BUSINESS FINANCE 1

Starting up a Business in the Philippines Topic 2

A. Reason why people engage into business

1. To increase your income and the level of control over your income
Running your own business allows you to be directly involved in how much money you will be making.
Instead of waiting for promotions, raises, or bonuses to see your income increase, you can relate your
income to how hard you are working and the actual progress of the business itself.

2. To free up more time for other purposes

When you are the boss, you can make better use of your time and give yourself the necessary time off to
have a life outside of work. 9 to 5 is not a required restriction anymore, so you will be able to engage in
other activities besides your work.

3. To gain greater control over your life

Rather than waiting for others to tell you what to do or allowing yourself to be fit into some sort of
corporate mold, starting your own business means you get to decide for yourself how your life is going to
go and what you are going to be doing along the way.

B. Common causes of business failures:

1. T
We often ask our clients, “Where will you play and how will you win?”.. In short, it’s vital to
understand your competitive marketspace and your customers’ buying habits. Answering
questions about who your customers are and how much they’re willing to spend is a huge step in
putting your best foot forward.
2. Opening a business in an industry that isn’t profitable.
Sometimes, even the best ideas can’t be turned into a high-profit business. It’s important to
choose an industry where you can achieve sustained growth. We all learned the dot-com lesson
– to survive, you must have positive cash flow. It takes more than a good idea and passion to stay
in business.
3. Failure to understand and communicate what you are selling.
You must clearly define your value proposition. What is the value I am providing to my customer?
Once you understand it, ask yourself if you are communicating it effectively. Does your market
connect with what you are saying?
 4. Inadequate financing.
Businesses need cash flow to float them through the sales cycles and the natural ebb and flow of
business. Running the bank accounts dry is responsible for a good portion of business failure.
Cash is king, and many quickly find that borrowing money from lenders can be difficult.
5. Reactive attitudes.
Failure to anticipate or react to competition, technology, or marketplace changes can lead a
business into the danger zone. Staying innovative and aware will keep your business competitive.
6. Overdependence on a single customer.
If your biggest customer walked out the door and never returned, would your organization be ok?
If that answer is no, you might consider diversifying your customer base a strategic objective in
your strategic plan.
7. No customer strategy.
Be aware of how customers influence your business. Are you in touch with them? Do you know
what they like or dislike about you? Understanding your customer forwards and backwards can
play a big role in the development of your strategy.
8. Not knowing when to say “No.”
To serve your customers well, you have to focus on quality, delivery, follow-through, and
follow-up. Going after all the business you can get drains your cash and actually reduces
overall profitability. Sometimes it’s okay to say no to projects or business so you can
focus on quality, not quantity.
9. Poor management.
Management of a business encompasses a number of activities: planning, organizing,
controlling, directing and communicating. The cardinal rule of small business
management is to know exactly where you stand at all times. A common problem faced
by successful companies is growing beyond management resources or skills.
10. No planning.
As the saying goes, failing to plan is planning to fail. If you don’t know where you are going, you
will never get there. Having a comprehensive and actionable strategy allows you to
create engagement, alignment, and ownership within your organization. It’s a clear roadmap that
shows where you’ve been, where you are, and where you’re going next.

C. Entrepreneurship and Sound Business Idea

Entrepreneurship
The capacity and willingness to develop, organize and manage a business venture along with
any of its risks in order to make a profit. The most obvious example of entrepreneurship is the
starting of new businesses.
What is a sound business idea?
 Economic opportunity which is within the reach of the entrepreneur and which will
provide him desirable value.
 An entrepreneur must determine the soundness of a business before commiting himself
financially.

D. Registration of the of Business Name (Project)

Steps in the Registration Process (Project)

E. Forms of Business Organization:

Sole Proprietorship
The vast majority of small businesses start out as sole proprietorships. These firms are owned
by one person, usually the individual who has day-to-day responsibility for running the
business. Sole proprietorships own all the assets of the business and the profits generated by
it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the
law and the public, you are one in the same with the business.

Advantages of a Sole Proprietorship

• Easiest and least expensive form of ownership to organize.
• Sole proprietors are in complete control, and within the parameters of the law, may make
decisions as they see fit.
• Profits from the business flow-through directly to the owner’s personal tax return.
• The business is easy to dissolve, if desired.

Disadvantages of a Sole Proprietorship

• Sole proprietors have unlimited liability and are legally responsible for all debts against the
business. Their business and personal assets are at risk.
• May be at a disadvantage in raising funds and are often limited to using funds from personal
savings or consumer loans.
• May have a hard time attracting high-caliber employees, or those that are motivated by the
opportunity to own a part of the business.
• Some employee benefits such as owner’s medical insurance premiums are not directly
deductible from business income (only partially as an adjustment to income).

Partnerships
In a Partnership, two or more people share ownership of a single business. Like
proprietorships, the law does not distinguish between the business and its owners.
 The Partners should have a legal agreement that sets forth how decisions will be made,
 profits will be shared, disputes will be resolved,
 how future partners will be admitted to the partnership,
 how partners can be bought out, or
  what steps will be taken to dissolve the partnership when needed; Yes, its hard to think
about a “break-up” when the business is just getting started, but many partnerships split
up at crisis times and unless there is a defined process, there will be even greater
problems.
 They also must decide up front how much time and capital each will contribute, etc.

Advantages of a Partnership

• Partnerships are relatively easy to establish; however time should be invested in developing
the partnership agreement.
• With more than one owner, the ability to raise funds may be increased.
• The profits from the business flow directly through to the partners’ personal tax return.
• Prospective employees may be attracted to the business if given the incentive to become a
partner.
• The business usually will benefit from partners who have complementary skills.

Disadvantages of a Partnership

• Partners are jointly and individually liable for the actions of the other partners.
• Profits must be shared with others.
• Since decisions are shared, disagreements can occur.
• Some employee benefits are not deductible from business income on tax returns.
• The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

Types of Partnerships that should be considered:

1. General Partnership
Partners divide responsibility for management and liability, as well as the shares of profit or loss
according to their internal agreement. Equal shares are assumed unless there is a written
agreement that states differently.

2. Limited Partnership and Partnership with limited liability

“Limited” means that most of the partners have limited liability (to the extent of their investment)
as well as limited input regarding management decision, which generally encourages investors
for short term projects, or for investing in capital assets. This form of ownership is not often
used for operating retail or service businesses. Forming a limited partnership is more complex
and formal than that of a general partnership.

3. Joint Venture
Acts like a general partnership, but is clearly for a limited period of time or a single project. If
the partners in a joint venture repeat the activity, they will be recognized as an ongoing
partnership and will have to file as such, and distribute accumulated partnership assets upon
dissolution of the entity.
Corporations
A Corporation, chartered by the state in which it is headquartered,
 Is considered by law to be a unique entity, separate and apart from those who own it.
 A Corporation can be taxed;
 It can be sued;
 It can enter into contractual agreements.
 The owners of a corporation are its shareholders.
 The shareholders elect a board of directors to oversee the major policies and
decisions.
 The corporation has a life of its own and does not dissolve when ownership changes.

Advantages of a Corporation
• Shareholders have limited liability for the corporation’s debts or judgments against the
corporation.
• Generally, shareholders can only be held accountable for their investment in stock of the
company. (Note however, that officers can be held personally liable for their actions, such as
the failure to withhold and pay employment taxes.

• Corporations can raise additional funds through the sale of stock.

• A Corporation may deduct the cost of benefits it provides to officers and employees.
• Can elect S Corporation status if certain requirements are met. This election enables
company to be taxed similar to a partnership.

Disadvantages of a Corporation
• The process of incorporation requires more time and money than other forms of organization.
• Corporations are monitored by federal, state and some local agencies, and as a result may
have more paperwork to comply with regulations.
• Incorporating may result in higher overall taxes. Dividends paid to shareholders are not
deductible from business income; thus this income can be taxed twice.

F. Steps in Promoting a Business

There are potentially hundreds of ways that could promote a new business and build up
a portfolio. Here are some of them:
1. Get listed
This is one of the most basic methods of business promotion. List the business in as
many business directories, yellow pages, and local business Websites as you can find.
Many of these will list your company for free, though some might require you to pay a
small fee. This type of promotion is well worth the time and investment, as most people
consult these publications when looking for a designer, plumber, electrician etc. You see
the point.
2. Contacts
It’s not what you know, it’s who you know. This little phrase holds a great deal of water
in the small-scale business industry. When you’re first starting out, you’ll find that a lot of
your work comes in via word of mouth promotion. It’s therefore very important to make
connections early.

3. Your Business Website

Here’s your opportunity to show them what you can do, to tell them exactly how your
company can help them and why they should choose you over the competition. Never
forget that first impressions count, and if your portfolio isn’t the best you can make in
terms of design, layout and content, you’re selling yourself short straight away.

4. Business Card
Yes, we’re living in the 21st century, and yes, it’s the digital era, the age of technology,
the future and all that, but let’s be honest: nothing beats a business card for quick,
effective promotion.

5. Advertise
Of course, you could always go the traditional route and advertise. Targeted advertising
is the key here; billboards and the sides of buses simply won’t cut it. Try placing an
advert in the local newspaper, or target your market even further by advertising in
publications specifically published for small business owners in your local area. These
will vary depending on where you are and what the local economy is like, so take some
time to research the various advertising mediums available before you commit yourself

6. Free Gifts, Bribery and Smarm

This method does take some capital investment to start with, but can yield good results
if it’s done properly and is correctly targeted. Invest in some branded mouse-mats,
pens, coasters etc to promote your business. Try to aim for items that executives would
keep on their desks.

7. Dealing Effectively with the Public

Dealing with people is very important in a business. How you deal with potential and
existing clients can be just as important as your level of technical skill or design
competency selling vacuum cleaners door to door. Treat your clients with patience and
respect, and try as hard as you possibly can to make them happy.

8. Your Brand Image

The establishment of a brand is a key factor in any business’s promotional activities.
Create a corporate image for your company, and incorporate it into all your stationary,
documents and business Website — these techniques echo professionalism and class.

G. Management and Control of Business

A management function aimed at achieving defined goals within an established

timetable, and usually understood to have three components:
(1) Setting standards,
(2) Measuring actual performance, and
(3) Taking corrective action.

A typical process for management control includes the following steps:

(1) Actual performance is compared with planned performance,
(2) The difference between the two is measured,
(3) Causes contributing to the difference are identified, and
(4) Corrective action is taken to eliminate or minimize the difference.

H. Incorporation of Business

Classes of Corporations
 Stock corporation – are private C that have capital stock divided into shares and are
authorize to distribute to the holders of such shares dividends or allotments of surplus
profits. Ex. San Miguel Corporation
 Non-Stock corporation – do not issue stocks such as religious, social, charitable, civic or
professional organization, membership org.
 like bar or medical associations etc.

Classifications of Corporations
1. Profit Corporation
 A corporation created to conduct a business for profit.
 Can distribute profits to shareholders in the form of dividends.
2. Nonprofit Corporation - A corporation that is formed to operate charitable institutions,
colleges, universities, and other not-for-profit entities.
3. Public Corporation
 A corporation formed to meet a specific governmental or political purpose.
4. Private Corporation
 A corporation formed to conduct privately owned business.
5. Professional Corporation
 A corporation formed by lawyers, doctors, or other professionals.
 6. Publicly Held Corporation
 A corporation that has many shareholders.
 It’s securities are often traded on national stock exchanges.
7. Closely Held Corporation
 A corporation owned by one or a few shareholders.

Types of Corporations
1. Domestic - A domestic corporation is one incorporated under the Philippine laws.

2. Foreign - A foreign corporation formed and organized under any laws other than the
Philippines.
Promoter - A person or persons who:
 Organize and start the corporation
 Negotiate and enter into contracts in advance of its formation
 Find the initial investors to finance the corporation
 Gets rewards after successfully organizing a corporation
Incorporation
 Corporations are creatures of statute.
 The organizers of the corporation must comply with the Corporation Code.
 It is the certificate of incorporation that gives juridical personality to a corporation
and places it with in the jurisdiction of the Securities of Exchange and Commision.

Incorporation Procedures

Incorporator – persons that are responsible for incorporation of a corporation.

Articles of Incorporation – The basic governing documents of the corporation.

 Must be filed with the SEC.
 Can be amended to contain any provision that could have been lawfully included in
the original document.
Selecting a Corporate Name – Organizers must ensure that the name is not already in use and
available.
General-Purpose Clause – A clause often included in the articles of incorporation that
authorizes the corporation to engage in any activity permitted corporations by law.
Registered Agent – A person or corporation that is empowered to accept service of process on
behalf of the corporation.
Corporate Bylaws – A detailed set of rules adopted by the board of directors after the
corporation is incorporated.
  Contains provisions for managing the business and the affairs of the
corporation.
Organizational Meeting – A meeting that must be held by the initial directors of the corporation
after the articles of incorporation are filed.
Corporate Seal – A design containing the name of the corporation and the date of
incorporation.
 It is imprinted by the corporate secretary using a metal stamp on
certain legal documents.
Corporate Status – The SEC provides that corporate existence begins when the articles of
incorporation are filed.
 The filing of the articles of incorporation is conclusive proof that a
corporation exists.
 After that, only the state can challenge the status of the
corporation.
 Third parties cannot thereafter challenge the existence of the
corporation.
Corporations
 Corporations are separate legal entities.
 They generally must pay corporate income taxes to BIR.
 If a corporation distributes its profits to shareholders in the form of dividends,
shareholders must pay personal income tax on the dividends.
 This double taxation of corporations is a disadvantage of doing business.
Financing the Corporation
 A corporation needs to finance the operation of its business.
 Equity securities (or stocks) – represent ownership rights in the corporation.
 Debt securities – establish a debtor-creditor relationship in which the corporation
borrows money from the investor to whom the debt security is issued.
Equity Securities
 Common Stock – A type of equity security that represents the residual value of the
corporation.
 Common stock has no preferences.
 Common stock does not have a fixed maturity date.
 Corporations may issue different classes of common stock.
 Common shareholders have limited liability.
 Preferred Stock – A type of equity security that is given certain preferences and rights
over common stock.
 Preferred stock can be issued in classes or series.
  One class of preferred stock can be given preferences over another class of
preferred stock.
 Preferred shareholders have limited liability.
Preferences of Preferred Stock
1. Dividend Preference
2. Conversion Right
3. Liquidation Preference
4. Right to Participate in Profits
5. Cumulative Dividend Right
Debt Securities
 Debenture – A long-term unsecured debt instrument that is based on the corporation’s
general credit standing.
 Bond – A long-term debt security that is secured by some form of collateral.
 Note – A debt security with a maturity of five years or less.

Components of a Corporation
 Corporators – are those who composed the corporation whether as stockholders or
members. Includes incorporators, stockholders or members.
 Incorporators – stockholders, members originally forming the corp. and are signatories
of the Articles of Incorporation that had been filed to the SEC.
 Stockholders or shareholders – owners of shares of stocks in a corporation which has
capital stock.
Board of Directors qualifications
 Elected among the holders of stocks
 Must own at least one (1) share of capital stock;
 Must be resident of the Philippines;
 Must not have been convicted of an offense punishable by law.
Express Powers of a Corporation
 A corporation has the same basic rights to perform acts and enter into contracts as a
physical person.
 A corporation’s express powers are found in:
o Philippine Constitution, (2) SEC (3) articles of incorporation, (4) bylaws, (5)
resolutions of the board of directors.
 A corporation has the same basic rights to perform acts and enter into contracts as a
physical person.

 A corporation’s express powers are found in:

 (1) Philippine Constitution, (2) SEC (3) articles of incorporation, (4) bylaws, (5)
resolutions of the board of directors.
 Generally, a corporation has the power to:
 Purchase, own, lease, sell, mortgage, or otherwise deal in real and personal
property
 Make contracts
 Lend and borrow money
 Incur liabilities
 Issue notes, bonds, and other obligations
 Invest and reinvest funds
 Sue and be sued in its corporate name
Implied Powers of a Corporation
 Powers beyond express powers that allow a corporation to accomplish its corporate
purpose.
 e.g., a corporation has the implied power to open a bank account
 e.g., a corporation has the implied power to to reimburse its employees for
expenses
Dissolution of Corporations
1. Voluntary Dissolution
2. Administrative Dissolution
3. Judicial Dissolution
Winding-up and Liquidation
 The process by which a dissolved corporation’s assets are collected, liquidated, and
distributed to:
 Creditors
 Shareholders
 Other claimants
Termination
 The ending of a corporation that occurs only after the:
o Winding-up of the corporation’s affairs
o Liquidation of its assets
o Distribution of the proceeds to the claimants