Know the Law in Franchise Business

Most of the articles about franchising business were about teaching the franchisee on how to apply, story about the successful franchisee, and so on. However, I haven’t read an article dealing with the basic legal aspects of running the business. One essential information in business is knowing the law and how to apply it to avoid problems upon running a business. Basic law in business is a must to know for you to manage your franchise in a right path.

One reason why some franchisee failed to run their business successfully is because they are not aware of the basic law. They only knew is that business can raise them from poverty, or it can give them an extra income. But they are not aware of the laws in business. So, here are some of not so commonly known legal laws that franchisees – business owners in general must know:

#1 – A 20 percent final tax on all payments made tot the franchisor (including initial franchise fee), should withhold by the franchisee.

The first law is based on Section 24 (B) of Republic Act No. 8424, otherwise known as National Internal Revenue Code. Under the Section 57 (A) of the NIRC, the franchisee is the “payor” and is thus constituted as the withholding agent. And the franchisee’s responsibility is to withhold the equivalent of 20% from amounts paid as franchise fees or royalties. The said “royalties” are defined as the sums paid to a creator or a participant in an artistic work, based on individual sales of the work. In order to receive royalties, the work must generally receive a copyright or patent. As well, often the amount of royalties received is negotiated by contract. Because this is a law, if the franchisee failed to withhold and remit this tax, the franchisee may be subject to a criminal or civil penalties under the NIRC in addition to the payment of the tax.

#2 – The franchisee may choose between registering as a VAT taxpayer or as a percentage taxpayer.

As a franchisee, you need to register yourself as a taxpayer. However, you need to choose between VAT taxpayer or a percentage taxpayer. If you choose to be a percentage taxpayer, your business may expect the gross annual sales and receipts, or both, not to exceed P1.5 million. The business that is under the percentage system shall pay a tax equivalent to 3 percent of the gross quarterly sales or receipts (Section 116, NIRC) and is remitted every month, instead of quarterly. If the business exceed the threshold amount of P1.5 million during its taxable year, the taxpayer must amend from percentage to VAT taxpayer.

On the other hand, the VAT tax amount is 12 percent rate, unlike on percentage tax which is 3 percent only. For the sake of those who don’t know about the VAT, this VAT is not fully passed onto the consumers. On the law, Section 8 of RA 0337 (B) provides that in computing the net Vat payable, the input VAT that may be credited for every quarter shall not exceed 70 percent of the output VAT. Simply means and stated that not all the VAT are being passed to the consumers.

#3 Not all sales transactions requires issuance of official receipt.

Like what the government said to the consumers, “Always ask for the receipt.” However, according to the law, official receipts must be issued for the following transactions: (1) sales merchandise or services of the transaction amount exceeds P25, (2) transactions by VAT registered businesses, and (3) payment for rentals, commissions, compensation or fees. As the law said, issuance of the receipt requires these said transactions. And know we know why some business don’t give receipt to their consumers.

#4 Businesses must withhold the income tax on the salaries of their employees and remit these to the BIR.

Stated on the Section 79 of the NIRC which provides no with of tax on salaries compensation income of an individual does not exceed the statutory minimum wage or P5,000/month. If the employee’s wage does not exceed on P5,000, the employer must refund to the employee the amounts withheld, at the end of the year. Aside from that, the owner of the franchised business must withhold tax on rentals, SSS, Philhealth, Pag-Ibig contributions and insurance which is required and a must to do as a business owner.

Knowing the basic law is important for all business owners. Having a business is not about money-making, or managing your business. It’s a package responsibility that you need to do. Being aware of the basic legal rules and regulations in business will help you to avoid any penalties or conflict upon running a business.

  • Edward Caliwan

    What is the law in franchise aggrement about the employees that the parents franchisor not giving permission to renew the franchise of franchisee because of violation.but the franchisee continue the work of the employee by planning a new bussiness.