PARTNERSHIP

 it is a CONTRACT whereby two or more persons (1) bind themselves to CONTRIBUTE

money, property, or industry to a COMMON FUND (2) with the intention of dividing the
PROFITS among themselves or in order to EXERCISE a PROFESSION

 a STATUS and a FIDUCIARY RELATION subsisting between persons carrying on a

business in common with a view on profit

CHARACTERISTIC ELEMENTS OF PARTNERSHIP

1. Consensual – perfected by mere consent

2. Nominate – has a special name or designation in our laws
3. Bilateral – entered into by two or more persons and the obligations and rights created
are always reciprocal
4. Onerous – each party aspires to procure a benefit for himself through the giving of
something
5. Commutative – undertaking of each of the partners is considered as the equivalent of
that of the others
6. Principal – it does not depend for its existence and validity upon some other contracts
7. Preparatory – entered into as a means to an end.

*A partnership, in its essence, is a contract of agency

ESSENTIAL FEATURES OF A PARTNERSHIP

8. Existence of a valid contract

9. The parties must have legal capacity to enter into the contract
10. Mutual contribution of money, property and industry to a common fund
11. Lawful object
12. The primary purpose is to obtain profits and to divide the same among the parties

*the articles of partnership must be known to the parties/members

DISTINCTIONS BETWEEN A PARTNERSHIP AND CO-OWNERSHIP

PARTNERSHIP  CO‐OWNERSHIP 
Creation 
Created by mere agreement of 
the parties  Generally created by law 
Juridical Personality 
Has Juridical personality 
separate and distinct from that 
of each partner  None 
Purpose 
Common enjoyment of a 
Realization of profits  thing or right 
Duration 
No limit set by law but may be 
limited by the stipulation of 
the parties.  Maximum of 10 years 
Disposal of Interest 
May not be done by a partner 
solely upon his will  May be done freely 
 Power to act with third persons 
A partner may bind the  A co‐owner may not 
partnership  represent the co‐ownership 
Effect of Death 
Death of a co‐owner does 
Death of a partner dissolves  not necessarily dissolve the 
the partnership  co‐ownership 

DISTINCTIONS BETWEEN A PARTNERSHIP AND PRIVATE CORPORATION

PARTNERSHIP  CORPORATION 
Creation 
Created by mere agreement of  Created by law or by 
the parties  operation of law 
Number of Incorporators 
At least two  At least five 
Juridical Personality 
Has Juridical personality  Has Juridical personality 
separate and distinct from that  separate and distinct from 
of each partner  that of each share holder 
Commencement of Juridical Personality 
Date of issuance of 
From the moment of execution  Certificate of Incorporation 
of the contract of partnership  by the SEC 
Powers 
Partnership may exercise any  Only those expressly 
power authorized by the  granted by law or incident to 
partners  its existence 
Management 
Management power is 
Every partner is an agent of  vested in the Board of 
the partnership  Directors 
Right of Succession 
No right of succession  Has right of succession 
Transferability of Interest 
May not be done by a partner  May be done freely by the 
sole upon his will  share holder 
Term of Existence 
May not be formed for a 
May be established for any  term in excess of 50 years, 
period of time stipulated by  renewable for another 50 
the parties  years 
 Dissolution 
May be dissolved at any time 
at the will of any or all of the  Can only be dissolved with 
partners  the consent of the State 

RULES ON CAPACITY TO BECOME A PARTNER

1. a person capacitated to enter into contractual relations may become a partner

2. an UNEMANCIPATED MINOR CANNOT become a partner UNLESS his parent or

guardian consents

3. a MARRIED WOMAN, cannot contribute conjugal funds as her contribution to the

partnership UNLESS she is permitted to do so by her husband OR UNLESS she is the
administrator of the conjugal partnership, in which the COURT must give its consent
authority

4. a PARTNERSHIP being a juridical person by itself can form another partnership

5. a CORPORATION cannot become a partner on grounds of public policy

 a partner shares not only in profits but also in the losses of the firm

*Art. 1782 Persons who are prohibited from giving each other any donation or
advantage cannot enter into a universal partnership.

CONSEQUENCES OF THE PARTNERSHIP BEING A JURIDICAL ENTITY

1. its juridical personality is SEPARATE and DISTINCT from that of each partner

2. the partnership CAN in GENERAL:

A) acquire and possess property of all kinds
B) incur obligations
C) bring civil and criminal actions
D) can be adjudged insolvent even if the individual members be each financially
solvent

3. unless he is generally sued, a partner has no right to make a separate appearance in

court, if the partnership being sued is already represented

LIMITATIONS ON ALIEN PARTNERSHIP

1) if 60% capital is not owned by Filipinos
 the firm cannot acquire by purchase or otherwise AGRICULTURAL Philippine lands
2) foreign partnership may “lease” lands provided the period does not exceed 99 years
3) foreign partnership may be “MORTGAGEES” of land
 period of 5 years, renewable for another 5 years
 they cannot purchase it in a foreclosure sale

A partnership may be constituted in any form

EXCEPTION: PUBLIC INSTRUMENT is required in the following cases:
1. IMMOVABLE PROPERTY is contributed
2. REAL RIGHTS are contributed
* need for INVENTORY of IMMOVABLES
** for EFFECTIVITY of the partnership contract insofar as innocent third persons
are concerned the same must be REGISTERED if REAL PROPERTIES are
INVOLVED

 a partnership contract is NOT COVERED by the STATUTE of FRAUDS

  an AGREEMENT TO FORM a partnership does not itself create a partnership

 when there are conditions to be fulfilled or when a certain period is to lapse, the
partnership is not created till after the fulfillment of the conditions or the arrival of the term
and this is true even if one of the parties has already advanced his agreed share of the capital

RULE: if CAPITAL is P3,000 or more

REQUIREMENT
1. PUBLIC INSTRUMENT
2. RECORDED – S.E.C.

*  FAILURE TO COMPLY – shall not effect the liability of the partnership and its members to
third persons

GENERAL PARTNERSHIP
 one where all the partners are general partners
 they are LIABLE even with respect to their individual properties, after the assets of the
partnership has been exhausted

LIMITED PATNERSHIP
 one where at least one partner is a general partner and the others are limited partners
 one whose liability is limited only up to the extent of his contribution

 a partnership where all the partners are limited partners cannot exist as a limited partnership
 REFUSED REGISTRATION
 IF it continuous as such, it will be considered as a general partnership and all the
partners will be general partners

*HOW PROFITS ARE DISTRIBUTED

1. according to AGREEMENT
2. IF NONE, according to amount of CONTRIBUTION

*HOW LOSSES are DISTRIBUTED

1. according to AGREEMENT as to losses
2. IF NONE, according to agreement as to PROFITS
3. IF NONE, according to amount of CONTRIBUTION

* an INDUSTRIAL PARTNER shall receive a JUST and EQUITABLE share in the profits

*RULE on INDUSTRIAL PARTNERS’ LIABILITIES

- may be held liable by third persons BUT he may recover what he has paid from the other
capitalist partners

RULE on LIABILITY for CONTRACTUAL OBLIGATIONS

* all partners, including industrial ones, shall be liable pro-rata with all their property and
after all the partnership assets have been exhausted

* NOT APPLICABLE for TORTS or CRIMES ----- LOSS

----- INJURY
----- MISAPPROPRIATION

** while an INDUSTRIAL PARTNER is exempted by law from LOSSES as between the partners,
he is NOT EXEMPTED from liability insofar as third persons are concerned
 he may recover what he has paid from the CAPITALIST partners
* under the law the liability of the partners is subsidiary and joint NOT principal and solidary

RULE:
* every partner is an “agent” of the partnership for the purpose of its business

The act of every partner for apparently carrying on in the USUAL WAY the business of the
partnership of which he is member binds the partnership
EXCEPT:
1. if he has NO AUTHORITY and
2. the person with whom he was dealing with HAS KNOWLEDGE of the fact that he has no
such authority

RULE:
 an act of a partner which is not apparently for the carrying on of business of the partnership
in the usual way does not bind the partnership UNLESS authorized by the other partners

