TYPES OF BUSINESS ORGANIZATIONS

1. SOLE PROPRIETORSHIP- a single individual conducts business under his own name or under
a business name. In effect, the sole proprietor manages and exercises complete control over
the conduct of his business. He is the only one to share in the profits as well as the one who is
personally liable for business debts.
- a sole proprietor has no legal personality separate from its
proprietor.
- the business is entirely dependent upon the life of the proprietor.
1.1 BUSINESS NAME
- A single proprietor may do business under a business name. However, doing
business under another name does not create an entity distinct from the person operating the
business.
- 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 or delivery receipts.
- When a proprietor uses another name as business name, he is required to register
the business name, firm name or style with the Bureau of Trade Regulation and Consumer
Protection of the Department of Trade and Industry

2. PARTNERSHIP- Under the Civil Code, there is a partnership when two or more persons bind
themselves to contribute money, property or industry to a common fund with the intention of
dividing the profits among themselves. (Art. 1767, Civil Code)
- Registration with the Securities and Exchange Commission os necessary where
the capital is P3,000 or more. (Art. 1772, Civil Code) However, the juridical personality exists even
if not registered with the SEC. Mere failure to register does not invalidate a contract that has all the
essential requisites of a partnership. The purpose of notice is only to give notice to third persons.
The liability of the partners and partnership will not be affected.
2.1 BUSINESS NAME
- The partnership shall bear the word “Company” or “Co.” If it is a limited partnership
the the word “Limited” or “Ltd.” A professional partnership may bear the word “Company” or
“Associates” or “Partners.”

3. 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 incident to
its existence. (Sec. 2, Corporation Code)
3.1 BUSINESS NAME
- The corporation shall bear the word “Corporation”

4. COMPARATIVE CHART BETWEEN PARTNERSHIP AND CORPORATION

CRITERIA PARTNERSHIP CORPORATION

MANNER OF CREATION mere agreement of parties general law or special law

NUMBER OF ORGANIZERS at least two generally, not less than 5 but not
more than 15
CRITERIA PARTNERSHIP CORPORATION

COMMENCEMENT OF from the very moment there is upon approval and issuance of
JURIDICAL PERSONALITY meeting of minds (consensual) the SEC of Certification

POWERS agreement of parties set out in the express in the Corporation Code,
Articles of Co- Partnership Articles of Incorporation, By Laws
as well as those which are implied
or incidental to its existence

AUTHORITY/ MANAGEMENT Managing Partner designated. If Board of Directors/ Board of

there is no one designated then
any of the partners may bind the
partnership. (Mutual Agency)
Trustees (in Close Corporation
stockholders may have the
management; Executive
Committee; Management
Contract)

EFFECT OF MISMANAGEMENT A partner as such can sue a co- Derivative Suit

partner who mismanages.

TRANSFER OF INTEREST not freely transferable without the freely transferable without the
consent of the other partners consent of other stockholders
except when there is Right of First
Refusal

SUCCESSION no right of succession there is right of succession

LIABILITY general partners are liable beyond the liability of the stockholder is
their contribution if the partnership limited only to the extent of his
assets are not enough to satisfy subscription contract
the debts and liabilities of the
partnership; a limited partner is
liable only up to the extent of his
contribution

DISSOLUTION may be dissolved any time by will death, civil interdiction and
of any or all partners insolvency of a partner does not
dissolve the corporation
death, civil interdiction and
insolvency of a partner dissolves
the partnership

GOVERNING LAW Civil Code Corporation Code

5. BUSINESS TRUST- it is a legal relation whereby one person, called the “trustor”, conveys a
property for the benefit of a person called the “beneficiary”. The person in whom confidence is
reposed regards the property is called the “trustee.”

