Why Start a Business in the Philippines?
Sooner or later many of us expats will decide to do something industrious to pad out the long days of sun, sea, sex and sand. Since arriving I’ve been involved with the creation, purchase and sale of businesses from sari sari stores, jeepneys and tour boats to call centers, restaurants and bars. Along the way I’ve picked up a fairly useful playbook of do and don’t which have served me well over the years.
So where to start, well depending on the size of the business you wish to start (I’ll cover takeovers later), the most important is the foundations on which it lays. The foundations of course form the structure of the company. From an unregistered habal habal (motorcycle taxi) to an SEC corporation you need to know who owns what and what will happen if things don’t (or do) work out.
Foreigners are not allowed to outright own a company so many people including myself have put them in the name of my wife. If this doesn’t suit you it is also possible to do this but own any equipment the company uses and the lease personally. This effectively renders the company a replaceable shell should anyone get ideas of going it alone. Another route is shared ownership where 60% must be Filipino owned. This is best done with three or more partners with a 40/30/30 share split to grant the majority of control in the foreigner. There are also contracts available from a lawyer which limit the ability of the minor share holders joining forces or selling their share to a third party.
Most of the above is fairly common knowledge so let’s begin with what to do once your company has a chosen structure.
- The number one most important thing to do is to know your partners. I’ve seen it so many times where all parties are friends, smiles and enthusiasm but later disputes arise and feuds start making working together a tiresome and sometimes dangerous obligation. Once it gets to that stage it’s probably worth throwing in the towel and getting back what you can (see next section). It doesn’t matter who your partners are, do some background research, if they are a foreigner find out what businesses they have been involved with abroad. Try to locate their company registration and accounts online and if possible contact their previous partners. Many expats who arrive in the Philippines use social networks, these are well worth checking over for ties to their homeland. As a rule of thumb, if there’s very limited family and friends back home, there’s a good chance they are hiding something from their previous life. Obviously raising this subject with your business partner to be can be uncomfortable at the best of times. Often there will be nothing to worry about and a display of mistrust like this can damage a business relationship. For this reason I suggest this is done as far as possible behind the scenes. If your partner is just a private kind of person and nothing can be found online then it will make things easier to compile a package of your own personal business experiences, present it, and ask for the same in return.
- The second most important thing to do is to know your responsibilities in the business and the responsibilities of everyone involved. These should always be documented in an official notarized contract and updated regularly as the company evolves. There should always be a dispute resolution protocol too. Many businesses look quite simple to operate on paper but when it comes down to it can be quite challenging at times, this again can lead to squabbles and a breakdown in communication – the death pill for any small business.
When taking over an existing business you also need to do some research. What you will need to see before you even think about a price is the:
- DTI (Department of trade and industry document). This is company name and who owns the company and it should be who your are dealing with directly in the purchase of the company, it however for reasons explained above often in the name of a silent partner. While it’s fairly simple to get a new DTI, processing all of the new documentation to get a mayor’s permit can be a lot more time consuming, costly and may possibly spell the end of being able to continue the business as it stands. Always talk to the person named on the DTI, face to face. This is a deal breaker situation.
Also make sure the type of company registered is the type of company you plan to be. This is stated more clearly on the BIR below. If there is no DTI document you will only buying any equipment and possibly taking over a lease, you’re not buying a company.
If you are having difficulty finding the DTI or there’s some plausible reason why it’s not in front of you, just pop down to the local DTI office with the address of the business and the supposed owner’s name. It’s a public record and they will let you know if there is or is not a DTI at that address, the company classification and who the owner of it is.
- BIR (Bureau of inland revenue). This is the orange poster which should be visible where payments are taken – alongside the DTI certificate. Check the company names match and the type of company you plan to operate, e.g. a Restobar is not a cocktail lounge and a dormitory is not a hotel. If your plans for the business do not fit with the business classification then you will need to register a completely new business which may or may not be permitted, something you can not always find out before the purchase. Similarly to the DTI if you’re having a problem location the BIR certificate, you can nip over to the local BIR office, explain your “wife” is buying the business and see what’s what.
Also you will want to visit the BIR office to ensure there are no tax arrears.
If the company is a corporation you will also need to find the SEC Certificate of Registration but due to the complexities of taking over a corporation a lawyer will give far better advice than a simple blogger.
- The ALL important Mayor’s Permit. This is essentially the last permit required before commencing trade. In some areas this permit can be applied for at certain times of the year. In Dumaguete City this is January which makes it possible although not strictly legally to operate a business before January. If the company you plan to purchase does not have this certificate check to see when the DTI/BIR was registered, if this has been a considerable length of time or it spanned the Mayor’s permit registration month it’s possible they were refused this permit. At City Hall you can find out this information first hand. If a company was refused a Mayor’s permit, similar to a missing DTI, you would just be buying equipment and possibly taking over a lease agreement.
- Lastly in this non exhaustive list, you will need to check the lease agreement by reading it in it’s entirety. Many leases have a minimum lease term where the occupants are obliged to remain so until it expires. There are two main things to check here. If the lease term is approaching you will need to form an agreement with the landlord/landlady that you will in fact be able to extend this lease to a period that suits your plans for the company. The second thing to check is if this lease has a significant time to it’s expiry that you can in fact take over this lease or create a new lease, and that the responsibility of any deposit shall be either transferred to the new lease, as part of the sale, or deposited by you.
A meeting with the landlord is essential for this, there may even be arrears which need to be addressed or outstanding telephone/internet and electricity bills too, all of which need to be considered before determining the value of a company.
Once the above has been determined it’s time to look at the accounts, equipment, staff, geographic restriction (e.g. noise pollution) and discuss a price. When considering the staff ad wages you must also consider the regulations that cover their rights such as:
- 13th Month Pay
- Regular Holiday
- Special Holiday
- Overtime Pay
- Pag Ibig
- SSS/Phil Health
- Night Shift Differential
- Service Incentive Leave
When taking over a company, it’s an ideal opportunity for staff to voice their rights and get what they deserve under the law, even if they weren’t getting it before this time.
By now you may be thinking all this research is just too much hassle to do business in the Philippines and for some it may be. It is however a lot better to follow some of these steps in the order above to avoid paying over the odds or throwing money down the drain on a dead duck.
Running your own business may be difficult to set up and laden with bureaucracy but if you get it right through determination, hard work and passion it can be an extremely rewarding experience and if you’re really lucky you might even turn a tidy profit!