤ Money that is paid to the government which serves as income to perform its duties and responsibilities to its citizens.

•  Tax Returns

¤ These are the documentation (forms and records) that reflect payments made.

•  “To Pay Taxes”

¤ This is the proper term to use. Since taxes are an amount, we essentially pay the taxes that are due from us.

•  “To File Tax Returns”

¤ Filing means to place something somewhere for future use. This applies to the forms/documents involved in a process – the returns.

 

2. Conducting Business While Not Being Registered Is Illegal

According to the Tax Code of the Philippines, under Chapter 2 Section 23,

“A citizen of the Philippines residing therein is taxable on all income within and without the Philippines.”

In other words, if you are not paying taxes (whether wholly or partially), you are doing something against the law and there are legal cases against it – both criminal and civil.

If you do not follow the law, repercussions may include jail time or financial penalties. That’s right — it means if you have your own online jewelry store, or selling bags and shoes, you are supposed to be paying your taxes and filing your returns – no matter how small your business is.

If you are not registered properly, you will not be able to file your tax returns. That is the main reason why going through the registration process and understanding the purpose of it will help you eliminate future risks and headaches.

 

3. You Have 4 Options to Choose From

 

1. Individual / Consultant / Professional

This is an often-overlooked aspect of legalizing your business. Registering as a self-employed/mixed income individual is one of the ways of conducting business properly. What a lot of people do not realize is this is actually the first part of starting your own business. I listed the reasons in Tip #4.

2. Sole Proprietorship

This is the simplest form of a company. Sole Proprietorships deal primarily with the Department of Trade and Industry (DTI). Most companies generally do not have restrictions on what they are allowed to do. The primary factors that people consider are (1) decision-making ability and (2) liabilities/risks. See the table below for comparison.

Sole Proprietorship has the highest rating in decision making and risks. That means, you as the owner can quickly decide where the company is heading or what strategies to implement. It also bears the highest risks because the owner and the company are treated as one. So if the company goes bankrupt, its creditors can pursue even your personal belongings.

 

3. Partnership

This is the type of company that is ranked middle in terms of decision-making and risks involved. This is composed of partners who have invested different amounts in the company. Usually, people practicing the same profession (i.e. lawyers, doctors, etc.) form partnerships. But that does not stop you from forming this type of company.

 

4. Corporation

Lastly, this type of company is the safest in nature. If it goes bankrupt, the only amount you are risking is the amount you initially invested. On the other hand, majority of the stockholders are needed when making big decisions.

Company Type

Decision Making

Liability / Risk

Sole Proprietorship

⇧⇧⇧

⇧⇧⇧

Partnership

⇧⇧

⇧⇧

Corporation

Of the three company types, each one has its pros and cons. If you want to know more about the differences among them, read more about it in the article by HomeGrown.

4. Tax Identification Number (TIN) Status and Registration Details

 

• What They Are

Currently, an application for a TIN is usually done by the employer. This is especially true for fresh graduates. What a lot of people unknowingly take for granted is the particular field in the BIR Forms used: Taxpayer Type.

Different forms apply to different people but we won’t talk about that here. 95% of the time, we are registered with a taxpayer type as a Local Employee Earning Purely Compensation Income using the BIR form 1902.

 

• How They Affect the Filing of Taxes

Currently, an application for a TIN is usually done by the employer. This is especially true for fresh graduates. What a lot of people unknowingly take for granted is the particular field in the BIR Forms used: Taxpayer Type.

Different forms apply to different people but we won’t talk about that here. 95% of the time, we are registered with a taxpayer type as a Local Employee Earning Purely Compensation Income using the BIR form 1902.

 

• What’s the Proper Way?

This table shows the applicable forms for various types of taxpayer.

 

Taxpayer Type

Form Used in Registration

Form Used in Filing Returns

Individual Level

Purely Compensation Earner

1902

1700 / 2316

Mixed Income Earner

1901

1701 / 1701Q

Self-employed Individual

1901

1701 / 1701Q

Company Level

Sole Proprietorship

1901

1701 / 1701Q

Partnership

1903

1702 / 1702Q

Corporation

1903

1702 / 1702Q

 

Given this information, new business owners need to be careful about ensuring that they have the correct tax status registered with the BIR.

Our Advice

Change your details first prior to starting your own business. If you do now know, just call the BIR hotline at this number (+632 981 8888) to verify your details. They will ask a couple of questions to verify it is you they are talking to. Next step is to determine where you will conduct your business (regardless if it’s as an individual or a company). The basic information to check is your address and your civil status. Any change in any of these requires you to use the BIR form 1905. After changing your details, use the BIR form 1901 to update your taxpayer status from Purely Compensation Earner to a Mixed Income / Self Employed Individual.

Business Permits Registration and Renewal

One Comment

  • Andrea Chiu says:

    Hi. I started a business in 2012 and was only in operation for 6 months due to financial and franchise problems. I have filed for the necessary closure with BIR but I have not yet complied with the other requirements until now. Can you help me in finally closing the business and getting the Certificate of closure?

Leave a Reply

css.php