6. JOINT VENTURE- association of persons or companies jointly undertaking some commercial

enterprise; generally all contribute assets and share risks. It has the features of a partnership.
- may be an agreement only or an association

7. Joint Accounts
8. Cooperatives
9. Homeowners’ Associations
10. Syndicate

GENERAL PROVISIONS
Section 1. This Code shall be known as “The Corporation Code of the Philippines.”

- the Corporation Code (B.P. 68) took effect on May 1, 1980.

- This Code applies to all corporations already in existence at the time the Code took effect.
- Section 148 of the Corporation Code provides that all corporations lawfully existing and
doing business in the Philippines on the date of the effectivity of the Code and thereafter
authorized, licensed or registered by the Securities and Exchange Commission shall be deemed to
have been authorized, licensed or registered under the provisions of the Code, subject to the terms
and conditions of its license, and shall be governed by the provisions thereof.
- Section 148 also granted corporations already in existence at the time the Corporation
Code took effect a period of not more than two (2) years from the effectivity of the Code within
which to comply with the new requirements of the Code.
- Suppletory application of Corporation Code for special corporations.

Section 2. Corporation defined.- 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 incident to its existence.

2.1 ATTRIBUTES
(1) artificial being
(2) created by operation of law
(3) successional rights
(4) It has the powers, attributes expressly authorized by law or incident to its
existence.

2.2 CONCESSION THEORY- The corporation owes its existence to the State.

2.3 PRIMARY VS SECONDARY FRANCHISE

- Primary franchise refers to the authority to exist as a corporation while Secondary
franchise is a special authority given to a corporation to engage in a specialized business.

2.4 ARTIFICIAL BEING- The corporation does not have physical existence- its existence is
artificial. Due to the artificial nature of the existence of the corporations, corporations can perform
physical acts or commit omissions only through natural persons.
2.4.1 DOCTRINE OF SEPARATE LEGAL ENTITY- The Corporation has a legal/
juridical personality separate, distinct and independent from the persons composing it.
2.4.2 MORAL DAMAGES ENTITLEMENT- As a general rule, the corporation is not
entitled to it. But if there is an allegation that the corporation has a reputation that was debased
resulting to humiliation then it is entitled to moral damages.
2.4.3 TORT AND CRIMINAL LIABILITY
2.4.4 CONSTITUTIONAL RIGHTS- due process, equal protection, right against
unreasonable searches and seizure

2.5 CREATED BY OPERATION OF LAW

2.5.1 Section 4 of the Corporation Code provides:
Section 4. Corporations created by special laws or charters. – Corporations
created by special laws or charters shall be governed primarily by the provisions of the special law
or charter creating them or applicable to them, supplemented by the provisions of this Code,
insofar as they are applicable.
2.5.2 GENERAL vs SPECIAL LAW. The general law referred here is the B.P. 68. All
private corporations owes its existence because of B.P. 68. The special law on the other hand
refers to acts and legislations made by Congress in creating GOCC’s with special charters.
2.5.3 Section 16 of Article XII of the 1987 Constitution provides:
 Section 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the common good
and subject to the test of economic viability.
2.6 RIGHT OF SUCCESSION- a corporation has a capacity of continuous existence
irrespective of the death, withdrawal, insolvency or incapacity of the individual stockholders or
members regardless of the transfer of their interest or shares of stock.
2.6.1 Section 11 of the Corporation Code provides:
Section 11. Corporate term. – A corporation shall exist for a period not exceeding fifty (50) years
from the date of incorporation unless sooner dissolved or unless said period is extended. The
corporate term as originally stated in the articles of incorporation may be extended for periods not
exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation,
in accordance with this Code; Provided, That no extension can be made earlier than five (5) years
prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the Securities and Exchange Commission.

2.7 POWERS, ATTRIBUTES, PROPERTIES- the powers of the corporation may be

express or incidental. The express powers may be found under Article 16, 36, 37-44, 76 and 117.
The incidental powers are those which are implied in nature.

