How Are Unregistered Business Profits Taxed Between Common-Law Spouses?
Introduction
Unmarried couples who jointly operate a business may incur Philippine income tax and registration obligations even when the enterprise is informal, uses a shared bank account, or operates under only one partner’s name. The absence of a written partnership agreement or formal registration does not necessarily prevent the Bureau of Internal Revenue (BIR) from treating the activity as a taxable business arrangement.
The principal concern is whether the couple is merely co-owning property or is habitually conducting business for profit. If the latter is established, the arrangement may be treated as an unregistered partnership or joint business enterprise, exposing the business and the individuals involved to tax, registration, filing, and possible criminal penalties.
When Does a Joint Activity Become a Taxable Partnership?
The Supreme Court held that individuals who pool resources, acquire property, manage it, and repeatedly lease or operate it for profit may be treated as an unregistered partnership for tax purposes, even without formal registration as a partnership (Evangelista, et al. v. Collector of Internal Revenue, et al., General Register No. 9996, 1957).
Accordingly, the BIR may examine the parties’ actual conduct rather than rely solely on the label they use. Indicators of a business partnership may include the following:
- joint contribution of money, property, or services;
- shared responsibility for business operations;
- regular or habitual commercial transactions;
- sharing of gross receipts, net profits, or business losses;
- use of common business assets or accounts; and
- an intention to earn income from continuing business activity.
However, the mere co-ownership of property and sharing of proceeds from a sale do not automatically establish an unregistered partnership. The Supreme Court recognized that there must be evidence of an intent to form a partnership and habitual business transactions for profit before co-owners may be taxed as a corporation (Pascual, et al. v. Commissioner of Internal Revenue, et al., General Register No. 78133, 1988).
Tax Treatment of Unregistered Partnerships
A registered general partnership and an unregistered business partnership do not receive the same tax treatment. Under the doctrine recognized in Commissioner of Internal Revenue v. Ledesma, et al., General Register No. 17509, 1970, a duly registered general partnership is treated differently from an unregistered partnership because the government can identify the partners, their capital contributions, their profit shares, and the income attributable to each partner.
The Supreme Court explained that an unregistered partnership may be subject to corporate income tax on its profits, while the persons treated as partners may also be assessed individual income tax on their respective shares. The Court described this as the tax consequence of an unregistered partnership under the then-applicable law (Commissioner of Internal Revenue v. Ledesma, et al., General Register No. 17509, 1970).
The historical provision concerning duly registered general co-partnerships stated that the partners were taxable in their individual capacities and that their respective shares in partnership profits had to be reported for income tax purposes ([National Internal Revenue Code](#L1.29)). The present tax treatment must, however, be determined under the current NIRC and its amendments, together with applicable BIR regulations and rulings.
Application to Common-Law Spouses
Common-law spouses are not exempt from business registration or tax obligations merely because they are not married. Their personal relationship does not determine whether their commercial activity constitutes a taxable enterprise.
For example, the following arrangements may attract BIR scrutiny:
- the couple jointly operates a food, retail, construction, transport, or online business;
- one partner registers the business but the other contributes capital and regularly receives a share of profits;
- the couple repeatedly buys, improves, leases, or sells properties for profit; or
- the business receives payments through accounts or digital wallets controlled by either or both partners.
By contrast, a single isolated sale of jointly owned property may not, by itself, prove that the parties formed an unregistered partnership. The relevant inquiry is whether the facts show a continuing business undertaking, a profit-making purpose, and participation by both individuals.
Business Registration Requirements
Section 236(A) of the NIRC requires every person subject to internal revenue tax to register with the BIR within the applicable period, including on or before the commencement of business, before payment of tax due, or upon filing a required return. Revenue Regulation No. 15-2024 expressly covers persons engaged in brick-and-mortar businesses and online trade or business ([Revenue Regulation No. 15-2024](#I1.0)).
The regulation also states that persons engaged in business who fail to register may incur administrative and criminal liability. In the case of partnerships and corporations, liability may extend to responsible partners, officers, and employees ([Revenue Regulation No. 15-2024](#I1.1)).
Where a business is conducted by two individuals, the parties should carefully determine whether the proper registration is as a sole proprietorship, partnership, corporation, or another legally appropriate structure. Registering only one person’s name does not necessarily eliminate the tax consequences of the other person’s actual participation.
Penalties for Conducting Business Without Registration
Revenue Memorandum Circular No. 55-2025 explains that Section 258 of the NIRC penalizes carrying on business without registering it in accordance with Section 236. Upon conviction, the penalty is a fine of not less than P5,000 but not more than P20,000, and imprisonment of not less than six months but not more than two years ([Revenue Memorandum Circular No. 55-2025](#I2.1)).
The higher penalty applicable to businesses engaged in distilling, rectifying, repacking, compounding, or manufacturing articles subject to excise tax is separate and applies only when the statutory conditions are present. The ordinary penalty should not be confused with administrative registration-related penalties or civil tax liabilities.
