Planning to set up your own business or have already started one? It’s important to determine what type of business you have so you would know the advantages and benefits you are entitled to.
What is a Small Business or Enterprise?
In the Philippines, small businesses are categorized as Small, Micro and Medium Enterprises (MSMEs). By definition, MSMEs refer to business activities or enterprises, whether single proprietorship, cooperative, partnership or corporation, engaged in industry, services, and/or agribusiness.
The classification of these businesses is determined by asset size. According to the Republic Act (RA) No. 6977, also known as Magna Carta for Micro, Small and Medium Enterprises, micro enterprises must have not more than PHP3,000,000; small enterprises must have PHP3,000,001 to PHP15,000,000; while medium enterprises must have PHP15,000,001 to PHP100,000,00 in total assets.
Note: Total assets include loan assets but exclude land/s where the office, plant and equipment of a particular business entity is located.
Aside from asset size, MSMEs can also be classified according to the number of employees. Micro enterprises usually have less than 10 workers; small enterprises have about 10 to 99 workers; while medium enterprises have 100 to 199 workers.
Benefits of Knowing Your Classification
The government, through RA No. 6977, provides regulation and support for MSMEs. That’s why it is important to identify your classification so you would know what laws and privileges can be applied to your business.
Based on the categorization provided by the Magna Carta for MSMEs, qualified businesses can avail of financial assistance, counseling, incentives, and promotion, among others. Here are the eligibility requirements for said government assistance:
- Duly registered with the appropriate agencies as presently provided by law. In the case of micro enterprises, registration with the office of the municipal or city treasurer shall be deemed sufficient compliance for this requirement;
- One hundred percent (100%) owned, capitalized by Filipino citizens, whether single proprietorship, cooperative, partnership or corporation. If the enterprise is a juridical entity, at least 60% of its capital or outstanding stocks must be owned by Filipino citizens;
- A business activity within the major sectors of the economy, namely: industry, trade, services, including the practice of one’s profession, the operation of tourism-related establishments, and agri-business, which for purposes of R.A. 6799 refers to any business activity involving the manufacturing, processing, and/or production of agricultural produce; and
- Must not be a branch, subsidiary or division of a large scale enterprise
Micro enterprises can also qualify as Barangay Micro Business Enterprises (BMBEs)– or those businesses engaged in processing, manufacturing, and trading of services and products, including agro-processing, and whose total assets are less than PHP3,000,000. Under RA 9178, also known as Barangay Micro Business Enterprises Act of 2002, BMBEs can avail benefits such as income tax exemption, priority to government financial assistance, and exemption from the coverage of the Minimum Wage Law, among others.
Advantages of Being a Small Scale Business
Aside from the mentioned government assistance earlier, local banks and some government agencies also offer funding support to MSMEs such as business loans.
On a more personal aspect, managing a small business can also allow you to:
- Work within your own terms and schedule
- Pursue and nurture your passion
- Create your own products
- Inspire fellow small business owners
Importance of Small Businesses
MSMEs are considered the backbone of the national economy. According to the data of the Department of Trade and Industry (DTI), MSMEs account for 99.6% of all businesses in the Philippines, and have employed almost 70% of the workforce.
Challenges Faced By MSMEs
Although they play an important role in the country’s economy, MSMEs still experience financial challenges and low productivity because of their vulnerability to changes in the business environment.
In a research conducted by The Asia Pacific Foundation of Canada, entitled “The Challenges to SME Market Access in the Philippines and the Role of Business Associations,” the primary obstacles to market access among Philippine SMEs include:
- Inadequate business operations
- Human resource constraints
- Difficulties complying with international standards and government regulations
- Inability to compete with competitors
- Marketing and branding constraints
- Inadequate infrastructure and distance to markets
- Lack of access to finance
- Lack of access to market information
- Shifting consumer preferences
These challenges were heightened further by the COVID-19 pandemic. Majority of the MSMEs in the country have suspended their operations, and were even forced to shut down their businesses, due to the implemented lockdowns and mobility restrictions.
And while a good number of these MSMEs have already recovered in the past year, challenges in the new normal continue, including having to compete with much larger businesses, improving their online presence and shifting to e-commerce, among others.