Common Legal Mistakes Startups Make in the Philippines

Avoid Costly Errors and Build a Legally Sound Business from Day One

The Philippines is a vibrant and fast-growing market for startups. Whether you’re launching in Cebu, Metro Manila, or Davao, the country offers a compelling mix of talent, affordability, and English fluency. But behind the energy and enthusiasm lies a challenging legal environment—one where even small mistakes can lead to big consequences.

This guide explores the most common legal mistakes startups make in the Philippines, from unpaid taxes to vague contracts, and offers practical tips to help you stay compliant, protected, and investor-ready.

1. Operating Without Proper Business Registration

The Mistake:

Many startups begin operations—hiring, invoicing, selling—without formally registering their business with the SEC, DTI, or LGU (local government unit).

Why It’s a Problem:

• You can’t issue official receipts (ORs), which are required for tax compliance.

• You’ll be penalized for non-registration if caught.

• You’re not legally recognized as a business, which can invalidate contracts.

How to Avoid It:

• Register with the DTI (for sole proprietorship) or SEC (for corporations).

• Apply for a Mayor’s Permit, Barangay Clearance, and BIR registration.

• Complete registration before hiring or transacting business.

2. Delaying BIR Registration and Official Receipts

The Mistake:

Many founders focus on launching fast and forget to register with the Bureau of Internal Revenue (BIR), or they delay printing official receipts and books of accounts.

Why It’s a Problem:

• You can’t legally issue invoices or collect VAT without BIR approval.

• You may be subject to closure orders or heavy fines.

• Investors will flag missing ORs as a major compliance issue.

How to Avoid It:

• Register with the BIR within 30 days of SEC/LGU registration.

• Secure your BIR Certificate of Registration (COR).

• Apply for ATP (Authority to Print) and have ORs printed by an accredited printer.

• Buy and register your books of account.

3. Handshake Agreements Instead of Contracts

The Mistake:

Startups often rely on informal agreements—verbal promises or text messages—when working with co-founders, freelancers, or clients.

Why It’s a Problem:

• Misunderstandings can lead to disputes with no legal remedy.

• You may not own the IP you paid for.

• Investors expect proper documentation.

How to Avoid It:

• Use written contracts for everything: founders’ agreements, employment, freelance work, NDAs, service agreements.

• Include IP assignment and non-compete clauses where necessary.

• Store signed documents securely (digitally or physically).

4. Ignoring the Intellectual Property (IP) Process

The Mistake:

Founders skip trademark registration or believe IP automatically belongs to the business.

Why It’s a Problem:

• Someone else can register your brand and prevent you from using it.

• Contractors may own the code, designs, or content you paid for.

• Lack of IP documentation deters investors and acquirers.

How to Avoid It:

• File your trademark with IPOPHL as soon as possible.

• Include IP assignment clauses in employment and contractor agreements.

• For software or content, register copyright or keep dated authorship records.

• Consider NDAs for employees, suppliers, or partners.

5. Non-Compliance with Tax Deadlines

The Mistake:

Startups miss tax filing deadlines (monthly, quarterly, annual), believing they don’t apply until they’re profitable.

Why It’s a Problem:

• The BIR imposes penalties, surcharges, and interest—even for zero-income filings.

• Accumulated fines can exceed actual tax dues.

• You may be flagged for audit or receive a closure notice.

How to Avoid It:

• Know your filing schedule (VAT/percentage tax, withholding tax, income tax).

• File returns even if there’s no revenue yet.

• Hire a local CPA or tax agent familiar with startup needs.

• Use tools like JuanTax or BIR’s eBIRForms for filing.

6. Misclassifying Workers

The Mistake:

Startups often treat full-time staff as freelancers to avoid government contributions and benefits.

Why It’s a Problem:

• The Department of Labor and Employment (DOLE) may reclassify workers.

• You may owe back payments for SSS, PhilHealth, Pag-IBIG, 13th month pay, etc.

• Wrong classification can be grounds for labor cases.

How to Avoid It:

• Understand the difference between employees and independent contractors.

• Provide proper contracts and government remittances for regular employees.

• If hiring freelancers, define the scope and timeline clearly in a contract.