* a partnership is a CONTARCT of MUTUAL AGENCY, each partner acting as a principal on

his own behalf and as an agent for his co-partners or the firm

REQUISITES on WHEN can a partner BIND the partnership

1. expressly or impliedly AUTHORIZED
2. when he acts in BEHALF AND IN THE NAME of the partnership

INSTANCES of IMPLIED AUTHORIZATION

1. when the other partners DO NOT OBJECT, although they have knowledge of the act
2. when the act is for “apparently carrying on in the usual way the business of the
partnership
* this is binding on the firm even if the partner was not really authorized PROVIDED
that the third party is in GOOD FAITH

DISSOLUTION AND WINDING UP

 the change in the relation of the partners caused by any partner causing to be associated in
the carrying on of the business
 it is the point of time the partners cease to carry on the business together

WINDING UP
 the process settling business affairs after dissolution

TERMINATION
 the point in time after all the partnership affairs have been wound up

RULE ON DISSOLUTION
* on dissolution the partnership is not terminated BUT continues until the winding up of
partnership affairs is completed

*EFFECT on OBLIGATIONS
1. just because a partnership is dissolved this does not necessarily mean that a partner
can evade previous obligations entered into by the partnership

2. dissolution saves the former partners from new obligations to which they have not
expressly or impliedly consented UNLESS the same be essential for winding up

*CAUSES OF DISSOLUTION
1. without VIOLATION of the AGREEMENT between the partners
A) TERMINATION of the DEFINITE TERM or PARTICULAR UNDERTAKING
B) EXPRESS WILL or ANY PARTY in GOOD FAITH (PARTNERSHIP by WILL)
 C) EXPRESS WILL of ALL of the PARTNERS except those who have (interests)
ASSIGNED or whose interests have been (separate debts) CHARGED
D) EXPULSION in good faith of a member
2. in CONTRAVENTION of the agreement between the partners
 by the EXPRESS WILL of ANY PARTNER at any time
3. UNLAWFULNESS of the BUSINESS
4. LOSS – thing promised
A) SPECIFIC THING – PERISHES before delivery
B) USUFRUCT is lost EXCEPT if ownership had been transferred to the partnership
5. DEATH of ANY partner
6. INSOLVENCY of any partner or of the partnership
7. CIVIL INTERDICTION of any partner
8. DECREE of COURT

*** if the cause is not justified or no cause was given, the withdrawing partner is liable for
DAMAGES BUT in no case can he be compelled to remain in the firm

* the insolvency need not be judicially declared, it is enough that the assets be less than the
liabilities

EFFECTS OF DISSOLUTION
RULE:
* when the firm is dissolved, a partner can no longer bind the partnership

* a dissolved partnership still has the personality for the winding up of its affairs
 the firm is still allowed to collect previously acquired credits
 the firm is still bound to pay of its debts

ORDER of PAYMENT in WINDING-UP of PARTNERSHIP LIABILITIES

GENERAL PARTNERSHIP
1. those owing to “creditors” other than partners
2. those owing to “partners” other than for capital or profits – REIMBURSEMENTS
3. those owing to partners in respect to CAPITAL
4. those owing to partners in respect to PROFITS

* IF the partnership assets are insufficient, the other partners must contribute more money
or property

PREFERENCE with RESPECT to the ASSETS

1. regarding partnership property
 partnership creditors have preference

2. regarding individual properties of partners

 individual creditors are preferred

RULE if PARTNER is INSOLVENT

- How INDIVIDUAL PROPERTY is DISTRIBUTED

ORDER OF PREFERENCE:
1. INDIVIDUAL or SEPARATE CREDITORS
2. PARTNERSHIP CREDITORS
3. those owing to other partners by way of contribution
LAW ON PRIVATE CORPORATION

An artificial being created by operation of law having the right of succession, and the powers,
attributes and properties expressly authorized by law and incident to its existence.

ATTRIBUTES OF A CORPORATION
1. It is an artificial being with separate and distinct personality.
2. It is created by operation of law.
3. It enjoys the right of succession.
4. It has the powers, attributes and properties expressly authorized by law or incident to its
existence.

