With the seemingly never-ending economic and public health uncertainty brought about by COVID-19, we have seen a number of greatly affected businesses incur continued losses. Several have even been forced to close down and cease operations. It seems that despite the grant of perpetual existence under the Revised Corporation Code (RCC), some corporations die natural deaths due to the unprecedented challenges caused by the pandemic.
Unlike the joy and excitement of starting a business, ceasing to do business is a painful undertaking. However, will physically closing shop be enough to say that business operations are terminated? Unfortunately, from a legal setting standpoint, it is not as easy. Some business owners believe that for as long as the business conducts no operations, the business is successfully closed and need no further steps to take.
Another inaccurate view some may hold is that for as long as the corporation ceases to exist in the eyes of the Securities and Exchange Commission (SEC), that suffices as business closure. This may be partially correct since the RCC provides that if a corporation becomes inoperative for at least five consecutive years, the corporation is placed under delinquent status. Thereafter, the delinquent corporation will be given two years to resume operations and comply with the requirements; otherwise, the corporation’s Certificate of Incorporation may be revoked. However, it should be emphasized that though the RCC provides for delinquency and/or revocation, the closure of the business does not end there. This is where problems usually arise; as a result, business owners tend to overlook the importance of properly deregistering the corporation.
While a corporation may have achieved delinquent status in the eyes of the SEC, it is still considered to be in business in the eyes of the Bureau of Internal Revenue (BIR) and the Local Government Unit (LGU). This can cause headaches for business owners — simply because the business was not properly closed and deregistered with all the necessary government agencies. As a result, a corporation will be penalized heftily for failure to file and pay the taxes and returns due from it and/or obtaining the necessary permits. The solution is to ensure that the corporation goes through the proper deregistration processes with urgency.
CONSIDERATIONS WHEN CLOSING SHOP
Since business deregistration with various government agencies may take time — spanning years for some — it should be highlighted that during the process of deregistration, the corporation stays alive and maintains its separate juridical personality for dissolution purposes. During the dissolution process, the management and/or the Board of Directors (BoD) have several factors to consider, such as deciding which functions are necessary for the dissolution or at a minimum, during the deregistration process. The accounting and finance team may need to prepare various documents, financial statements, tax returns and schedules for submission to various government agencies. The human resource team (HR) must also handle final pay, separation pay, and others.
The management and/or the BoD also need to weigh whether to outsource necessary functions to third parties or keep these in-house. More factors for deliberation include the cost of keeping salaried employees as compared to paying consultancy fees. This will depend on the skill set required, hours needed, and the level of control the management wants to exercise over the work performed. Another challenge is when employees jump ship to join another entity. As a result, a corporation may have no employees left to address the government agencies’ clarifications while in the process of deregistration. It is likely for this reason why some opt to hire business professionals/consultants to take care of deregistration matters and at the same time, safeguard business records for easy retrieval.
Business owners also need to determine how long the business space needs to be maintained. This will rely on management intent or the availability of an agent or authorized person to receive notices on their behalf. Although the deregistration and dissolution process may take years, the corporation does not necessarily need to keep its business space and employees during this period.
DEREGISTRATION WITH THE BIR, LGU AND OTHER GOVERNMENT AGENCIES
Embarking on the deregistration process may appear lengthy, costly and dreary. There is also a tendency to neglect a corporation that is no longer profitable and operative. Is it then worth going through the deregistration process? Will it not be worthwhile to simply be inactive for a long time and wait for the BIR and/or LGU to act? Just like with any other strategy, the impact of inaction or even delay can be frustrating and devastating. When visible and quantifiable, delays or failure to deregister may translate into potentially hefty penalties from the BIR and the LGU.
To formally close a business in the LGU, a company needs to obtain clearances such as but not limited to Barangay Clearance; City Treasurer’s Clearance; and other relevant clearances particular to the LGU concerned. The LGU will also assess deficiency taxes and any unpaid annual permits.
As for deregistration with the BIR, retiring corporations that have completely paid off their tax liabilities will be issued a Certificate of Tax Clearance. This confirms that the corporation no longer has any outstanding tax obligations to the government. The law is clear that corporations shall not be dissolved until cleared of any tax liability. It should be underscored that the processing of the tax clearance triggers a mandatory audit or assessment for the last three open years prior to the dissolution. Such an examination may result in a deficiency tax assessment unless the corporation has no operations during the periods under audit. Another matter worth emphasizing for the BIR deregistration process is the relevance of end-dating for tax return filing purposes. Prior to end-dating and notwithstanding the plan to dissolve, the company is still required to file returns, which can be nil returns if already non-operational, for reporting or compliance purposes.
The corporation must also submit an application for the cancellation of registration or an equivalent notice document in order to formally stop its obligation as a contributing employer to SSS, PhilHealth and Pag-IBIG.
It is worth noting that to engage in the deregistration process at the earliest time possible will also make it easier to retrieve accounting records and documents, smoothening coordination with the corporation’s employees who prepared these records. As the corporation ceases to be a going concern, is there an assurance that employees will remain to see through the dissolution process? Human nature can drive employees to look for other employment opportunities. When already employed by another entity, coordination on record-keeping and providing clarifications can be troublesome. Challenges in document retrieval and obtaining clarifications from previous process owners are usually encountered when years have passed before a corporation is properly deregistered.
A PROPER GOODBYE THROUGH PROPER DISSOLUTION AND DEREGISTRATION
Proper deregistration of a business may be a subject that business owners do not want to confront immediately, especially after the pain of loss. Despite the fact that dissolution and deregistration can be long and tedious, it can still be achieved fairly painlessly with the guidance and assistance of a trusted tax professional — especially when matters on assessments or audit findings come in.
Furthermore, in consideration of penalties that may be imposed, it is important for the company to go through the deregistration processes with the assurance and comfort that, in the future, no unresolved matters will haunt the business owners.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Anne Margaret E. Momongan is a Tax Senior Manager of SGV & Co.