Decision criteria

To help you make a better decision, we came up with this guide of key decision criteria that you need to consider before jumping into the conclusion of registering (or not registering) your business.

Are you (expecting to) incurring (incur) significant pre-operating costs?

One thing that people frequently ignore is that pre-operating costs are tax deductible as expense and can be carried-forward as net-operating loss carry-over (‘NOLCO’) over a three-year rolling period.

So you might ask, what are pre-operating costs? In layman’s term, how much are you expecting to spend before your business becomes operational.

I’d like to differentiate pre-operating costs a bit with organizational costs (though they’re usually used colloquially). Organizational costs refers to the expenses you incur to register your business, so you incur these before you get registered with the Philippine Securities and Exchange Commission (‘SEC’) or the Department of Trade and Industry (‘DTI’).

Here’s a few examples of pre-operating costs that businesses might incur:

A tech startup (software product) that outsources its software development work will incur significant costs in building the product itself aside from the ongoing costs (e.g., database, hosting, domain, etc).

its software development work will incur significant costs in building the product itself aside from the ongoing costs (e.g., database, hosting, domain, etc). A bag startup (hardware product) that incurs significant travelling costs to find suppliers and ultimately pay the supplier for the initial batch of bags.

Why did I highlight outsourced costs for a tech startup? If you, or your co-founders, will be developing the product yourself(yourselves) — there’s no real cost to any of you other than the ongoing costs. But if you need to get a team on board, then that’s the next item that we’ll tackle.

To summarize:

Register your business when you expect to incur loads of pre-operating costs so you can benefit from tax deductions in the future.

Do you need to get people on board soon?

Need more hands on board? Hire!

Hold on! We know that getting the first set of talents into the business is always an exciting idea, but chill and listen to me first. We have seen too many horror stories of startup founders getting their first recruits before they even registered their businesses.

You need to know that only registered businesses can register employees under the business with the relevant government agencies. While many will tell you that it’s okay to just defer the registration till your business becomes more sensible, it’s not. That’s illegal.

Do you think that your unregistered employees won’t do anything against you? Think again. You can never tell what an irate employee can do.

The worst thing that some unregistered businesses do to their unregistered employees is to withhold taxes and payroll taxes (i.e., SSS, Philhealth and Pag-ibig) from their payrolls without remitting them to the government agencies involved (how can they remit if they’re not registered?). It might sound funny, but it’s a rampant practice in the industry.

And please, don’t do it.

Before I end this, I would just like to flag that payroll costs of an unregistered business is not allowed as a tax deduction even when you get registered subsequently. Now, will you stick with the wrong way?

To summarize:

Register your business if you need to hire employees for your business. Operate legally and claim tax benefit for payroll costs.

Are you going to generate revenues soon?

I have personally seen a lot of ‘experts’ advising new entrepreneurs to hold back their registration while they’re still earning small. Is this really a sound advice?

The straightforward answer is no. You need to be registered first before you operate your business. There’s a list of sanctions imposed on businesses operating without the appropriate registration requirements.

While there are a few exceptional situations such as when you’re just selling a few pieces of brownies in an annual school fair for fundraising, you always need to weigh the risk of failing to comply with the applicable laws and regulations.

To summarize: