Owning a small business is a dream many have - a chance to build a legacy and call the shots. However, starting a business entails legal requirements, paving the way for a successful and legitimate business operation.

The legal requirements and processes in starting a business are essential in establishing credibility in your venture. Moreover, compliance helps you avoid legal challenges that could disrupt your operations.

Some legalities every small business owner should know include choosing the proper business structure, following registration protocols, filing taxes, and being aware of employment laws.

Know the legal requirements, so you won’t have to navigate the business world in the dark and avoid legal issues.

Starting a business doesn’t only involve you and your customers but also the government and its regulations. Here are the different legal requirements to know when establishing a small business:

The first legal requirement is choosing the right business structure or entity for your company. Business structures dictate your business ownership, registration requirements, and tax obligations, so choose the best fit for your needs.

In the Philippines, there are four types of business structures to choose from:

This business entity is the most common in the Philippines since it’s simple to set up.

There is only one owner in sole proprietorships, making it the go-to option for many micro-business owners and solopreneurs.

Sole proprietors enjoy complete business ownership and usually take all the profit.

However, they also bear unlimited liability to the business, which means the government or financial institutions can seize their assets in case of unpaid debts or losses.

A partnership is a good option if you want to share the ownership and responsibilities with another person or more.

One kind of partnership is called a general partnership, where all partners share equal responsibilities and profits but have unlimited liability to the business.

On the other hand, you can establish a limited partnership, where there’s at least one general partner and one or more limited partners. General partners keep more profits but bear more liability. Meanwhile, limited partners make less profit and are only liable for the amount of their investment.

A corporation is a business entity with two or more incorporators or shareholders. The total, though, should be at most 15 persons.

Even though a corporation is complex to set up, many businesses still choose this entity because of its limited liability protection to the shareholders and their assets.

Incorporating the business also allows owners to raise funds from investors by giving out shares or portions of the company’s equity.

Another business structure option is the one-person corporation (OPC), combining the best features of a sole proprietorship and corporation.

An OPC is a corporation with a single stockholder who wholly owns the business and has limited liability.

However, registering an OPC can be a complex task for solopreneurs compared to registering as a sole proprietor. For one, a requirement for OPC is to submit Articles of Incorporation.

Moreover, according to the Revised Corporation Code, professionals and financial institutions cannot register as OPCs.

Learn more about the legal business structure options in this video:

After choosing a business entity, it’s time to register your business, which also comes with the necessary fees.

Sole proprietorships should register their unique business name with the Department of Trade and Industry (DTI), valid for five years.

On the other hand, partnerships and corporations are to register with the Securities and Exchange Commission.

The SEC’s legal requirements may vary depending on the registered business entity type - stock corporation, non-stock corporation, or partnership. But in general, one needs to submit articles of incorporation, by-laws, treasurer’s affidavit, and proof of deposit of the paid-up capital.

After the business registration, businesses should process licenses and permits required by the local government unit (LGU). The usual permits that LGU looks for in businesses are barangay clearance and a Mayor’s permit, also known as a business permit.

The requirements for acquiring a barangay clearance depend on the local barangay your business is registered. Similarly, businesses should get their mayor’s permit from the city or municipal hall where the company operates.

Do note that business permits must be renewed on or before the 20th of January each year.

Depending on the nature of the business, entrepreneurs may need to process additional permits to follow local regulations. These permits are usually related to zoning, land use, health, and safety regulations.

Some examples of additional permits you may need are:

• Fire Safety Inspection Certificate
• Sanitary Permit
• Building Permit and Electrical Inspection Certificate
• Certificate of Occupancy
• Locational Clearance or Zoning Clearance
• Electric Utility Connection

There are also industry-specific permits you may need depending on the business. For example, food-related companies must register and comply with the Food and Drug Administration (FDA).

Additionally, the Department of Tourism must certify tourism-related establishments before getting permits from the LGU.

For a complete list of requirements, it’s best to research and consult with your LGU or consultants who can help with your business registration.

In the Philippines, the Certificate of Registration, also known as BIR Form 2303, is a vital document that grants legal permission to run your business.

Business owners should register their business with the BIR to get a Tax Identification Number (TIN) and have the BIR stamp their books of account.

If the business owner has an existing TIN from being an employee, they need to update its status to proceed with the registration.

To ease the cost of business registration, as of January 22, 2024, the BIR has ceased the collection of the annual registration fee of P500 in compliance with the Ease of Paying Taxes Act, or the Republic Act No. 11976.

As always, paying taxes is part of the legal requirements of starting and running a business. Here are the usual business taxes you should note as a business owner:

The income tax a business pays also depends on its business structure.

When filing for personal income tax, sole proprietors can choose between these two options:

• The 8% rate, which only applies to businesses with gross sales or receipts below ₱3,000,000;
• The graduated tax rates can reach up to 35% and require taxpayers to file a monthly percentage rate of 3%.

The partners in partnerships are also liable for personal income tax on the money they earn from the company.

Conversely, corporations are liable for their graduated tax rates of up to 25%. Corporations can take advantage of tax deductions and save more money to lower their tax liability.

Click the play button to get insights on how to take advantage of tax deductions for your small business:

Businesses with gross sales or receipts of more than ₱3,000,000 must register for value-added tax (VAT). The VAT rate is 12% of the gross sales, which businesses can file quarterly or monthly to the BIR.

It’s also important to remember that businesses opting for monthly VAT payments should submit their quarterly VAT return form within 25 days after the closing of each taxable quarter.

If the business has salaried employees, the company must withhold payroll taxes from their staff. Withholding taxes for employment purposes means employers automatically collect employees' income taxes from their salaries and remit them to the government.

The amount of payroll taxes to withhold is also based on the graduated tax rates given by the BIR.

Aside from the national taxes you pay, the LGU might also collect local taxes from your company.

Real property tax (RPT) is a local tax corporations should pay on lands, buildings, and machinery they own or use. The real property tax rate is 1% of the property’s assessed value for provinces and 2% for cities and municipalities within the Metro Manila area.

Corporations can also pay RPT annually on or before January 31 or quarterly.

Another local tax all businesses need to pay is local business tax (LBT). The amount of LBT to pay depends on the locality.

Like RPT, businesses can pay the LBT annually on or before January 20 or every quarter.

Any business, as long as there’s a trade of goods or services for a fee, needs legal business contracts. A business contract is a promise or set of promises that are enforceable by the law.

The main goal of a business contract is to protect all the parties involved and ensure that everyone will follow through on the agreement.

Some of the most common business contracts are the following:

When dealing with suppliers, a business needs a supply agreement to set the terms and conditions of their relationship. This contract outlines necessary details like payment terms, delivery schedules, pricing, product quality, etc.

A contract agreeable to the business and suppliers can foster a better partnership as the business grows.

A general employment contract between the employer and employee or a labor union is legal. Similar to the supply agreement, this contract defines the rights and responsibilities of each party, including the salary terms, contract duration, general duties, benefits, and more.

Some companies also include a non-compete clause in the employment contract, which prohibits the employee from joining a competitor’s company after the employment ends.

Businesses use a non-disclosure agreement (NDA) to protect sensitive information or trade secrets. This contract establishes confidentiality between the parties and prohibits them from disclosing unauthorized or sensitive information.

Aside from registering a business name, companies can also trademark their business name, logos, slogans, and other assets at the Intellectual Property Office (IPO).

The primary purpose of a trademark is to provide exclusive rights to the business and prevent others from copying or using their assets without permission.

The trademark process can take six to 18 months since the IPO must examine the application and publish it to its e-gazette. If no one opposes the trademark application after publishing it, the IPO will give the applicant their Certificate of Registration.

Applying for a trademark also comes with its fees. While this is not a requirement, trademarks can be investments as you establish the business and build its unique identity.

When hiring employees, businesses must be aware of the Labor Code mandated by the Department of Labor and Employment (DOLE). Studying the Labor Code or consulting an expert in labor laws helps the business stay compliant and avoid legal issues with its employees.

The Labor Code outlines all necessary provisions in hiring and terminating employees, their working conditions, and benefits.

The Labor Code highlights the mandatory benefits companies should provide, including Social Security System (SSS), PhilHealth, Pag-IBIG Fund, and 13th-month pay.

SSS, PhilHealth, and Pag-IBIG are government-owned and controlled corporations providing employees with social security, healthcare, and housing program benefits. All businesses need to register with these government agencies and remit the employees' monthly contributions and the company's share for their employee's benefit.

The 13th-month pay is another mandatory benefit, where companies give employees an extra month's worth of income by Christmas Eve or in bi-annual installments.

Employers must also submit a compliance report to DOLE by mid-January to prove they gave the mandatory bonus.

Starting a small business can be fulfilling, but you must navigate legal hoops before establishing one. Complying with the different legal requirements helps your company avoid future issues and create a safe environment for your employees and customers.

If you need advice or assistance starting your small business, OneCFO will guide you!

The team of finance experts at OneCFO can help business owners like you decide what’s best for your business financially - such as choosing the right structure, maximizing tax benefits, and more.

Visit us at onecfoph.co or contact us at [email protected] to learn how we can help with your small business registration.

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