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
Just Fill Up These Forms, Sir, and You'll Be Good To Go... Perhaps NOT
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.
Recently, the Anti-Dummy Law was cited as the law violated by the consortium of 2010 poll automation project winners Total Information Management(TIM) and Barbados-based Smartmatic.
(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”
Wow.
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?
Wow. Very scary stuff. There are certainly better ways to earn a living anywhere in the world.
Indeed, Bob. That’s why I also pointed to your recent article as well … this isn’t just a one-person crazy-man vendetta here, it’s a real issue that I find a heck of a lot of people just won’t consider. They do planning and “Due Diligence” until it gets downright boring, but they tend to gloss over the basic facts.
Dave:
I also say the same thing when people ask me. It really amazes me how many people try and circumvent the law through various schemes without looking at the basic facts: The laws are there for a reason, regardless of what you feel or think of that reason. Right or wrong, the laws are stacked against you from the start.
I was in one of the Philippine linkedin groups today, and there was a rather in-depth discussion about foreigners flipping properties here. Of course, it was veering into the “setting up corporation to own” realm…Great! You want to play with both corporate and real estate law here? Pure f*cking genius. I stayed out of it. You know that old saying, “Don’t waste your time talking to an idiot”. Even worse is the people wanting to start resorts here. Yeah, a few have done it, but there are so many that have lost everything.
I look at business here in the same manner as property ownership. If Rebecca wants to start something herself someday or start it for her family, I’ll help, and even give advice or counsel. But I do not want to own or have anything to do with the business. Not worth the risks. This is knowing everything going in 100%, and realizing that it may fail.
Another thing that people seem to overlook is the fact that when they see foreign companies here, like Microsoft, IBM, or Marrott, those companies invest millions, have large legal departments, and government support and approval. No small investor can even begin to compete on that level.
So true, John, so true. The other thing that totally amazes me is how many of these folks who are convinced that starting a business here is the right path for them actually have NO BUSINESS EXPERIENCE back in their own country. This, to me, is insanity. Starting a business is hard work. 80% of new businesses in the US fail in the first 2 years. To think you will come here and _then_ learn how to do things is mind boggling. Business is harder here.
And then there is time. More than one guy whom I have queried on this has told me, “I don’t have time for that, in the Philippines I’ll have more time”.
Ha. This is the land of, “for a while”, and Filipino Time. And government offices scattered all over Metro Manila. The same thing that can make retirement enjoyable makes trying to run a business a total nightmare … everything takes five times longer thna you expect it too, and usually requires extra trips to offices you never thought you would visit
Additionally, regarding lawyers, in the Philippines you can find a lawyer to represent you for just about anything… ethics be damned, many will tell you just what they think you want to hear. I get the impression that his original lawyer retained may have been after asking several others. (Little details like this, I’ve found, are often omitted when sad stories are recounted to me). Very often those who lose everything were either warned in advance by others or aware of the risks.
I also find it interesting that his first response after being take was wanting to sue him… A very American reaction. My question to him would be:
1. How do you plan on a lawsuit? Are you prepared to wait many years?
2. Even if you prevail in court, how do you think you are going to collect?
3. Do you think a Philippine court will rule against an attorney here, who knows the law far better than you, even if you retain counsel?
Exactly. Just ask the International consortium who figured they “knew the ropes” and built NAIA Terminal Three, based on a promise of the Philippine government themselves to pay. The terminal has been open for several years now, the builders have yet to be paid. Doing business in the Philippines? Good luck!
Webmaster’s edit:
Thank you for your cooperation.
been living in the philippines 32 years on and off now full time 12years and i’ve seen and heard so many stories like this
as i was told in 1978 when i was green and was thinking of starting a business here
” how do u make a small fortune in the philippines???
start with a real big 1″ lol
think real hard i know guys that have lost millions of $ not peso’s
thanks for reading and for contributing to the discussion. I write often on this aspect of life here, see: http://philfaqs.com/live-there/phils-business/how-to-become-a-millionaire-in-the-philippines/ which basically says the same thing … to become a millionaire in the Philippines is easy … just start with two million *smile*.
Seriously, though, a lot of people don’t want to hear this sort of advice, or hear it but somehow think it doesn’t apply to them. No matter, I intend to keep giving it. If I save just one poor soul from losing his life savings and having to go to the US Embassy to get a loan for a ticket home, I’ll consider it worth my time.
This is a great place to visit/live but a poor place for a foreigner to start a business or, in most cases, try to have a conventional job. It’s like pushing a car uphill with a rope.
Hi there my name is Tim and i,m 39, been living here now 7 years, came here with 5 million pesos and at one point went down to 200 pesos, reason? With the wrong woman and family. i moved got a job earning 1500 a day, worked my way back up and found a decent wife who (owns) our business and we are doing well.