ARTIFICIAL BEING WITH SEPARATE PERSONALITY

DOCTRINE OF SEPARATE PERSONALITY
A corporation is a legal or juridical person with a personality separate and apart from its
individual stockholders or members and from any other legal entity to which it may be
connected.

Consequences
1. Liability for acts or contracts
2. Right to bring actions in its own name
3. Right to acquire and possess property
4. Acquisition of court jurisdiction
5. Changes in individual membership does not affect the Corporation
6. Entitlement to constitutional guarantees
a. Due process
b. Equal protection
c. Right against unreasonable searches and seizures
7. Liability for Torts
8. Liability for Crimes

TEST TO DETERMINE THE NATIONALITY OF A CORPORATION

1. Place of Incorporation test
2. Control Test

DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY

The doctrine that a corporation is a legal entity distinct from the persons composing is a theory
introduced for purposes of convenience and to serve the ends of justice. But when the veil of
corporate fiction is used as a shield to defeat public convenience, justify wrong, protect fraud,
or defend a crime, this fiction shall be disregarded and the individuals composing it will be
treated identically (Cruz vs. Dalisay, 152 SCRA 487 [1987]).

In any cases where the separate corporate identity is disregarded, the corporation will be
treated merely as an association of persons and the stockholders or members will be
considered as the corporation, that is, liability will attach personally or directly to the officers
and stockholders (Umali vs. Court of Appeals, 189 SCRA 529 [1990]).

CREATED BY OPERATION OF LAW

DOCTRINE OF CORPORATE ENTITY
A corporation comes into existence upon the issuance of the certificate of incorporation (Sec.
19). Then and only then will it acquire a juridical personality to sue and be sued, enter into
contracts, hold or convey property or perform any legal act, in its own name (Corporation Code
of the Philippines, Ruben C. Ladia, 2001 Ed.).
RIGHT OF SUCCESSION
It is the capacity to have continuity of existence despite the changes on the persons who
compose it. Thus, the personality continues despite the change of stockholder, members, board
members or officers (Reviewer in Commercial Law, Jose R. Sundiang & Timoteo Aquino, 2005
ed.).

POWERS, ATTRIBUTES AND PROPERTIES

THEORY OF SPECIAL CAPACITY / LIMITED CAPACITY DOCTRINE

No corporation under the Code, shall possess or exercise any corporate power, except those
conferred by law, its Articles of Incorporation, those implied from express powers and those as
are necessary or incidental to the exercise of the powers so conferred. The corporation’s
capacity is limited to such express, implied and incidental powers (Reviewer in Commercial
Law, Jose R. Sundiang & Timoteo Aquino, 2005 ed.).

If the act of the corporation is not one of those express, implied or incidental powers, the act is
ultra vires.
(Reviewer in Commercial Law, Jose R. Sundiang & Timoteo Aquino, 2005 ed.).

ADVANTAGES AND DISADVANTAGES OF A CORPORATION

ADVANTAGES  DISADVANTAGES 
Has a legal capacity to act and contract in  Complicated in formation and 
its own name  management 
High cost of formation and 
Continuity of existence  operation 
Its credit is strengthened by its continuity  Its credit is weakened by the 
of existence  limited liability feature 
Centralized management in the Board of 
Directors  Lack of personal element 
Its creation, management, operation and 
dissolution are standardized as they are 
governed under one general  Greater degree of 
incorporation law  governmental supervision 
Management and control are 
Limited liability  separated from ownership 
Shareholders are not the general agent of  Stockholders have little voice 
the business  in the conduct of business 
Transferability of shares    

CLASSES OF CORPORATION

CLASSIFICATIONS OF CORPORATIONS
1. In Relation to the State:
(a) Public corporations (Sec. 3, Act No. 1459)
 Organized for the government of the portion of the state (e.g., barangay,
municipality, city and province)
 Majority shares by the Government does not make an entity a public
corporation. xNational Coal Co., v. Collector of Internal Revenue, 46 Phil. 583
(1924).
(b) Quasi-public corporations
Private corporations that render public service, supply public wants, or pursue other
eleemosynary objectives. While purposely organized for the gain or benefit of its members, they
are required by law to discharge functions for the public benefit. Examples of these
corporations are utility, railroad, warehouse, telegraph, telephone, water supply corporations
and transportation companies. It must be stressed that a quasi-public corporation is a species
of private corporations, but the qualifying factor is the type of service the former renders to the
public: if it performs a public service, then it becomes a quasi-public corporation. xPhilippine
Society for the Prevention of Cruelty to Animals v. Commission on Audit, Sept. 25, 2007