Revenue Regulation No. 15-2024 further provides that the responsible partner, president, general manager, branch manager, treasurer, officer-in-charge, or responsible employee of an association, partnership, or corporation may be penalized for a violation ([Revenue Regulation No. 15-2024](#I1.1)).
Online and Digital Businesses
Joint businesses operated through social-media pages, online marketplaces, messaging applications, or digital payment platforms remain subject to registration and tax compliance requirements. Revenue Memorandum Circular No. 60-2020 directed persons conducting business through electronic media, including partner sellers and merchants, to register and comply with applicable tax obligations ([Revenue Memorandum Circular No. 60-2020](#I4.0)).
Revenue Regulation No. 15-2024 likewise confirms that online trade and business fall within the mandatory registration framework ([Revenue Regulation No. 15-2024](#I1.0)). The use of a personal digital wallet, informal payment arrangement, or social-media account does not, by itself, make the income non-taxable.
Declaration of Joint Commercial Earnings
Registration alone does not complete the parties’ tax obligations. The business may be required to maintain books and records, issue invoices or receipts as required, file returns, declare gross receipts or sales, and pay income tax and other applicable taxes.
If the business is treated as an unregistered partnership, the BIR may assess tax based on the enterprise’s income and the individuals’ participation in the profits. The proper tax treatment depends on the nature of the entity, the applicable tax period, the type of income, and the governing version of the NIRC during that period.
This issue is different from the taxation of a general professional partnership. Under Section 26 of the current NIRC, a general professional partnership is not subject to income tax as such; instead, its partners are taxed individually on their distributive shares, and the partnership must file an information return ([National Internal Revenue Code 1997](#L6.60); [National Internal Revenue Code 1997](#L6.164)). That rule should not automatically be applied to a commercial business operated by common-law spouses.
Distinguishing Co-Ownership from an Unregistered Partnership
| Factor | Co-Ownership | Unregistered Partnership or Business |
|---|---|---|
| Purpose | Ownership, preservation, or disposition of property | Continuing commercial activity for profit |
| Transactions | Usually isolated or incidental | Repeated and habitual business transactions |
| Operations | No organized business management | Active management, sales, leasing, production, or service delivery |
| Income | Proceeds may arise from a sale or passive ownership | Receipts and profits are generated through business operations |
| Tax concern | Tax depends on the specific transaction and applicable rules | Possible entity-level and partner-level tax consequences |
Records That May Be Examined
In assessing whether a business exists and whether both individuals participate in it, the BIR may consider contracts, invoices, receipts, bank records, digital-wallet statements, supplier documents, permits, advertisements, online listings, delivery records, and communications concerning the sharing of profits.
Partners should preserve records showing capital contributions, ownership interests, expenses, withdrawals, distributions, and the identity of the person who performed particular business functions. Accurate records are especially important where only one partner appears in the registration documents but both individuals participate in the enterprise.
Recommended Compliance Steps
- Identify the actual business arrangement. Determine whether the activity is a sole proprietorship, partnership, corporation, professional partnership, or mere co-ownership.
- Review the parties’ conduct. Examine contributions, control, frequency of transactions, profit sharing, and the continuity of the activity.
- Register the business promptly. Registration should correspond to the real business structure and should include applicable branches or business locations.
- Reconstruct prior transactions. Gather sales, expense, payment, and distribution records for prior taxable periods.
- Assess unpaid taxes and penalties. Determine possible income tax, value-added tax or percentage tax, withholding tax, documentary stamp tax, and local tax exposure.
- Obtain professional advice before voluntary disclosure. A tax review should be completed before filing amended returns or making disclosures because the treatment of income may affect both partners.
Practical Examples
Example 1: Online retail business. One partner registers an online shop, while both purchase inventory, answer customer inquiries, and divide the net proceeds. The BIR may examine whether the business is in substance operated jointly, regardless of whose name appears on the registration.
Example 2: Joint property leasing. The couple contributes funds to acquire several units, repeatedly leases them, and divides rental income. The continuing and profit-oriented activity may support treatment as an unregistered partnership, consistent with the principle recognized in Evangelista.
Example 3: Sale of inherited property. The couple sells a single jointly owned property and divides the proceeds. Without additional evidence of habitual dealing or an intent to conduct business, the transaction may be more consistent with co-ownership than with an unregistered partnership, consistent with the principle recognized in Pascual.
Conclusion
Common-law spouses who jointly earn commercial income should not assume that informality, personal relationship, or registration under only one person’s name removes BIR obligations. The decisive issue is generally the substance of the activity: whether the parties jointly and habitually conduct business for profit.
They should document their arrangement, register the business under the appropriate form, declare income accurately, maintain complete records, and promptly address unregistered prior operations. Failure to register may result in administrative assessments and, upon conviction, the penalties described in Section 258 of the NIRC and Revenue Memorandum Circular No. 55-2025.
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