Start a Business in the Philippines. Yesterday I wrote an article about how to start a business in the Philippines. You might want to refer back to it if you are still in that Philippine business dream world.
Start a Business in the Philippines — Practical?
One of my good readers here at PhilFAQS is pretty well along in the planning stage for starting a business here in the Philippines. Without revealing too many details of his plans, I feel his story is well worth looking into.
He’s asked for some advice from me a number of times, and rather than hide my responses in private emails, I thought I’d bring them out (suitably anomymized of course) here in the main article section.
Here are some of the major points and my thoughts on them.
Do, please remember, I am a small business person and a successful US business start-up guy, but I am by no means and expert, and I absolutely am not qualified to give legal advice or tax advice. What follows is my personal opinion only. YMMV
(and if you don’t know what YMMV is, you better learn to use Google, learning to do your own research is very important)
Start a Business in the Philippines — Obstacles. Real and Manufactured
The first obstacle a foreigner needs to look into is whether or not s/he can even own any part of a business in the Philippines at all.
This link lists businesses by category and the percentage a foreigner is allowed to own. Note carefully that there are a number of businesses that a foreigner can not own any part of, and then a list of various types of business that a foreigner can own ‘a piece of’.
The ‘piece’ typically tops out at 40%. This means the business founder has to go through all the many steps of business foundation, invest his/her money, and then someone else will own (and totally control) 60% …and, of course, be entitled to 60% of the profit.
If any of you think this sounds insane, join my club. So do I.
I was going to write a lot more words about this, but I’ll keep it simple. The Philippines does not want foreigner-owned business here in the Philippines. Read this article, and think about the words as you are reading them, and then tell me again why you feel putting up a business in the Philippines is a good idea.
Here’s a very simple exercise you can try easily, no matter where you live or what kind of business you are contemplating.
- Park a car at the bottom of a hill
- Tie a rope to the “downhill” bumper of the car
- Put the car in neutral and release the brakes
- Now, carefully, holding the rope straight out from the bumper, push the car uphill with the rope
Start a Business in the Philippines — Practicalities and Loopholes
Let me tell you what the law of the Philippines really means when it says, for example, a foreigner may own 40% of a business.
A business must be founded with a specific capital investment. Real cash money.
40% of that investment can come from the foreigner. Sixty percent must come from the Filipino citizens on the board of directors.
I don’t know about you, but I know I’d have a pretty hard job in walking the streets asking people if they have cash money in the bank to invest in my business. I think most of you reading this would have trouble as well.
So here;’s the little “gimmick” many foreigners come up with. They, the foreigner, provide all the money. They “under the table” give money to their Filipino partners so it appears the “60-percenters” actually contributed a legitimate 60%. Simple, eh?
Well, aside from the insanity of giving 60% of your money away to people you hardly even know, let me tell you what you have just done if you “buy into’ this common scheme.
You have very likely violated the good old Anti-Dummy Law (or Commonwealth Act No. 108, as amended) which was written to spell out how Filipinos are punished when they participate in evading the Philippine business laws. The Anti-Dummy Las also prohibits foreigners from intervening in the management, operation, administration, or control of any nationalized activity.
Filipinos who violate this law commits a criminal act punishable with 5- to 15-year imprisonment.
(and plenty other citations I could bore you with. Suffice to say, the law has “teeth”, and its enforcement is actively pursued by a number of government agencies)
So what legally defines a “dummy corporation”?
Well again, I’m no lawyer, but here are some clues, as written by actual Philippine government lawyers:
Badges of “dummy status”
The Department of Justice Opinion No. 165, Series of 1984, laid down the following “significant indicators” or badges of “dummy status”
- That the foreign investor provides practically all the funds for the joint investment undertaken by Filipino businessmen and their foreign partner.
- That the foreign investors undertake to provide practically all the technological support for the joint venture.
- That the foreign investors, while being minority stockholders, manage the company and prepare all economic viability studies.
(my opinion on the honesty of this lawyer will be withheld for now, I don’t want to melt my keyboard down with the words I really ought to use regarding this scumbag).