(c) Private Corporation (Sec. 3, Act 1459)

A government-owned or -controlled corporation when organized under the Corporation Code is
still a private corporation. But being a government-owned or -controlled corporation makes it
liable for laws and provisions applicable to the Government or its entities and subject to the
control of the Government. Cervantes v. Auditor General, 91 Phil. 359 (1952).

A private corporation is created by operation of law under the Corporation while a government
corporation is normally created by special law referred to often as a charter. xBliss Dev. Corp.
Employees Union v. Calleja, 237 SCRA 271 (1994).

The present doctrine in determining whether a government-owned or -controlled corporation is

subject to the Civil Service Law is the manner of its creation, such that government corporations
created by special charter are subject to the Civil Service Law, while those incorporated under
the general corporation law are governed by the Labor Code. xPNOC-Energy Development Corp.
v. NLRC, 201 SCRA 487 (1991); xDavao City Water District v. Civil Service Commission, 201
SCRA 593 (1991).

The test to determine whether a corporation is government owned or controlled, or private in

nature is simple. Is it created by its own charter for the exercise of a public function, or by
incorporation under the general corporation law? Those with special charters are
government corporations subject to its provisions, and its employees are under the
jurisdiction of the Civil Service Commission, and are compulsory members of the
Government Service Insurance System. xCamparedondo v. NLRC, 312 SCRA 47 (1999).

2. As to Place of Incorporation:
(a) Domestic Corporation
(b) Foreign Corporation (Sec. 123)
3. As to Purpose of Incorporation:
(a) Municipal or Public corporation
(b) Religious corporation (Secs. 109 and 116)
(c) Educational corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)
(d) Charitable, Scientific or Vocational corporations
(e) Business corporation
4. As to Number of Members:
(a) Aggregate Corporation
(b) Corporation Sole
5. As to Legal Status:
(a) De Jure Corporation
(b) De Facto Corporation (Sec. 20)
Elements for Existence of De Facto Corporation:
(1) Valid law under which incorporated;
(2) Attempt in good faith to incorporate; “colorable compliance;”
(3) Assumption of corporate powers; and
(4) Issuance of certificate of incorporation. Arnold Hall v.
Piccio, 86 Phil. 634 (1950).
(c) Corporation by Estoppel (Sec. 21)
6. As to Existence of Shares (Secs. 3 and 5)
(a) Stock Corporation
(b) Non-Stock Corporation

COMPONENTS OF A CORPORATION

1. Corporators – those who compose a corporation whether stockholders or members

2. Incorporators – those who are mentioned in the Articles of Incorporation as originally
forming the corporation, having signed the Articles and acknowledged the same before a
notary public.
Qualifications:
a. natural person;
b. not less than 5 but not more than 15;
c. of legal age;
d. majority must be residents of the Philippines; and
e. each must own or subscribe to at least one share
3. Stockhoders – owners of shares of stock in a stock corporation
4. Members – Corporators of a corporation which has no capital stock

CAPITAL AND CAPITAL STOCK

Concept of "Capital Stock" (Central Textile Mills v. National Wage and Productivity
Commission, 260 SCRA 368 [1996]).
By express provision of Section 13 [of the Corporation Code], paid-up capital is that portion
of the authorized capital stock which has been both subscribed and paid. Not all funds or
assets received by the corporation can be considered paid-up capital, for this term has a
technical signification in Corporation Law. Such must form part of the authorized capital
stock of the corporation, subscribed and then actually paid up. xMSCI-NACUSIP Local
Chapter v. National Wages and Productivity Commission, 269 SCRA 173 (1997).
The term “capital” and other terms used to describe the capital structure of a corporation are
of universal acceptance, and their usages have long been established in jurisprudence. Briefly,
capital refers to the value of the property or assets of a corporation. The capital subscribed is
the total amount of the capital that persons (subscribers or shareholders) have agreed to take
and pay for, which need not necessarily be, and can be more than, the par value of the shares.
In fine, it is the amount that the corporation receives, inclusive of the premium if any, in
consideration of the original issuance of the shares. xNational Telecommunications Commission
v. Court of Appeals, 311 SCRA 508, 514-515 (1999).

CLASSIFICATION OF SHARES (Sec. 6)

(a) Common Shares
“A common stock represents the residual ownership interest in the
corporation. It is a basic class of stock ordinarily and usually issued without
extraordinary rights or privileges and entitles the shareholder to a pro rata division
of profits.” xCommissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152
(1999).
(b) Preferred Shares (Republic Planters Bank v. Agana, 269 SCRA 1 [1997]).
 Participating and Non-participating
 Cumulative and Non-cumulative

Preferred stocks are those which entitle the shareholder to some priority on
dividends and asset distribution. xCommissioner of Internal Revenue v. Court of
Appeals, 301 SCRA 152 (1999).
 “A preferred share of stock, on one hand, is one which entitles the holder
thereof to certain preferences over the holders of common stock. The preferences
are designed to induce persons to subscribe for shares of a corporation.
Preferred shares take a multiplicity of forms. The most common forms may
be classified into two: (1) preferred shares as to assets; and (2) preferred shares
as to dividends. The former is a share which gives the holder thereof preference in
the distribution of the assets of the corporation in case of liquidation; the latter is a
share the holder of which entitled to receive dividends on said shares to the extent
agreed upon before any dividends at all are paid to the holders of common stock.
There is no guaranty, however, that the share will receive any dividends. Republic
Planters Bank v. Agana, 269 SCRA 1 (1997).
(b) Redeemable shares (Sec. 8)
Redeemable shares are shares usually preferred, which by their terms are
redeemable at a fixed date, or at the option of either issuing corporation, or the
stockholder, or both at a certain redemption price. A redemption by the
corporation of its stock is, in a sense, a repurchase of it for cancellation.
(c) Treasury Shares (Sec. 9; Commissioner v. Manning, 66 SCRA 14 [1975]).
Treasury shares are shares of stock which have been issued and fully paid
for, but subsequently reacquired by the issuing corporation by purchase,
redemption, donation or through some other lawful means. Such shares may
again be disposed of for a reasonable price fixed by the board of directors.
When a treasury share which has not been retired by the corporation may
be sold again; but so long as it remains a treasury share, it does not participate in
dividends (since a corporation cannot pay dividends to itself) and cannot vote in
stockholders’ meeting. San Miguel Corp. v. Sandiganbayan, 340 SCRA 289 (2000).
(d) Founders’ Shares
Founders' shares classified as such in the articles of incorporation may be
given certain rights and privileges not enjoyed by the owners of other stocks,
provided that where the exclusive right to vote and be voted for in the election of
directors is granted, it must be for a limited period not to exceed five (5) years
subject to the approval of the Securities and Exchange Commission. The five-year
period shall commence from the date of the aforesaid approval by the Securities
and Exchange Commission.

FILIPINO OWNERSHIP REQUIREMENT

The Constitution expressly declares as State policy the development of an economy “effectively
controlled” by Filipinos. Consistent with such State policy, the Constitution explicitly reserves
the ownership and operation of public utilities to Philippine nationals, who are defined in the
Foreign Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60
percent of whose capital with voting rights belongs to Filipinos. The FIA’s implementing rules
explain that “[f]or stocks to be deemed owned and held by Philippine citizens or Philippine
nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial
ownership of the stocks, coupled with appropriate voting rights is essential.” In effect,
the FIA clarifies, reiterates and confirms the interpretation that the term “capital” in Section
11, Article XII of the 1987 Constitution refers to shares with voting rights, as well as with
full beneficial ownership. This is precisely because the right to vote in the election of
directors, coupled with full beneficial ownership of stocks, translates to effective control of a
corporation.
xxx In short, the 60-40 ownership requirement in favor of Filipino citizens must apply
separately to each class of shares, whether common, preferred non-voting, preferred voting or
any other class of shares. xxx Gamboa v. Tevez, G.R. No. 176579, October 09, 2012.
For additional info regarding Ownership Requirement, Please see Foreign Investment Negative
List (10th) – Executive Order 184, May 29, 2015.
DOCTRINE OF EQUALITY OF SHARES -Where the articles of incorporation do not provide for
any distinction of the shares of stock, all shares issued by the corporation are presumed to be
equal and enjoy the same rights and privileges and are also subject to the same liabilities (Sec.
6, par. 5).

