NOTES

ON BUSINESS LAW REGULATION 202

HAND OUT NO. 01

By:

Atty. REINIER JOHN G. BROFAR

(References/Sources: Reviewer on Commercial Law by Jose R. Sundiang, Sr., 2019 Ed;
The Law on Business Organizations by Justo P. Torres, Jr., 2000 Ed.,;
The Law on Partnerships and Private Corporations by Hector De Leon, 2013 Ed.;
Merchantile Law Digest by Crescencio P. Co Untian, 2007 Ed.)

BUSINESS ORGANIZATION

Business Organization – refers to a group of individuals systematically united for the accomplishment
of a common purpose or undertaking for pro it in any of the several ways allowed and regulated by law.
(J. Torres),

BUSINESS NAME. A Business Name refers to any name that is different from the true name of an
individual which is used or signed in connection with his/her business on any written or printed
receipts, signs or document. Act no. 3883 governs the law on Business Names;
➢ A proprietor is required to register his business name other than his true name with the
Bureau of Trade Regulation and Consumer Protection of the Department of Trade and
Industry pursuant to Section 1 of Act no. 3883). [NOTE: There must be a separate
registration of a Business for a branch or satellite of ice]IF the business name is not
registered, the proprietor CANNOT use or sign the business name in connection with his
business on any written or printed receipts, sign or other documents.
➢ Prohibited Names (under DTI Department Order no. 10-01 :
i. The name or nature of business itself is illegal, offensive, scandalous, or contrary to
propriety;
ii. Business names which are identical or resemble a Business Name already registered
as likely to cause confusion or mistake in the minds of the public taking into
consideration the (1) nature of business; (2) product or service handled; (3)
location or place of business; (4) Dominant word; (5) use of descriptive words; and
(6) Spelling, sound and/or meaning;
iii. Names composed of purely generic or geographic words;
iv. Names which by law or regulation cannot be appropriated;
v. Names, words, or terms or expressions used to designate or distinguish or
suggestive of quality of any class of goods, articles, merchandise, or service;
vi. The names or abbreviation of names of any nation, international organization; and
vii. Names which are deceptive, misleading or which misrepresent the nature of the
business.

BASIC FORMS OF BUSINESS ORGANIZATION

I. Sole/Single Proprietorship
➢ It is a business enterprise owned and managed by an individual person. Its creation is
subject to the provisions of local ordinances while the obligations arising from its business
transactions are generally governed by the provisions of the Civil Code on Obligations and
Contracts;
➢ In this type of business organization, a person personally conducts business under his name
or a business name. It is composed of the proprietor himself and his employees, but it has no
personality and distinct from the proprietor.
viii.“A sole propriertorship does not possess a juridical personality and has no legal
personality to ile or defend an action in court.” (Anita Mangila vs. Court of Appeals,
GR no. 125027, August 12, 2002);
➢ Private individuals or single proprietors may also be considered as “merchants” under
the Code of Commerce. Although the concept of merchants is now rendered obsolete
by the provisions of law that provide for different quali ications and requirements, it is
important to note such term in so far as they are still referred to in the Code of
Commerce provisions are still in force.
▪ MERCHANTS, are those who having capacity to engage in commerce,
habitually they habitually devote themselves (Art. 1, Code of Commerce).
[Note: Corporations and partnerships (organized for business) are also

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 merchants from the time they registered with the Securities and Exchange
Commission).
o Quali ications of Merchants: (1) at least 18 years of age; (2) must
have free disposition of property; and (3) must habitually involve
themselves in commerce;
o Disquali ication to engage in Commerce/Business:
i. Absolute Disquali ication (Art. 13, Code of Commerce):
1. Those serving the penalty of civil interdiction;
2. Those judicially declared insolvent until they would
have obtained a discharge;
3. Those who are absolutely disquali ied under special
laws;
ii. Relative Disquali ication (under Art.14 of the Code of
Commerce). The following cannot engage in business within
a the territory or place where they exercise their functions
or under speci ied circumstances:
1. Justices, judges and prosecutors;
2. Administrative, economic or military heads of
districts, provinces or posts;
3. T h o s e e m p l o y e d i n t h e c o l l e c t i o n a n d
administration of funds of the State;
4. Stock and commercial broker of whatever class;
5. Those disquali ied under special laws;
iii. Disquali ication under the Constitution. The following
cannot engage in business or practice of profession during
the tenure of their of ice:
1. The President, Vice-president, Members of the
Cabinet and their Deputies or Assistants (Art. VII,
Sec. 13, 1987 Constitution)
2. S e n a t o r s a n d M e m b e r s o f t h e H o u s e o f
Representatives (Art. VI, Sec. 14, 1987 Constitution)
3. Members of the Constitutional Commission (Art. IX,
Sec. 2, 1987 Constitution)

