Atty. Rami Hourani discusses with us why aspiring business owners should not take setting up a corporation lightly and be cautious of advice found on the internet.
There are few more unique experiences than being a lawyer on Facebook. People are quick to post their personal grievances online and solicit the opinions of others. The advice they get is often incomplete if not outright dangerous. As a lawyer, I am tempted to comment my own advice but frankly there are always status posts like those. Also, as a lawyer offering advice is like writing a blank check to be included in the problems of other people.
Friends who you have not seen in decades message you out of nowhere for a quick kumustahan before spilling their guts on the most intimate of issues. They could have standing arrest warrants against them. The BIR might be sending them very sternly worded letters. They may themselves have been the victim of a crime. But the moment you bring up setting an appointment with you so you can talk it through more thoroughly, the replies magically disappear.
These minor annoyances do not keep me off the platform but there is one piece of advice that gets passed around the I feel merits a public comment. “Dapat gagawa ka ng Corp!” is a phrase I see passed around more and more these days as people are looking to supplement their income with a little business on the side. Let me break down a few of the ways that this is not the kind of advice to be passed around casually much less acted upon.
I understand where the advice is coming from. People should make corporations so that they are protected. This impulse comes from a place of respect for our laws. (As we shall see though, it definitely does not come from a place of understanding.)
The first and biggest pitfall that people fall into is failing to really think about how to split the profits of the endeavor. I sit across from people excited to enter into a venture together all the time. I consider it my personal responsibility to ask them the questions I know they would not speak out loud to each other. I begin typically by asking them how much they expect to earn in the first year of operation. I get conservative answers like 500,000 to 1 Million Pesos. Let’s assume 5 people are in the room with me. Assuming the upper end of their conservative estimate that is around 200,000 pesos to each of them, that’s around 16,000 pesos a month for each of them. If we assume their costs are around 50 percent of their revenue, that’s 8,000 pesos a month. You should also note how the share of the BIR has not been factored in at that point. At that point, it’s less than minimum wage. If the venture would instead be undertaken by just one of them that monthly figure jumps to 83,000 pesos a month.
I typically move to other questions because I don’t expect them to have a ready response for my first set of questions. I ask them what their respective involvements will be in the venture. Inevitably, they fall into two groups: the financier or the worker. I often ask both groups to really think if they are getting a fair deal alongside other questions like “How will you keep track of where the money is spent?” and “How will you keep track of what work is being done?” These questions are probably some of the most basic ones but they are the first that are forgotten among good friends.
Yes, corporations provide a degree of insulation from legal liability. This is useful when an employee gets into an unfortunate accident. The corporation, and not its owners, is the only thing at stake if it ever came to litigation. However, a corporation does not only create rights, it also creates duties. All too often people forget to submit a form, file a return, make the necessary report or some other documentary lapse. I have seen people get called into court for a corporation that they scarcely remember having made beyond a vague recollection of having signed some paperwork. Let me tell you right now if you are not a lawyer, knowing that you have a date in court can rob you of sleep for weeks leading up to it.
I know, it’s a bit cliché, a lawyer that tells you there’s a danger of you going to court over something. It’s a cliché though because it happens. It happens in the most insidious of ways. The small penalties that these government agencies impose on people who do not comply with their requirements often come with interest if not paid within a given period of time. In a decade, these penalties will have accumulated and tripped a circuit breaker in the system and the government agency concerned starts printing a lot of papers that reference you.
At that point in time, you could be planning for your daughter’s wedding, changing into your formal wear for your eldest’s graduation, or getting ready to retire. The law has a weird habit of intruding into your life when you are in a moment of serene tranquility. A policeman will knock on your door and politely introduce themselves. They will say they are looking for a person named <Insert Your Name Here> you will reply absent mindedly that that is you. They will present you a paper with your name on it with the phrase “Arrest Warrant” boldly emblazoned at the top. You will ask for details, they will not have them. At this point, your only option is to accompany the policemen as you yell to your family to get in touch with Mr. So-And-So because you vaguely remember that he mentioned he was a practicing lawyer at a party you both happened to attend.
As you ride with the policemen, you will vaguely remember someone stopping by your office with letters from some government office, but you handed it off to a manager each time before dashing off to some important engagement. At this point though, the involvement of a lawyer will cost considerably more than if you had simply bit the bullet and phoned one up when you first started receiving the notices. Once you find out what legal requirement related to your corporation that tripped you up, you might even reach out the person who initially told you to make a corporation and more likely than not they will not even remember having given you the advice.
I tell you this story not to frighten or scare you, but to endear you to the idea of approaching a lawyer well in advance of actually needing to. You will save a lot of money that way. Additionally, I hope this article has taught you to be cautious of the advice you might find on the internet.
If you need a lawyer, you can find one right here on Legal Tree. It even lists me! Thank you for making it to the end of my article and I sincerely hope you never need my advice.
Atty. Rami Hourani is a lawyer based in Cebu City who specializes in the fields of commercial and labor law. He is solution oriented and gives practical and commercial legal advice, being a businessman himself and a consultant to various business organizations. You can view Atty. Rami's profile here.
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