Sole Proprietorship in the Philippines: A Guide for Employers

The pandemic has, in no doubt, kindled a sense of entrepreneurship in the heart of many Filipinos. In 2020 when businesses closed left and right due to lockdown, many found themselves starting their own business to make a living. The same year, the Department of Trade and Industry (DTI) recorded more than 916,000 business name registration. The figures rose in 2021, and again, in 2022, noting that the rise in sole proprietors in the country is a positive sign that people are well on their way to recovery. Learn more about sole proprietorship in the Philippines here. 

What is Sole Proprietorship?

Sole proprietorship is a type of business model where the owner, called the sole proprietor, is the only one who has direct control over the business and its profits. 

Many businesses in the country are under this model - it’s very straightforward, with a simple registration process and very little paperwork involved. 

How is Sole Proprietorship Different from Partnerships and Corporations?

The differences between these three can be summed up in the table below:

Who Can be a Sole Proprietor in the Philippines?

Filipinos aged 18 and up can be a sole proprietor in the country; there’s also no capital requirement. 

Considering this, is it possible for a foreign national to have a sole proprietorship business in the Philippines? According to the law, it is, in fact, allowed. 

It is possible for foreign people to open a sole proprietorship business in the country, provided that they reach the minimum capital requirement AND their business is not under the Foreign Investment Negative List. Of course, the foreign national must also possess the necessary permit and visa. 

Are you planning to be a sole proprietor in the Philippines? Learn more about the Work Visas and Permits here. 

Advantages of Sole Proprietorship

Sole proprietorship is the simplest form of business in the country, that’s why many Filipinos who want to start a business begin with this structure, and then transition to being a domestic corporation when they want to expand. 

Below are advantages of being a sole proprietor in the Philippines:

It has simple registration process

The registration process is straightforward - it involves at least 3 offices, but the steps are minimal particularly if the owner is not employing anyone OR they are only employing a few workers. 

It’s cost-effective

The reason why sole proprietorship is the go-to structure for budding entrepreneurs is because it’s cost-effective. For Filipinos, there is no capital requirement and the fees are minimal . 

You have complete control over management and earnings

Unlike partnerships and corporations, sole proprietors are the only one responsible for their business - both in management and profits. It allows for swift decision-making and immediate reward for all the hard work. 

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Disadvantages of Sole Proprietorship

Despite its advantages, sole proprietorship also has several disadvantages:These are the following: 

There’s unlimited personal liability

Since the business is an extension of the owner, there’s no clear-cut line between what’s for business, and what’s personal. Hence, should there be debts, losses, and liabilities, the owner’s personal assets are at risk. In fact, in many cases, business bankruptcy directly affects the sole proprietor. 

Also, lawsuits to the business is considered a lawsuit to the owner as well. 

There’s limited access to capital and growth potential

Sole proprietors are not allowed to sell shares to raise capital. This means there’s little room for expansion. 

It can be exhausting 

Being in charge of everything can be exhausting for the sole proprietor, particularly in challenging situations. 

It may be difficult to separate personal and business finances

A sole proprietor is responsible for separating their business and personal money. Unlike in corporations where it is a requirement to have a corporate bank account, sole proprietorship registration doesn’t require it. Hence, to separate finances, the owner may open several bank accounts under their name. 

Note that even if the owner makes several bank accounts, the separation is unofficial and won’t be honoured in court should there be problems (eg. creditors can still come after their “personal” money.

Tax Considerations for Sole Proprietors 

In the Philippines, sole proprietors are considered self-employed. As such the taxes they file for their business also count as their personal tax. If their gross income is P3,000,000 or below, then their tax rate is at 8%. 

Registration: Requirements and Process

Are you planning on opening a sole proprietorship in the Philippines? Here are the steps to register your business:

Step 1: Choose a business name and register it

The first step is to choose a business name that complies with the guidelines of the Department of Trade and Industry (DTI). Learn more about the guidelines here. 

Afterward, register the name to DTI as well. This can be done online or at the nearest DTI office. 

Step 2: Get the barangay clearance

Go to the barangay office where your business is located and get the Barangay Clearance, which certifies that your business complies with the regulations on the barangay level. 

Requirements:

• DTI Certificate
• Payment of fees 
• Proof of address
• 2 valid IDs

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Step 3: Get the Mayor’s Permit

After getting the Barangay Clearance, proceed to the Mayor’s Office of the municipality where your business is located. The Mayor’s Permit or Business Permit certifies that your business complies with the local regulations. 

Requirements:

• DTI Certificate
• Barangay Clearance
• ID and Proof of address
• Payment of fees
• Accomplished forms to get the permits 

Step 4: Register at the Bureau of Internal Revenue (BIR)

The Bureau of Internal Revenue is the government agency responsible for collecting taxes, so a business has to be registered here, too. After registration, the sole proprietor receives a Certificate of Registration (COR) and Tax Identification Number (TIN). 

Requirements:

• Certificates and permits from the above steps and IDs
• Payment of fees 
• Accomplished BIR Forms 

Step 5: Register at Social Security System (SSS) and PhilHealth

If you haven’t already enrolled at SSS and PhilHealth, proceed to their offices and register as a self-employed individual. Contributions to these agencies give you access to a number of benefits they provide. 

If you’re employing people, you must also enrol them here and take care of their contributions. 

Are you trying to register another type of business? Learn more about Company Registration in the Philippines here. 

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Best Practices in Managing a Sole Proprietorship

Managing a sole proprietorship in the Philippines can be both rewarding and challenging. As the single owner, you're responsible for every aspect of your business. Here are some tips and best practices to help you in your journey:

Stay compliant with the legal requirements 

Ensure your business is registered as per the law, and if you’re hiring, remember to follow the employment legislation. Keeping up with these requirements will ensure that your business operates legally and avoids penalties.

Learn more about Employment Laws in the Philippines here. 

Keep Accurate Financial Records

Maintaining clear and organised financial records is crucial. This will not only help you understand your business's financial health but also simplify the process during tax season. Consider using accounting software or hiring a professional accountant to assist you.

While it’s not legally possible to separate your business and personal finances, it’s important to still keep them distinct from one another - at least unofficially. Open a separate bank account for your business and use it for all business-related transactions.

Understand your tax obligations

As a sole proprietor in the Philippines, you're subject to personal income tax, which integrates your business income. Familiarise yourself with the different tax brackets and allowable deductions to optimise your tax filings.

Continuously improve your skills

As a sole proprietor, the success of your business heavily depends on your skills and knowledge. Regularly invest in training and development to keep up with industry trends and enhance your business acumen.

Build a strong online presence

In today's digital age, having an online presence is essential. Create a professional website and engage actively on social media to reach a wider audience. This will help you market your products or services effectively and interact with customers.

Hire only reliable and trustworthy employees

The people you hire can significantly impact the success of your business. Ensure that you employ only reliable and trustworthy individuals by conducting thorough background checks. This will help maintain a safe and productive work environment. Here’s Everything You Need to Know About Background Checks in the Philippines. 

Key Takeaways

Establishing a sole proprietorship in the Philippines offers simplicity and direct control over business decisions, making it an appealing option for many entrepreneurs. However, it is crucial for potential and current sole proprietors to understand the responsibilities that come with unlimited personal liability and the need for meticulous tax and financial management.