II. Partnership

CONTRACT OR PARTNERSHIP/ PARTNERSHIP – it is a contract whereby two or more persons bind

themselves to bind themselves to contribute money property or industry to a common fund, with the
intention of dividing the pro its among themselves.
➢ Elements or Essential Requisites of a Contract of Partnership
1. There must be a valid contract;
2. There must be a contribution of money, property, industry to a common fund;
3. The partnership must be organized for gain or pro it;
4. The partnership should have a lawful object or purpose and must be established for the
common bene it or interest of the partners
➢ Partnership has a juridical personality separate and distinct from that of each of the
partners. [Juridical Personality means an entity created by law.] and such juridical personally
is created from the moment the partners consent to the establishment of the partnership. As a
general rule, no special form is required for the validity or existence of the contract of partnership.
The contract of partnership may be made orally or in writing.
➢ Registration of partnership with the SEC is only necessary as condition for the issuance of licenses to
engage in business or trade, but not for purposes of acquiring juridical personality, and the non-
registration does not affect the liability of the partnership and the members to third persons.
.
➢ REGISTRATION. If capital of the partnership is P3,000.00 or more, or if immovable (real) property is
contributed, the law requires that the contract of partnership must be a public instrument and must
be registered with the SEC. Once the partnership is registered, it need not be registered anew under
the Business Name Law (Act no. 3883).
o Public instrument is one which is acknowledged by the person who executed the same
before a notary public or any of icial authorized to administer oath.
o In case immovable property is contributed, the law also requires that there must be an
inventory signed by the parties which should be attached to the public instrument.

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 ➢ A Contract of Partnership is based on the Principle of Delectus Personae/Delectus Personarum

(Choice of Person), which meant that a person has the right to select or choose with whom he
wants to be associated.

➢ The contribution of partners to the partnership fund may either be money, property or industry.

➢ Generally, the object/purpose of forming a partnership is for pro it. Note however that
partnership share not only the pro its but also share the losses.

III. Corporation

Corporation/Private Corporation – It is an arti icial 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. It generally requires at least 5 persons for its creation/incorporation. It is governed by the
provisions of the Corporation Code (BP 68).

Attributes of a Corporation
1. It is an arti icial being or juridical entity
➢ A corporation is a legal entity/ iction. It has personality separate and distinct
personality from the individuals or stockholders who are merged in the corporate body.
This is known as the Doctrine of Corporate Entity. Pursuant to such doctrine, a
corporation is not liable for the debts of its stockholders, and the stockholders or
members are not individually liable for the corporation’s debts.
➢ Where the legal iction of corporate entity is being used as a cloak or cover for fraud or
illegality, or to defeat public convenience, justify wrong, protect fraud or defend crime,
the courts will disregard this legal iction and treat the individuals composing the
corporation as identical. Consequently, the corporation will be treated as mere
association of persons and the liability attaches to the stockholders and members
comprising it. This is known as the Doctrine of Piercing the Veil of Corporate Entity.
2. It is created by operation of law;
➢ It means that the corporation cannot be created by mere agreement of the parties. It
requires special authority or grant from the state upon compliance with the
requirements of the law.
3. It enjoys the right of succession;
➢ A corporation has a capacity of continuous existence irrespective of the death,
withdrawal, insolvency, or incapacity of the individual members or stockholders and
regardless of the transfer of their interest or shares of stock.
4. It has the powers, attributes and properties expressly authorized by law or incident to its
existence.
➢ A corporation may exercise powers expressly granted by law and also perform functions
implied from those expressly provided by law and those which are incidental or
essential to its existence.
Classes of Corporation under Sec. 3 of the Corporation Code
1. Stock Corporation – a corporation which have capital stock divided into shares and are
authorized to distribute to the holders of such shares dividends or allotments of the surplus
pro its on the basis of the shares held. It is ordinarily created for the purpose of making a pro it.
2. Non-stock Corporation – A corporation which do not issue stock and are created not for pro it
but for the public good and welfare. Its capital is sourced from contributions and donations.