DEFINITION OF TERMS
1. Capital Stock or Legal Stock or Stated Capital – The amount fixed in the corporate
charter to be subscribed and paid in cash, kind or property at the organization of the
corporation or afterwards and upon which the corporation is to conduct its operation.
2. Capital – The value of the actual property or estate of the corporation whether in money or
property. Its net worth (or stockholder’s equity) is its assets less its liabilities.
3. Authorized Capital Stock - The capital stock divided into shares.
4. Subscribed Capital Stock- The total amount of the capital stock subscribed whether fully
paid or not.
5. Outstanding Capital Stock - The portion of the capital stock issued to subscribers, whether
fully paid or partially paid (as long as there is a binding subscription contract) except treasury
stocks (Sec. 137).
6. Unissued Capital Stock – The portion of the capital stock that is not issued or subscribed.
It does not vote and draws no dividends.
7. Legal Capital - The amount equal to the aggregate par value and/or issued value of the
outstanding capital stock.
8. Stated Capital – The capital stock divided into no par value shares.
9. Paid-up Capital – The amount paid by the stockholders on subscriptions from unissued
shares of the corporation.

ARTICLES OF INCORPORATION

The Articles of Incorporation have been described as one that defines the charter of the
corporation, and the contractual relationships between the State and the corporation, the
stockholder and the State, and between the corporation and its stockholders (Lanuza v. CA GR
No.131394, March 28, 2005).

Contents (Sec. 14):

1. Corporate Name (Sec. 18)
The corporation acquires juridical personality under the name stated in the certificate of
incorporation. It is the name of the corporation which identifies and distinguishes it from other
corporations, firms or entities.
A corporation’s right to use its corporate and trade name is a property right, a right in rem
which it may assert or protect against the whole world in the same manner as it may protect its
tangible property against trespass or conversion (Philips Export B.V. vs. CA, 206
SCRA 457).

Statutory limitation:
The proposed name must not be:
a. identical; or
b. deceptively or confusingly similar to that of any existing corporation or to any other name
already protected by law; or
c. patently deceptive, confusing or contrary to law.

Remedies of corporation whose name has been adopted by another:

1. Injunction
2. De-registration
2. Purpose Clause

Significance:
a. A person who intends to invest his money in the business corporation will know where and
in what kind of business or activity his money will be invested;
b. The directors and the officers of the corporation will know within what scope of business
they are authorized to act; and
c. A third person who has dealings with the corporation may know by perusal of the articles
whether the transaction or dealing he has with the corporation is within the authority of the
corporation or not.

Limitations:
a. Purpose or purposes must be lawful;
b. Purpose or purposes must be stated with sufficient clarity;
c. If there is more than one purpose, the primary as well as the secondary purpose must be
specified; and
d. Purposes must be capable of being lawfully combined.
A corporation the primary object of which is without statutory authority can have no lawful
existence, even though some of its declared purposes may be lawful.
3. Principal Office
The articles of incorporation must state the place where the principal office of the
corporation is to be established or located, which place must be within the Philippine (Sec. 14
[3]).
Purpose: To fix the residence of the corporation in a definite place, instead of allowing it to be
ambulatory (Young Auto Supply Co. vs. CA, 223 SCRA 670).
It is now required by the SEC that all corporations and partnerships applying for registration
should state in their Articles of Incorporation the specific address of their principal office,
which shall include, if feasible, the strict number; street name; barangay; city or municipality;
and specific residence address of each incorporator, stockholder, director or trustee in line with
the full disclosure requirement of existing laws (SEC Circ. No. 3, Series of 2006).