The budget for this new bistro was about $100,000 USD. My friend didn’t have that much in savings, but he burned his home country bridges behind him, borrowed money he knew he couldn’t pay back, and scraped up $100 “large”.
He gave his lawyer, who was going to serve on the bard of directors, as well as serve as the company legal counsel (for a fee, of course), two other “trusted” business associates recommend by the lawyer, and his wife-to-be $20,000 USD each to put in their personal bank accounts.
Then the lawyer filed the articles of incorporation, which appeared all legal and square, with more than 60% Filipino ownership. At the first board meeting the “seed” money was transferred from each shareholder into a corporate bank account.
The company found a great building to lease, locked up the lease, hired an architect who knew restaurant design and came up with a great plan.
The corporate counsel (for a fee of course) filed all the permits, license applications, clearance forms, etc. They signed a 10 year lease on the building for a fair price, and my friend ordered a lot of remodeling supplies, and (big-ticket item) kitchen equipment and furnishings. (cash in advance, of course, a new business isn’t going to get credit from suppliers, you realize).
After a couple weeks, the shipments started arriving and were stored in the building, which painters and other craftsmen were rapidly getting into a ship-shape appearance. Time to start hanging the new signage and start looking for food suppliers.
Hmm. One little catch. One morning my friend received a phone call from his lawyer.
“Bad news. Thieves broke in last night and all the kitchen equipment, furniture, linens, silverware, plates, glasses, everything … gone.”
An immediate emergency board meeting was called. Turns out that the board member who had said he was going to handle the insurance hadn’t quite gotten around to buying a policy … he was diligently looking for the cheapest deal.
Oh, and the first month’s lease payment was due at the end of the week and there wasn’t enough cash in the bank to make the payment.
The “corporate counsel” then went on to say he had just that morning happened across a guy who would be willing to take over the lease so as to avoid the business having to declare bankruptcy (of course their deposit on the lase would be lost).
And since the business obviously couldn’t continue, he moved that the board declare the business dissolved and that the remaining pittance in the bank be distributed equally to the board members.
My friend, of course, voted no, but the rest of the board voted yes. All democratic and legal and such.
Bang. $100,000 bucks gone. Forever. Just like that. My friend could have burned the money with a cigarette lighter and gotten more satisfaction than that.
Are you still so sure you want to start a business in the Philippines which you don’t control, under the control of people you just met?
The “rest of the story” on that restaraunt venture?
Turns out the fellow who so generously took over the lease was none other than the son of the “corporate counsel”.
And that son was great businessman, he found a “used restaurant equipment” dealer who just happened to have everything needed to equip the restaurant, like new, for hardly any money.
I mean the furniture was even the same color and style as the stuff that got stolen, What a lucky coincidence, eh?
Well this sounded just as fishy to my foreigner friend as it probably does to you out there reading this, so my friend took a little of his meager remaining money and went to see another lawyer.
“I want to sue that SOB of a legal advisor. He cheated me, cleaned me out, took my life savings … ” and so forth.
You know what the new lawyer told my friend?
“I won’t take your money. If I were you, I’d leave town. I have reliable information that the provincial prosecutor is preparing a case against you for violating the Anti Dummy Law. All the money invested was your money, which made it an illegally owned foreigner business, if found guilty you are facing prison and then mandatory deportation after your prison term”
My friend married his intended, got her a visa, borrowed money yet again from his family for plane fare and took her home to his former country.
Last I heard from him he was working as a used car salesman, living in a cheap rental apartment … he had no savings and no credit left to buy his family a decent home, and was expecting to have all his debts paid off by the time he started having to shell out to send his first child to college.
Start a business in the Philippines as a foreigner? Oh yeah, great idea say some.
I say, stay the hell away from it. They don’t want you, the law and local rules are stacked against you, and it’s way, way easier to live in the Philippines and earn your money elsewhere. Safer, by far too.
I’ve got more stories, but this is already 2,000 odd words. Enough already.
I’ll leave you with another real-world story, though. Read this great and 100% true account of why you don’t want a business in the Philippines in someone else’s name. Recommended.
And your thoughts on Start a Business in the Philippines?