NOTABLE DISTINCTIONS BETWEEN A PARTNERSHIP AND A CORPORATION:

PARTNERSHIP CORPORATION

As to manner of Creation

Created by mere agreement of the parties Created by law or by operation of law

As to number of partners/incorporators

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 May be organized by at least two (2) persons There may be one (1) incorporator (Sec. 10, Revised
Corporation Code of the Philippines)

As to commencement of juridical/legal personality

Acquires juridical personality from the moment of Acquires juridical personality from the date of
execution of the contract of partnership issuance of the certi icate of incorporation.

As to management

When management is not agreed upon, every The power to do business and manage the
partner is an agent of the partnership. corporation is vested in the board of directors or
board of trustees.

As to right of succession

Partnership has no right of succession Corporation has right of succession

As to the effect of death a partner/stockholder

Death of a partner generally dissolves the Death of a stockholder does not result in the
partnership. dissolution of the corporation.

As to the transferability of interest

A partner cannot transfer his interest in the A stockholder generally has the right to transfer his
partnership so as to make the transferee a partner shares without prior consent of the other
without the unanimous consent of all existing stockholders.
partners. (Principle of Delectus Personarum)

As to term of existence

Partnership may be established for any period of Corporation may have a perpetual term/life.
time stipulated by the partners.

As to manner of dissolution

Partnership may be dissolved at any time by any or Corporation can only be dissolved with the consent
all f the partners. of the State

As to the governing law

Partnership is governed by the Civil Code. Corporation is governed by the Corporation Code.

SIMILARITIES BETWEEN PARTNERSHIP AND CORPORATION:

1. Both have a juridical personality separate and distinct from the individuals composing it;
2. Both can act only through agents;
3. Both are organizations composed of an aggregate of individual (except corporation sole);
4. Both generally distributes pro it to those who contribute capital;
5. Both can be organized only where there is a law authorizing its organization;
6. Both are subject to income tax as a general rule;

May a corporation become a partner to a partnership contract?

a) According to Hector De Leon – NO. Because if a corporation becomes a partner in a

contract of partnership, it will be bound by the acts of person/partners who are not the
duly appointed or authorized of icers of the corporation, and this would be inconsistent
with the policy of the law that the corporation shall manage its own affairs separately
and exclusively.

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 b) According to Justo P. Torres – YES, provided that the corporation-partner will be the
managing partner; and the charter expressly allow the corporation to enter into
partnerships. (Based on the SEC Bulletin, P.18-19, Oct. 1981).

c) Under the Revised Corporation Code, a corporation can now be a partner in a

partnership and a joint venture. (Sec. 35[h], RCCP)

OTHER FORMS OF BUSINESS ORGANIZATION

Joint Venture
➢ Joint Venture is an association of persons or companies jointly undertaking some
commercial enterprice. Parties to a joint venture generally contribute assets and share
risks. It requires a community of 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 pro it and losses. (Kilosbayan, Inc. vs. Guingona, 232 SCRA
110 [1994])
➢ A joint venture is actually a form of partnership and should be governed by the laws on
partnership (Aurbach vs. Sanitary Wares Manufacturing Corp., 180 SCRA 130 [1989]).
➢ A joint venture may be likened to a partnership with a ixed term or a partnership for a
particular undertaking.