2.8 DOCTRINE OF PIERCING THE CORPORATE VEIL- exception to the doctrine of

piercing the corporate veil. Under this doctrine, the corporation’s separate juridical personality may
be disregarded when there is an abuse of corporate form.
2.8.1 The Supreme Court observed that this doctrine may be applied in at least
three basic areas:
(1) cases where public convenience may be defeated, as when the corporate fiction
is used as vehicle for the evasion of an existing obligation
(2) fraud cases or when the corporate entity is used to justify a wrong
(3) alter ego cases, where a corporation is merely a farce since it is merely an alter
ego or business conduit of a person, or where a the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.
2.8.2 The effects of piecing the corporate veil is basically to consider the corporation
and stockholder as one to make the stockholders liable for the debts and obligations of the
corporation.

2.9 NATIONALITY AND CITIZENSHIP OF CORPORATION

2.9.1 Tests:
(1) Place of incorporation test- nationality is determined by the state of
incorporation, regardless of the nationality of stockholders.
(2) Control test- uses the nationality of controlling stockholders.
- adopted by the Foreign Investment Act of 1991 (RA 7042) as a
general guideline in determining the nationality of corporations engaged in nationalized or party
nationalized activity.
- Control here means not mere majority or complete stock control,
but complete domination of finances, policy and business practice.
-Examples of Nationalized and Partly Nationalized Activities
(A) 100% Filipino owned- mass media except recording; practice of
professions; utilization of marine resources; small scale mining, retail trade with paid-up capital of
less than US$2.5M
(B) 75% Filipino owned- recruitment agencies
(C) 70% Filipino owned- advertising; pawnshop business
(D) 60% Filipino owned- private land ownership; educational institution;
exploration, development and utilization of natural resources; public utilities
 (3) Grandfather Rule- the nationality of corporation engaged in nationalized
activities is determined by looking also at the nationality of the second or subsequent tier of
ownership (investing corporations)
- the control and grandfather rule are not incompatible tests.
They can in fact be used cumulatively to determine the nationality of corporations engaged in
nationalized activities.
- if the subject corporation’s Filipino equity falls below the threshold
60%, then such corporation is considered automatically foreign-owned.

(4) Domiciliary Test- determined by the prinicipal place of business of the

corporation.

2.10 PARENT- SUBSIDIARY RELATIONSHIP

- Subsidiary is a corporation wherein more than 50% of the voting
stock is owned or controlled directly or indirectly by another corporation called the parent
corporation.

Section 3. Classes of corporations. – Corporations formed or organized under this

Code may be stock or non-stock corporations. Corporations which have capital
stock divided into shares and are authorized to distribute to the holders of such
shares dividends or allotments of the surplus profits on the basis of the shares held
are stock corporations. All other corporations are non-stock corporations.

Section 4. Corporations created by special laws or charters. – Corporations created

by special laws or charters shall be governed primarily by the provisions of the
special law or charter creating them or applicable to them, supplemented by the
provisions of this Code, insofar as they are applicable.

(1) As to functions
(a) Public Corporation- organized for the government of a portion of a State (like
cities and municipalities) for the serving general good and welfare.
(b) Private Corporation- formed for some private purpose or benefit.
(c) Quasi- Public Corporation- private businesses affected with public interest

(2) As to number of components

(a) Aggregate Corporation- consisting of more than one member
(b) Corporation Sole- consisting of only one member. Example: Corporation Sole

(3) As to manner of creation

(a) Corporation created by special law- Congress enacted a special law. It must be
a government owned and controlled corporation.
(b) Corporation created under general law
(c) Corporation by prescription- a corporation that was not formally organized as
such but has been duly recognized by immemorial usage as a corporation, with rights and duties
enforceable under the law.

(4) As to legal status

(a) De jure corporation- organized in accordance with the requirements of law
(b) De facto corporation- there is a flaw in its incorporation but there is colorable
compliance with the requirements
 (c) Corporation by estoppel- a group of persons which holds itself out as a
corporation and enters into a contract with a third person on the strength if such appearance
cannot be permitted to deny its existence in an action under the said contract

(5) As to existence of stocks

(a) Stock corporation- a corporation with capital stock divided into shares and is
authorized to distribute to its holders dividends or allotments of surplus profits on the basis of the
shares held.
(b) Non-stock corporation- does not issue stocks and does not distribute dividend to
their members.

(6) As to laws of incorporation

(a) Domestic corporation- formed, organized or existing under Philippine laws.
(b) Foreign corporation- formed, organized or existing under any laws other than
those of the Philippines and whose laws allow Filipino citizens and corporations to do business in
its own country or state.

(7) Special Types

(a) Close Corporation- a corporation whose articles of incorporation provide that: (a)
all the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record
by not more than a specified number of persons, not exceeding twenty (20); (b) all issued stock of
all classes shall be subject to one or more specified restrictions on transfer; (c) the corporation
shall not list in any stock exchange or make any public offering of any of its stock of any class
(b) Educational Corporation
(c) Religious Corporation

(8) As to relationship
(a) Subsidiary- a corporation more than 50% of the voting stock is owned or
controlled directly or indirectly by another corporation.
(b) Affiliate- a corporation directly or indirectly is controlled by another corporation.
(c) Parent- a corporation which has control over another corporation

(9) Miscellaneous Classification

(a) Ecclesiastical- composed of spiritual persons for the furtherance of religion
(b) Lay- all corporations other than ecclesiastical corporations
(c) Eleemosynary- charitable corporations
(d) Civil- all except charitable corporations

Section 5. Corporators and incorporators, stockholders and members. –

Corporators are those who compose a corporation, whether as stockholders or as
members. Incorporators are those stockholders or members mentioned in the
articles of incorporation as originally forming and composing the corporation and
who are signatories thereof.

Corporators in a stock corporation are called stockholders or

shareholders. Corporators in a non-stock corporation are called members.

5.1 INCORPORATORS. The incorporators are the stockholders or members mentioned in

the Articles of Incorporation as originally forming and composing the corporation and who are
signatories thereof. There is only one set of incorporators. The incorporators appearing as such in
the Articles of Incorporation will remain to be incorporators up to the termination of the life of the
corporation. The Articles of Incorporation cannot be amended to change the name of the
incorporator because it is considered as an accomplished fact.
 5.2 SHAREHOLDERS. The shareholders are the holders of shares in a corporation with
interest over the management, income and assets of the corporation.

Section 6. Classification of shares. – The shares of stock of stock corporations may

be divided into classes or series of shares, or both, any of which classes or series
of shares may have such rights, privileges or restrictions as may be stated in the
articles of incorporation: Provided, That no share may be deprived of voting rights
except those classified and issued as "preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided, further, That there shall always be a
class or series of shares which have complete voting rights. Any or all of the shares
or series of shares may have a par value or have no par value as may be provided
for in the articles of incorporation: Provided, however, That banks, trust companies,
insurance companies, public utilities, and building and loan associations shall not
be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference
in the distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the articles
of incorporation which are not violative of the provisions of this Code: Provided,
That preferred shares of stock may be issued only with a stated par value. The
board of directors, where authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any series thereof: Provided,
That such terms and conditions shall be effective upon the filing of a certificate
thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid
and non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares without par
value may not be issued for a consideration less than the value of five (P5.00) pesos
per share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall not be
available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled to
vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or
other corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
 Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this Code shall be
deemed to refer only to stocks with voting rights. (5a)

6.1 Reason for Classification of Shares. Classification of shares is allowed under the
Corporation Code so that entrepreneurs who decide to go into business would have a wide latitude
of flexibility and in order to assure that they will be able to raise capital and at the same time run
the corporation in the manner which will be equitable to all investors.

