CORPORATION LAW: General Principles

 

General Principles

What are the different forms of business organizations in the Philippines?

Sole Proprietorship	A form of business organization with only one proprietary owner   A single individual conducts business under his own name or under a business name   Specialist of primitive society were the first proprietors   Sole proprietorship is the oldest, simplest and most prevalent form of business enterprise   Sole proprietorship may be the only choice for certain income-generating undertakings because there are activities that are not open to a corporate form   A sole proprietorship is neither a creature of statute nor of contract; hence it involves none of the complexity or expense required of business associations   The sole proprietor manages and exercises complete control over the conduct of his business   A sole proprietorship has no legal personality separate from its proprietor or owner of the enterprise. The owner has unlimited personal liability for all the debts and obligations of the business, and it is against him or her that a judgment against the enterprise is to be enforced.
Partnerships	Under the CC, there is a partnership when 2 or more persons bind themselves to contribute money property or industry to a common fund, with the intention of dividing the profits among themselves   ELEMENTS: (1)    Two or more persons bound themselves to contribute money, property, or industry to a common fund; and (2)    They intend to divide the profits among themselves
Joint Accounts or Sociedad de Cuentas en Participacion	Present when there is an arrangement whereby merchants may interest themselves in the transaction of other merchants, contributing thereto the amount of capital they may agree upon, and participating in the favourable or unfavourable results thereof in the proportion they may determine.   This is also commonly called as “accidental partnership.   In Bourns v. D.M. Carman, et al., the SC defined a joint account as a partnership constituted in such a manner that “the existence of which is only known to those who had an interest in the same, there being no mutual agreements between the partners, and without a corporate name indicating to the public in some way that there were other people besides the one who ostensibly managed and conducted the business.   CHARACTERISTICS: (a)    Has no juridical personality (b)    No commercial name (c)     General partners are all managers in this partnership (d)    Only the ostensible partner – the person carrying on the joint business – can be sued by and is liable to all persons transacting with the former
Business Trusts	It is a legal relation whereby one person called the “trustor,” conveys a property to another for the benefit of a person called the “beneficiary.” The person in whom confidence is reposed as regards the property is called the “trustee.”   Trusts are either express or implied. Express trusts are created by the intention of the trustor or of the parties. Implied trust comes into being by operation of law.
Joint Venture	Joint venture is an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks. It requires a community interest in the performance of the subject, a right to direct and govern the policy connected therewith, and duty, which may be altered by agreement to share both in profit and losses.   RATIONALE FOR JOINT VENTURES: (1)    Joint ventures reduce the investment required of any one company and distribute the risk of undertaking an expensive and risky venture because some projects are of such magnitude that they strain the financial reserves of corporations; (2)    Joint ventures pool “know-how,” thereby permitting the members to achieve diversification that it would have difficulty achieving alone; (3)    A member of the joint venture may gain possible legal, political or public relations advantages by organizing and incorporating where activities are to be conducted; and (4)    A member may avoid government scrutiny of corporate expansion.   In Aurbach v. Sanitary Wares Manufacturing Corporation, the SC adopted the view that a joint venture is an organization formed for some temporary purpose. “It is hardly distinguishable from the partnership, since their elements are similar – community of interest in the business, sharing profits and losses, and mutual right of control.” It was further explained that: “it would seem that under Philippine law, a joint venture is a form of a partnership and should thus be governed by the law of partnerships.   Corporations can enter into joint venture agreements. Two or more corporations may enter into a joint venture through a contract or agreement if the nature of the venture is in line with the business authorized by their charters.   It follows that Joint Ventures may result in the formation of joint venture corporation. However, the joint venture corporation itself is subject to corporate law not to partnership law.
Cooperative	A cooperative is an autonomous and duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve their social, economic, and cultural needs and aspirations by making equitable contributions to the capital required, patronizing their products and services and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles.   The governing law is RA 9520 also known as “The Philippine Cooperative Code of 2008.”   Although cooperatives are not primarily governed by the Corporation Code, they are also treated as a corporate entity with their own acts and liabilities. A cooperative is vested with powers and capacities under Art. 9 of the Philippine Cooperative Code, including the power to sue and be sued and the right of succession. The law also expressly provides that a duly registered cooperative shall have limited liability.
Syndicate	A syndicate is a group of people who come together to work for a common aim.   This unincorporated business association is often encountered among insurance companies who may be underwriting a large risk or banks that are lending a huge amount.   Syndication is therefore the practice of dividing investment risk between several persons in order to minimize individual risks.
Corporation	A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence. (sec. 2)