4. Term of Existence (Sec. 11)

The corporation shall exist for the term specified in the articles of incorporation not
exceeding 50 years, unless sooner legally dissolved or unless its registration is revoked upon
any of the grounds provided by law.
The corporate life may be reduced or extended by amendment of the articles of incorporation
by complying with the procedural requirements laid down in Sec. 37.
The extension of corporate term is subject to the following limitations:
a. The term shall not exceed 50 years in any one instance;
b. The amendment is effected before the expiration of the corporate term of existence,
for after dissolution by expiration of the corporation term there is no more corporate life to
extend (Alhambra Cigar vs. SEC, 24 SCRA 269).
c. The extension cannot be made earlier than 5 years prior to the expiration date unless
there are justifiable reasons therefore as may be determined by the SEC.

5. Incorporators

6. Directors and Trustees

The Board of Directors is the governing body in a stock corporation while Board of Trustees is
the governing body in a non-stock corporation. They exercise the powers of the corporation
(Reviewer in Commercial Law, Jose R. Sundiang & Timoteo Aquino, 2005 ed.).

Matters required to be stated in the AI:

a. a statement of the names, nationalities and residences of the incorporating directors or the
persons who shall act as such until the first regular directors or trustees are duly elected and
qualified in accordance with the law
b. the number of directors or trustees, which shall not be less than 5 but not more than 15.
Exceptions:
1. educational corporations registered as nonstock corporation whose number of trustees
though not less than five and not more than fifteen should be divisible by five; and
2. in close corporation where all the stockholders are considered as members of the board of
directors thereby effectively allowing twenty members in the board (Corporation Code of the
Philippines,Ruben C. Ladia, 2001 ed.).

7. Capitalization
Matters required to be stated in the AI:
a. the amount of its authorized capital stock in lawful money of the Philippines;
b. the number of shares and kind of shares into which it is divided;
c. in case the shares are par value shares, the par value of each;
d. the names, nationalities and residences of the original subscribers;
e. the amount subscribed and paid by each on his subscription;
f. sworn statement of the treasurer elected by the subscribers showing that at least 25% of the
authorized capital stock of the corporation has been subscribed;
g. sworn statement of the treasurer elected by the subscribers showing that at least 25% of the
total subscription has been fully paid to him in actual cash and/or in property the fair
valuation of which is equal to at least 25% of the said subscription; and
h. sworn statement of the treasurer elected by the subscribers showing that such paid-up
capital being not less that five thousand pesos.

BOARD OF DIRECTORS AND TRUSTEES

Qualifications:
1. For a stock corporation, ownership of at least 1 share capital stock of the corporation in his
own name, and if he ceases to own at least one share in his own name, he automatically ceases
to be a director (Sec. 23). For a non-stock corporation, only members of the corporation can be
elected to the Board of Trustees.
In order to be eligible as a director, what is material is the legal title to, not beneficial
ownership of the stocks appearing on the books of the corporation.
A person who does not own a stock at time of his election or appointment does not disqualify
him as a director if he becomes a shareholder before assuming the duties of his office.
A person who is not a stockholder cannot be a director, but he can be an ex officio member
without voting rights in the board (Grace Christian High School v. CA 281 SCRA 133 October 23,
1997).
2. A majority of the directors/trustees must be residents of the Philippines (Sec. 23).
3. He must not have been convicted by final judgment of an offense punishable by
imprisonment for a period exceeding 6 years or a violation of the Corporation
Code, committed within five years from the date of his election (Sec. 27).
4. Only natural persons can be elected directors/trustees.
In case of corporate stockholders or members, their representation in the board can be
achieved by making their individual representatives trustees of the shares or membership to
make them stockholders/members of record.
5. Other qualifications as may be prescribed in the bylaws of the corporation.
6. Must be of legal age
CORPORATE OFFICERS
1. President – must be a director and he may not be concurrently the treasurer or secretary
2. Treasurer – may or may not be a director; as a matter of sound corporate practice, must be a
resident
3. Secretary – need not be a director unless required by the by-laws; must be a resident and
citizen of the Philippines; and
4. Such other officers as may be provided in the by-laws.