Business Closure

Closing a business must be devastating to business owners. They had dedicated their time and hard work for many years.

Business closure is when the business owners can apply for cancellation of the registered business name and safely close the business, not just closing the physical store.

Processing the business closure properly can help business owners avoid lawsuits and unnecessary penalties from the Bureau of Internal Revenue (BIR), Department of Trade and Industry (DTI), Security Exchange Commission (SEC), and other government agencies.

Before we dive into the processing part, it is essential to determine which classification your business belongs to because the requirements and processes are a different per type of company and per government agency.

These must be long and tedious. The help of an expert accountant matters to do the ‌procedures in line with the law.

What are the Most Common Reasons for Closing a Business?

Bankruptcy

The organization lacks sufficient funds to continue operations, maybe because of the obsoleteness of their product, tough competition, or unbearable interest expenses on their loans.

Filling bankruptcy allows options to either repay to erase their debts or offer an asset that a company or individual owns outright—for example, buildings, homes, cars, etc.

Poor Business Plan

Poor up-front planning is one of the main reasons businesses are forced to close. Failure to define the goals and steps to achieve those goals makes a weak business foundation.

Poor Management

This is associated with a poor business plan. Even if you have done the planning, written goals, and have a high-quality product, it can threaten your business if you do not adequately manage the employees, creditors, and suppliers.

Business Reorganization

Some business closures are not because of failure to handle the business properly. Others want to expand or rebrand their business into another type of business.

Involuntary Closure

This is when your business has been forced to close by the authorities such as BIR, DTI, Security Exchange Commission (SEC), and the Department of Labor and Employment (DOLE) for violating the regulation or the law like child labor failure to pay taxes, fraud, etc.

They will only do this kind of force closure after careful investigations, notices, and hearings.

Determine which Classification your Business Belongs to

Sole Proprietorship

A sole proprietorship (can also be identified as individual entrepreneurship, sole trader, or simply proprietorship) is an unincorporated entity owned by one individual only.

This includes freelancers, home-based consultants, self-employed professionals, and regularly earning income outside of an employer-employee relationship.

Sole proprietors must file a cancellation of their business with the Department of Trade and Industry Business (DTI).

Corporations and Partnerships

If in a sole proprietorship, the business is owned and operated by one individual. However, at least two members hold and manage the corporation and partnership. They share ownership, profits, and liabilities.

In an open corporation, shareholders own the business. A closed corporation comprises only nonvoting members.

Includes cooperatives, companies, and organizations required to register with the SEC and apply for the consolation of their business with the same agency.

Procedure in Closing a Business in the Philippines

Termination of Employees

Philippines labor law allows employers to terminate employees due to authorized causes. One of which is closure or cessation of business points to the actual shutting down of a business.

In this case, an employer must give written notice to both employees and the DOLE 30 days before the projected date. And the employee is entitled to receive a separation pay at the time of their dismissal.

Failure to follow the above conditions could be grounds for an illegal dismissal lawsuit.

Notice to the BIR, SSS, Phil health, and Pag-ibig,

The employer is required to send notice to Social Security System (SSS), Philippine Health Insurance Corporation (Phil Health), and Home Development Mutual Fund (Pag-ibig), as they are computing the monthly contributions for the employees.

They need to get approval from the Bureau of Internal Revenue (BIR) to discontinue assessing taxes based on the company's assumed income.

Failure to notify and secure clearances from these government agencies can have significant consequences.

Notice and Clearances from other Government Agencies

Suppose the business or the company has been granted a secondary license by the different government agencies, such as the Philippine Export Zone Authority (PEZA), the Board of Investments (BOI), etc. In that case, must submit the notice of closure to these agencies.

Some will require further documents to secure a clearance for closure.

Application for Closure at Local Government Unit

In the same setting as securing a business mayor's permit when starting a business, one must submit a notice of closure and other necessary documentary requirements to the city where the company is located and the office that issued the business permit.

Application for Dissolution at DTI and SEC

If the business belongs to a sole proprietorship, it must file a closure notification with the Department of Trade and Industry (DTI) and further documentation.

A corporation must file the documentation for both processes with the DTI and SEC if it is a corporation.