Partnership v. Corporation

	PARTNERSHIP	CORPORATION
Manner of creation	Mere agreement of the parties	By law or by operation of law
Number of incorporators	May be formed by 2 or more natural persons	Can compose of 1 person (One Person Corp) The 5-incorporator rule was removed in the RCCP
Commencement of juridical personality	Moment of execution of the contract of partnership	From the date of the issuance of the certificate of incorporation by the SEC
Powers	May exercise any power authorized by the partners provided it is not contrary to law, morals, good customs, public order, or public policy	Powers expressly granted by law or implied from those granted or incident to its existence
Management	When management is not agreed upon, every partner is an agent of the partnership	Power to do business is vested in the board of directors or trustees
Effects of mismanagement	A partner can sue a copartner who mismanages	The suit against a member of the board of directors or trustees who mismanages must be in the name of the corporation
Right of succession	Based on mutual trust and confidence such that the death, incapacity, insolvency, civil interdiction or mere withdrawal of one partner would result in its dissolution.	Has the right of succession which presupposes that it continues to exist despite the death, withdrawal, incapacity or civil interdiction of the stockholders or members
Transferability of interest	A partner cannot transfer his rights or interest in the partnership so as to make the transferee a partner without the consent of the other partners.	Any stockholder can ordinarily transfer, sell or assign his shares of stock without the consent of the other stockholders.
Extent of liability to 3rd persons	All partners are liable pro rata with all their property and after all the partnership property has been exhausted, for all partnership liability.	The liability of the stockholders or members is limited to the extent of their subscription or their promised contribution.
Terms of existence	May exist for an indefinite period.	Perpetual unless limited by their Articles of Incorporation The 50 year limit was removed by the RCCP
Capacity to be partner/stockholder	A partnership can be an incorporator/stockholder of a corporation (Sec. 10, RCCP)	A corporation can now also enter into a partnership or joint corporation (Sec. 35, RCCP)

 

SIMILARITIES

(1)    Both have juridical personality distinct from their components;

(2)    Both are groups of persons (XPN: OPC);

(3)    Capitals of both are derived from their components;

(4)    There is distribution of profits in stock corporations and in partnerships;

(5)    They both act only through their agents; and

(6)    They can be organized only where there is a law authorizing their organization.

History of corporation

Corporations have their origin in Roman law. The republic – Populus Romanus, Senaturs, Popolusque Romanus, Res public – is said to be the “orginal” corporation. It was during the early republic that corporate forms and other organizations gradually developed.

How did the Revised Corporation Code started?

PURPOSE OF THE RCCP

(1)    Enhance the ease of doing business in the Philippines;

(2)    Prioritizing corporate and stockholder protection;

(3)    Instilling corporate and civic responsibility; and

(4)    Strengthening the country’s policy and regulatory corporate framework

 

WHY DID CONGRESS REVISED THE CORPORATION CODE?

(a)    Formation of new businesses, especially small and medium sized-enterprises in the local market.

(b)    To strengthen good corporate governance by prescribing restriction to insure transparency in corporate management and transactions

(c)     To expand the powers, authority and jurisdiction of the SEC so that it can effectively enforce the new law and implement its rules and regulations.

WHAT IS A CORPORATION?

A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence. (sec. 2, RCCP)

An artificial being, invisible, intangible, and existing only in contemplation of law.  (Dartmouth College v. Woodward, 4 Wheat [U.S.] 518)

A corporation was also defined as a collection of many individuals united into one body, under a special denomination, having perpetual succession under an artificial form, and vested by the policy of the law with the capacity of acting in several respect as an individual, according to the design of the institution or the powers conferred upon it either at the time of its creation or any subsequent period of its existence.  (Clark on Corporations)

ADVANTAGES OF CORPORATIONS

(1)    The capacity to act as a legal unit;

(2)    Limitation of or exemption from individual liability of shareholders;

(3)    Continuity of existence;

(4)    Transferability of shares;

(5)    Centralized management of board of directors;

(6)    Professional management;

(7)    Standardized method of organization, and finance; and

(8)    Easy capital generation

DISADVANTAGES OF CORPORATIONS

(1)    It is prone to “double taxation”;

(2)    They are subject to greater governmental regulation and control;

(3)    A corporation may be burdened with an inefficient management if stockholders cannot organize to oppose management;

(4)    Limited liability of stockholders may at times translate into limited ability to raise creditor capital;

(5)    It is harder to organize compared to other business organizations;

(6)    It is harder or more complicated to maintain; and

(7)    The “owners” or stockholders do not participate in the day-to-day management.