Cooperatives
➢ 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 bene its of the undertaking in accordance with universally accepted
cooperative principles. (Art. 3, RA no. 9520).
➢ Cooperatives need to be registered to the Cooperative Development Authority by iling
its Articles of Cooperation. Once registered, it acquires juridical and separate
personality.
➢ Fifteen (15) or more natural persons who are Filipino citizens, of legal age, having a
common bond of interest and are actually residing or working in the intended area of
operation, may organize a primary cooperative under this Code: Provided, That a
prospective member of a primary cooperative must have completed a Pre-Membership
Education Seminar (PMES). (Art. 10, RA no. 9520)
➢ A cooperative shall exist for a period not exceeding ifty (50) years from the date of
registration unless sooner dissolve or unless said period is extended. The cooperative
term, as originally stated in the articles of cooperation, may be extended for periods not
exceeding ifty (50) years in any single instance by an amendment of the articles of
cooperation (Art. 13. RA no. 9520)
➢ Cooperative Principles. - Every cooperative shall conduct its affairs in accordance with
Filipino culture, good values and experience and the universally accepted principles of
cooperation which include, but are not limited to, the following:
o (1) Voluntary and Open Membership - Cooperatives are voluntary organizations,
open to all persons able to use their services and willing to accept the
responsibilities of membership, without gender, social, racial, cultural, political or
religious discrimination.
o "(2) Democrative Member Control - Cooperatives are democratic organizations that
are controlled by their members who actively participate in setting their policies and
making decisions. Men and women serving as elected representatives, directors or
of icers are accountable to the membership. In primary cooperatives, members have
equal voting rights of one-member, one-vote. Cooperatives at other levels are
organized in the same democratic manner.
o "(3) Member Economic Participation - Members contribute equitably to, and
democratically control, the capital of their cooperatives. At least part of that capital
is the common property of the cooperative. They shall receive limited compensation

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 or limited interest, if any, on capital subscribed and paid as a condition of

membership. Members allocate surpluses for any or all of the following purposes:
developing the cooperative by setting up reserves, part of which should at least be
indivisible; bene itting members in proportion to their partonage of the
cooperative's bubsiness; and, supporting other activities approved by the
membership.
o "(4) Autonomy and Independence - Cooperatives are autonomous, self-help
organizations controlled by their members. If they enter into aggreements with
other organizations, including government, or raise capital from external sources,
they shall do so on terms that ensure democratic control of their members and
maintain their cooperative autonomy.
o "(5) Education, Training and Information - Cooperatives shall provide education and
training for their members, elected and appointed representatives, managers, and
employees, so that they can contribute effectively and ef iciently to the development
of their cooperatives.
o "(6) Cooperation Among Cooperatives - Cooperatives serve their members most
effectively and strengthen the cooperative movement by working together through
local, national, regional and international structures.
o (7) Concern for Community - Cooperatives work for the sustainable development of
their communities through policies approved by their members.

Joint Accounts (Cuentas en Participacion)

➢ Joint Accounts or Cuentas en Participacion is an agreement whereby merchants may
interest themselves in the transaction of other merchants, contributing there the
amount of capital they may agree upon, and participating in the favorable or
unfavorable results thereof in the proportion they determine. It is governed by Art.
239 of the Code of Commerce.
➢ Joint accounts are commonly known as accidental partnership. However, in this type
of Business Organization, there is no indication to the public that there is an existing
arrangement because only the ostensible partner is conducting business. (e.g.
supplier and manufacturer arrangement/agreement; Manufacturer and Sales-
marketing arrangement).
➢ As distinguished from partnership, Joint Accounts or Cuentas en Participacion has no
juridical personality, no business name, and only the person carrying out the
business can be sued or is liable to persons transacting with it.

Business Trusts
➢ It is a legal relation whereby one person, called the trustor, conveys a property to
another for the bene it of a person called the bene iciary. The person in whom the
con idence is reposed as regards the property is called the trustee. (Art. 1440, Civil
Code)
➢ Trust, under the law, is the right to the bene icial enjoyment of property, the legal title to
which is vested in another.
o It is a iduciary relationship concerning property which obliges the person
holding it to deal with the property for the bene it of another. The person
holding, in view of equitable title, is allowed to exercise certain powers
belonging to the owner of the legal title.
o E.g. Lucio Nat is the owner of a multi-million airline business. He is already 80
years old and is already weak to handle his business affairs. His only child, Mackho
Nat, is only 17 years old and is still in college. In order to protect his business, he
appointed his long time friend Atty. Dee Matulungin as the Interim General
Manager of his airline business until such time that Mackho Nat is ready and
capable to handle the airline business. Here there is a business trust established
between Lucio Nat and Atty. Dee Matulungin in favor of Mackho Nat

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