The problem here like any country we all get greedy, talk of corporations and share owned businesses, most of the expats here would not have a clue how to set them up in there own country let alone here.
There should be a book that every foreigner gets given at the airport on arrival Titled “Dont be flush Idiot!”
Treat the philippine peso the same as a dollar or a UK pound as it is for me, because if you treat it as only 20 pesos or 500 pesos lang, you will go hungry!
Good forum by the way, cheers Tim
Hello, Tim, thanks for the kind words and for the great contribution here. One of your most momentous pieces of advice is one I have often given before. For those who have never set up a corporation or other formal business entity,, the Philippines is a very, very poor place to learn.
My wife and I had an actual corporation in the US that we started from scratch. It was hardly an easy thing to do even there, where there is hand holding and companies who assist you left, right and center. Doing the same thing in the Philippines is HARD and when I ask people thinking of moving here and starting a business if they already have business experience in their home country, I frequently get the response, “Oh I don’y have time or I don’t have money to do that back home, I’ll come to the Philippines first where things are cheap”.
Bzzzzt! Wrong answer. If you can’t find the time or the investment to sart a business at home, it’s going to be way harder, and possibly way, way more expensive to do it here in the Philippines.
Hi Dave,
In case some of your readers are still in doubt about doing business in the Philippines, here’s an article I saw on Yahoo Philippines today.
Philippines is 4th worst country in the world for business
BTW, do you know of anyone in the Philippines who can do federal tax returns that involves a US-based LLC or C-Corp? I’m assuming you have at least one of them.
Thanks.
Hello JayVee. Thanks for passing that along. The Philippines has consistently ranked in that third or fourth from the worst slot for years now. It’s all very well for the present administration to make noise about improvements … and blame everything on previous administrations … but little or no meaningful change is apparent. That’s why I know I bore people and even alienate some from time to time with my “forget about a business in the Philippines” stance, but the truth is the truth, and, as the song goes, “You have to stand for something or you’ll fall for anything”.
I operate strictly as a sole proprietor these days. My wife and I had a C-Corp back when we lived in the USA, but we closed that business down completely after we moved here. At times, I think that was a mistake, I probably should have kept things alive and run it remotely from the Philippines .. a solution VASTLY superior than trying to start a business up here. There’s no need for me to have any corporate structure behind me now, I have no assets in the US, so sole proprietorship and a good old “Schedule C” do the job for me just dandy.
There are a number of CPA firms that offer tax advice and preparation for expats in the Philippines. One that I know who does a good job is: Paul A. Keating, CPA. If you contact Paul, tell him “Philly” sent you. Godspeed.
There are business that can be 100% foreign owned, such as anything to do with export or outsourcing with a minimal paid-in capital.
Non export business like consulting, real estate brokerage, wholesale distribution can also be 100% foreign owned but the business must have a minimum of USD200k paid-in capital.
Even if you do open a 100% foreign owned business, there will still be hassles to obtain the numerous business permits needed to operate legally.
Some investors succeed others don’t.
Thank you David. As I have mentioned before, there is help available for those who are serious about starting a business here. I note that your site is one such place. Don’t be a stranger.
Hey Phil,
I don’t know if this will help any of your readers or not, but there’s a much better way to setup a corporation in the Philippines instead of “gifting” 60% or more of your business to unknowns. Also…I would suggest that if you consider hiring Filipinos that you DO definitely setup a corporation. Failing to do this and paying the agents or employees directly can cause you a ton of hassle with DOLE…some friends are going through this now.
Our Philippines corp. is owned 95% by our US corp. The other 5% is split between myself, my American business partner, and 3 dummy members. This allows us to legally hire Filipinos with our PI corp, enter into contracts, own property (we don’t…but could) through the corp, etc.
That being said, dealing with ANY kind of legal or business paperwork here is a nightmare. The Philippines is EXTREMELY bureaucratic and can be a real pain to get things done and set up.
Justin, thanks so much for this comment. It’s really great when a “real” business owner shows up rather than yet another wistful thinker.
As you point out and likewise David in the last comment, and I myself have pointed out many times, there _ARE_ ways, especially within the Philippine SEZ’s and for businesses involving import/expert and BPO (Business Processing Operation), to have a legally foreign-owned corporation here in the Philippines.
But even then it’s not easy. On a worldwide survey of ease of business foundation in over 200 courtiers, the Philippines was rated about 4th from the overall worst. You can’t do it on a shoestring and by “under the table” methods.
You bring up an important point also that I have been meaning to write about. It’s very, very popular in the online world these days to hire Virtual Assistants and other online helpers, often from the Philippines. It’s a great idea, and I promote it .. much better than shipping talented folks off to clean toilets in Hong Kong or Saudi. BUT, and this is a big but … hire people only through companies/agencies licensed by the government of the Philippines.
