As the Philippine economy contracts from the impact of COVID-19, businesses are finding different ways to cope. For some, closing the business may be the best option. But closure, in business or otherwise, is not as simple as it seems. Here are 10 requirements when closing a business.
- Voting requirements
Partnerships can be dissolved with the vote of all partners. Corporations will require a majority vote of the board of directors, as well as a majority vote of all stockholders if no creditors will be prejudiced by the voluntary dissolution, a 2/3 vote of all stockholders if creditors will be prejudiced by the voluntary dissolution, or a 2/3 vote of all stockholders if the corporate term will be shortened. Of course, there is no vote requirement to close down a sole proprietorship.
- Employee termination
For termination of employment due to closure of business, three requirements must be complied with: a) the employers must notify the Department of Labor and Employment (DOLE) and the employees at least 30 days before the intended date of closure; b) the cessation of business must be bona fide in character; and c) there is payment of separation pay to the employees in the amount of ½ month pay per year of service or one month pay, whichever is higher.
Take note, however, that if the employer can prove serious business losses or financial reverses as the cause for closure, separation pay is not required. Just please note that the losses must be serious in nature and not merely de minimis (in law, too trivial to merit consideration).
- Bureau of Internal Revenue (BIR) clearance
Obtaining BIR clearance is a necessary requirement for the dissolution of a corporation. Further, cancelling the BIR registration is vital so that the business will be relieved from the obligation to continue to file regular tax returns. Otherwise, the business will continue to be subjected to a minimum penalty of P1,000 for every unfiled return.
- Local government unit (LGU) cancellation
Similarly, to avoid the continuous assessment of business tax, community tax and other administrative fees, businesses must also apply for the cancellation of their registration with the local government unit concerned.
- Social Security System (SSS), PhilHealth, and Pag-IBIG
As you may be aware, failure to remit contributions to the SSS, PhilHealth, or Pag-IBIG has heavy consequences under the law, and may subject employers to criminal prosecution. To avoid future complications after the closure, the corresponding registration of the business with these entities must also be cancelled.
- Department of Trade and Industry (DTI) registration cancellation
For sole proprietorships, you are not required to cancel your business name registration. You may choose to keep it to sell the brand, or resume the business in the future. But you may also voluntarily cancel your business name registration with the DTI.
- Securities and Exchange Commission (SEC) approval
A corporation may be dissolved through voluntary dissolution upon securing the approval of the SEC. It is important to note that the process and documentary requirements are different for voluntary dissolution where no creditors are affected, and voluntary dissolution where creditors are affected. Dissolved partnerships should also cancel their SEC registration.
Before the assets of a business can be distributed to the business owners, they must first be used to satisfy creditors of the business. For sole proprietorships and partnerships, when the business assets are insufficient to pay for the obligations of the business, creditors can go after the assets of the owner/partners. For corporations, creditors cannot generally go after the assets of the stockholders because the law recognizes the corporation’s separate personality.
- Insolvency and rehabilitation
The Financial Rehabilitation and Insolvency Act affords several remedies to individual and corporate debtors. Individual debtors with sufficient property who are unable to pay their debts on time may apply for a suspension of payments to put a temporary stop to the collection of payment in order to allow them to properly settle their obligations, subject to the approval of creditors. Individual debtors may also file a petition for liquidation to settle all obligations and discharge them from their debts. Corporate debtors may undergo rehabilitation, including the suspension of payments, either through the filing of the appropriate court case or through an out-of-court agreement with a specific percentage of creditors. Corporate debtors may also apply for liquidation to settle all obligations and dissolve the corporation. Please note that these proceedings may involve substantial costs for legal fees as well as the compensation of the rehabilitation receiver/liquidator.
- Asset distribution
For corporate stockholders, corporate assets received in excess of the investment will be subject to regular income tax and not the preferential dividend tax. Consequently, all retained earnings should always be declared as dividends before any plan to dissolve is put into action. AD
The author is one of the founding partners of Kua, Sy & Yeung Law Office (SKY Law). He specializes in labor, general business, and family law. He is also a professorial lecturer at the University of the Philippines College of Law.
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