7. Not Renewing Permits Annually

The Mistake:

Startups fail to renew business permits, especially the Mayor’s Permit, assuming once is enough.

Why It’s a Problem:

• Permits expire every January and must be renewed annually.

• LGUs impose penalties for late renewal.

• You can’t process tax filings without valid permits.

How to Avoid It:

• Mark renewal dates on your compliance calendar.

• Assign a staff or corporate secretary to handle renewals.

• Prepare renewal documents (AFS, lease, clearances) early.

8. Neglecting Data Privacy Obligations

The Mistake:

Startups collect customer data without a privacy policy, consent mechanism, or data protection measures.

Why It’s a Problem:

• You may be violating the Data Privacy Act of 2012.

• Complaints can lead to investigation by the National Privacy Commission (NPC).

• Future partners or clients may reject working with non-compliant firms.

How to Avoid It:

• Post a clear privacy policy on your website/app.

• Appoint a Data Protection Officer (DPO) if collecting sensitive data.

• Register with NPC if required.

• Use consent checkboxes for data collection and marketing.

9. No Founders’ Agreement

The Mistake:

Co-founders dive into product building or sales without discussing equity splits, roles, or decision-making protocols.

Why It’s a Problem:

• Co-founder disputes are among the top reasons startups fail.

• Ambiguity leads to resentment or unexpected exits.

• Lack of vesting clauses creates risk for investors.

How to Avoid It:

• Draft a Founders’ Agreement early.

• Cover equity, roles, vesting, decision-making, exit procedures.

• Have each founder sign it before raising funds or hiring.

10. Assuming Foreign Contracts Are Always Valid

The Mistake:

Startups use contract templates or NDAs from the US, Singapore, or other jurisdictions without review.

Why It’s a Problem:

• Not all foreign contract clauses are enforceable under Philippine law.

• Jurisdiction issues can arise in case of dispute.

• Court may invalidate parts of the contract.

How to Avoid It:

• Localize contracts to Philippine standards.

• Include jurisdiction and venue clauses that apply locally.

• Have important contracts reviewed by a Philippine lawyer.

11. Not Assigning IP to the Corporation

The Mistake:

Even if employees or founders create IP (software, branding), it’s not formally assigned to the company.

Why It’s a Problem:

• The individual, not the company, may own the IP.

• This complicates licensing, fundraising, or sale.

• Employees can leave and take the IP with them.

How to Avoid It:

• Include IP assignment clauses in employment contracts.

• Use board resolutions to assign IP created by founders pre-incorporation.

• Maintain proper documentation for all IP assets.

12. Using Unlicensed Software or Media

The Mistake:

Startups use pirated software, unlicensed stock images, or uncredited code snippets.

Why It’s a Problem:

• Violates copyright law

• Can lead to takedown notices, lawsuits, or app store removal

• Signals poor governance to investors or partners

How to Avoid It:

• Use only properly licensed software and tools.

• Subscribe to commercial licenses (Adobe, Shutterstock, etc.)

• Credit open-source contributions as required.

13. Ignoring Annual Report Requirements

The Mistake:

Startups forget to file mandatory reports like the General Information Sheet (GIS) and Audited Financial Statements (AFS).

Why It’s a Problem:

• Non-filing leads to SEC penalties or eventual revocation.

• BIR may investigate incomplete financial reporting.

• Delays in fundraising or renewals.

How to Avoid It:

• File GIS within 30 days of the annual stockholders’ meeting.

• Submit AFS annually to the SEC and BIR.

• Work with a CPA or corporate secretary to track due dates.

Conclusion: Legal Compliance is Not Optional

Startups often move fast, break things, and prioritize growth. But in the Philippines, legal compliance is not a luxury—it’s a necessity. From the very first hire to your first investor pitch, your legal and regulatory hygiene sets the tone for your business’s long-term credibility.

Avoiding these common mistakes doesn’t just keep you out of trouble—it builds trust with partners, protects your IP, improves valuation, and creates a foundation for scaling.

Take time to review your current practices. If you see gaps, fix them now. Prevention is cheaper than cure—especially when it comes to the law.