Once you start bragging to the world about your “employees” in the Philippines, you have just opened yourself up to a whole slew of issues with the government of the Philippines. This is not the wild, wild west when it comes to employment laws. In fact, if you “accidentally” wind up with someone as your legal “employee”, you’re going to find that marriage with no divorce is a lot simpler to deal with than Philippine employment law.
Just be careful out there, folks.
So, just to be clear: if I give ANY money to my longtime girl Friend to set up even a barebones local Sari-Sari Store its illegal…correct?
Or am I reading way to much into the jist of the article.
Hi Joe, welcome and thanks for the question. Yes, you are reading too much. The illegality about giving money applies to those who want to start a corporation and need “dummy” Filipinos to serve on the board of directors. Has nothing to do with Filipino-owned businesses getting ‘cash infusions” from investors, foreign or domestic. Just don’t have your name on the paperwork. Godspeed.
I have been living in the Philippines for only four months but as a former small business owner in the US I can tell you that there are just too many what I call ugh knowns to even think about starting a business here. First thing being you cant trust ANYBODY! A foreigner can’t even rent a house without fear of coming home one day to a locked door because the house is in foreclosure. And foreign ownership provides no comfort either. A friend of mine who has been here for 14 years wanted my help to start a business building concrete dome homes that are termite proof, earthquake proof and typhoon proof. He has been in construction all his life and is a certified dome home builder. He says all the components are here, cheap labor, cheap materials and a need for cheap homes. Sounds good huh? WRONG! Without going into much detail here my research concluded that there were sharks out there just waiting for me to invest my hard earned money in this indeavor just so they could swoop in and take it from me. I aint going to give them a chance. I gave him some money to help his filipino family with a sari sari store, canderia, vulcanizing shop and motorcycle repair, 100% owned by his filipina wife who he trusts. I would much rather do this than to squander my money on greasing the palms of shyster filipina attorneys (or any attorneys for that matter) trying to set up a business. My advice is to use your money wisely, travel, have fun but let the big boys have headaches with businesses here.
I am a Filipina. Got married with an american for 10 years. I convinced him to settle down here in Philippines because I am not comfortable going to USA because of discrimination. He is already a retired businessman. I proved and keep on proving to him that if we stay in my country, we can be better and well off than staying in USA. I was the one who opened the corporation or started. A buyer-developer-seller company. He didn’t cash out any amount but I made him the vice president of the corporation. We are doing fine here. My situation is very rare, being a Filipina married to a foreigner-99% of those women with foreigner husbands are so dependent with the DOLLARS of their husbands. I pitied those foreigners fooled with these bar girls, housemaids and trying hard filipinas. If they only find a God fearing woman, they could not be a victim. Investing here in Philippines is NOT GOOD, My situation is different, maybe because all of are radicals.
Foreign Investment Tip:
Always read the laws carefully.
You can only acquire 100% of the company if the companies services provide 60% non-domestic clients or only 40% domestic clients. Such as BPO, Exporting companies.
Yes they maybe filipino moneysuckers but now goes with everyone. I have a friend who trust me enough to start a bussines here in the philippines. Gave me out $200,000. I made him the Vice President of the Company and me as the President. After nearly 12yrs, Be able to return him the invested amount.
Never ever try to circumvent the law as it will come back and bite you.
Here is a link to the latest 9th Foreign Investment Negative List published in 2012
http://www.dayananconsulting.com/9th-regular-foreign-investment-negative-list-2/
not much of a change from previous years.
Foreigners can do/own businesses in the Philippines but choose wisely what you invest and your partners.
@ David Philippines Business Expert
Thanks for the update. I don’t see much difference from the last one I published, do you? See:
http://philfaqs.com/live-there/phils-business/philippine-business-for-foreigners-you-can-you-can-not/
Philly, there are a few changes but as usual only in favor of Filipino citizens.
You respond? Wow, thanks for answering back, David. Appreciate having your expertise here.
I’m certainly at least as interested in changes in favor of Filipino citizens as I am changes in favor of foreigners … perhaps you don’t know this, but well over half my readership are Filipinos … it’s just a “Filipino thing” that you see comments almost always from foreigners. I truly wish more Fiulipinos would join in the conversation.
This isn’t a site just for foreigners, it’s a site about living and earning in the Philippines, and last time I checked there were about 100,000,000 or so Filipinos already ;living here
And my “anti-JOB” comments apply equally to my Filipino brethren as well. Starting your own business, building your own success, instead of selling one’s self into “Job Slavery” is every bit as much my advice to Filipinos as it is to foreigners. I see so many Filipinos settling for crappy pay, long hours and mediocre benefits, simply because that’s what their lolo or their tatay did, instead of making their own way in the 21st century.
You know it’s easy to make as much money off a “fish ball” cart or a “hot dog ” stand as it is to equal the money most get, even for a call center job. And retail work or regular office work? What a waste of life and talent. Maybe I should write more about hot dog stands