In the Philippine entrepreneurial landscape, starting a business is often met with fanfare, but the process of winding one down—whether due to retirement, financial shifts, or strategic pivots—requires even more meticulous attention. Improperly closing a business can lead to "zombie" entities that continue to accrue taxes, penalties, and legal liabilities long after the doors have physically shut.
To properly exit the market, a business must undergo a multi-staged legal "de-registration" process involving several government agencies.
Phase I: Internal Corporate Action
Before approaching the government, the entity must formally decide to dissolve.
- For Sole Proprietorships: The owner simply executes an Affidavit of Cessation of Business, stating the reason for closure and the effective date.
- For Corporations/Partnerships: * A Board Resolution or Partners’ Resolution is required.
- This must be followed by a stockholders' meeting where at least two-thirds (2/3) of the outstanding capital stock vote in favor of dissolution.
- The appointment of a liquidator to manage the remaining assets and settle debts is standard practice.
Phase II: The "Big Three" Clearances
The meat of the closure process involves clearing obligations with three primary regulatory bodies.
1. The Barangay and Local Government Unit (LGU)
You must retire your business permit where it was born.
- Barangay Clearance: Obtain a clearance stating that the business has no outstanding obligations in the local community.
- Mayor’s Permit Retirement: Submit an application for retirement to the Business Permits and Licensing Office (BPLO).
- Assessment: The LGU will assess if you owe any back taxes or fees. Once settled, they will issue a Certificate of No Outstanding Liability or a formal Certificate of Retirement.
2. The Bureau of Internal Revenue (BIR)
This is the most critical and often the most time-consuming step.
- Form 1905: File this for the "Cessation of Registration."
- Audit and Verification: The BIR will conduct an audit of your books for the past three years (or since the start of operations) to ensure all taxes (Income, VAT, Expanded Withholding, etc.) were paid correctly.
- Surrender of Documents: You must surrender your original Certificate of Registration (COR), unused official receipts/invoices, and the "Ask for Receipt" signage.
- Tax Clearance: Only after all "open cases" (unfiled returns or unpaid penalties) are settled will the BIR issue a Tax Clearance.
3. The Securities and Exchange Commission (SEC) or DTI
- Sole Proprietors: Simply file a cancellation of the Business Name with the Department of Trade and Industry (DTI).
- Corporations: Submit the Articles of Dissolution to the SEC. You will need to provide the Tax Clearance from the BIR and the LGU clearance to prove that the "life" of the corporation can be legally extinguished.
Phase III: Labor and Social Agencies
A business is not truly closed until its obligations to its employees and the social safety net are severed.
| Agency | Requirement |
|---|---|
| Department of Labor (DOLE) | You must file an Establishment Termination Report at least 30 days before the closure. Employees are generally entitled to Separation Pay (unless the closure is due to serious business losses). |
| SSS, PhilHealth, Pag-IBIG | Submit formal notices of closure (e.g., SSS Form R-3) to stop the accrual of monthly employer contributions and penalties. |
Summary of Mandatory Documents
Note: Always keep original and notarized copies of these documents for at least ten years, as secondary liabilities can sometimes surface later.
- Affidavit of Cessation / Board Resolution
- Audited Financial Statements (as of the date of closure)
- BIR Tax Clearance (The "Golden Ticket" of closure)
- LGU Certificate of Retirement
- Proof of Separation Pay (for employees)
The Risks of Non-Compliance
Ignoring the formal closure process does not mean the business ceases to exist in the eyes of the law. The BIR and SSS, in particular, will continue to expect filings. Failure to close properly can result in:
- Compounded Penalties: Monthly "stop-filer" cases that can reach hundreds of thousands of pesos.
- Injunctions: Difficulty for the individual owners or directors to open new businesses in the future.
- Legal Suits: Possible civil or even criminal cases for tax evasion or non-remittance of social contributions.
Would you like me to draft a checklist of the specific documents required for a BIR Tax Clearance application?