6.2 DOCTRINE OF EQUALITY OF SHARES. All stocks issued by the corporation are
presumed to be equal with the same privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences. This doctrine is actually provided in the fifth paragraph
of Section 6 of the Corporation Code.

6.3 Kinds of Shares

(a) Common Shares- basic class of stock ordinarily and usually issued without
extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. These
shares cannot be deprived of voting rights.
(b) Preferred Shares- entitle the shareholder to some priority on dividends and asset
distribution. Preferred shares can be deprived of the right to vote.
(b.1) Kinds of Preferred Shares:
(b.1.1) Preferred shares as to assets- a share which gives the holder
thereof preference in the distribution of the assets of the corporation in case of liquidation.
(b.1.2) Preferred shares as to dividends- a share the holder of which
is entitled to receive dividends on said share to the extent agreed upon before any dividends at all
are paid to holders of common stock.
(b.1.3) Cumulative- if a dividend is omitted in any year, it must be
made up in a later year before any dividend may be paid on the common in the later year.
(b.1.4) Non- Cumulative- there is no need to make up for undeclared
dividends.
(b.1.5) Participating- entitled to participate with the common shares in
excess distribution.
(b.1.6) Non- Participating- not entitled to participate in excess

(c.1) Convertibility of preferred shares to common shares is allowed as long

as it is stipulated in the articles of incorporation. If not reflected, then an amendment is necessary
before conversion may be done.
(d.1) Holders of preferred shares are not creditors of the corporation that can
compel the latter to give them dividends. The preference only applies once dividends are declared.

(c) Par Value Shares- are those with fixed value stated in the Articles of
Incorporation and the stock certificate. The “par value” is just an arbitrary amount assigned to the
share. It is not the same as the market value and book value.
(d) No Par Value Shares- shares without such arbitrary amount
(d.1) Conditions in issuing no par value shares:
(d.1.1) Shares which are no par value cannot have an issued
price of less than P5.00
(d.1.2) The entire consideration for its issuance constitutes as
capital so that no part of it should be distributed as dividends
(d.1.3) Preferred shares cannot be issue with no par value.
(d.1.4) These shares cannot be issued by Banks, Building
and Loan Associations, Trust Companies, Insurance Companies and Public Utilities.
(d.1.5) The Articles of Incorporation must state the fact that it
issued no par value shares as well as the number of said shares.
 (d.1.6) Once issued, they are deemed fully paid and non-
assessable.

(e) Voting and Non- Voting Shares. Non-voting shares are not totally deprived of the
right to vote. They may still vote on the matters provided in Section 6 paragraph 6 of the
Corporation Code. Only preferred or redeemable shares may be made non-voting shares.
(f) Shares issued to facilitate the requirement of nationalization laws
(g) Escrow Shares- conditional shares
(h) Fractional Shares- shares that are less than one full share
(i) Watered Stocks- original issuance of shares below its par or issued value

Section 7. 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. (n)

Founder’s shares are shares classified as such in the articles of incorporation which
may be given special preference in voting and dividend payments. The exclusive right to vote and
be voted for is subject to the approval of SEC and cannot exceed 5 years from the date of
approval. After the expiration of limitation period, founders’ shares shall have equal rights with the
holders of common shares.

Section 8. Redeemable shares. – Redeemable shares may be issued by the

corporation when expressly so provided in the articles of incorporation. They may
be purchased or taken up by the corporation upon the expiration of a fixed period,
regardless of the existence of unrestricted retained earnings in the books of the
corporation, and upon such other terms and conditions as may be stated in the
articles of incorporation, which terms and conditions must also be stated in the
certificate of stock representing said shares. (n)

8.1 Redeemable shares are shares issued by the corporation (which are expressly so
provided in the articles of incorporation) which said corporation can purchase or take up from their
holders.

8.2 Unrestricted Retained Earnings Not Required. Redemption of redeemable shares can
be made without the need of Unrestricted Retained Earnings. In effect, payment may come from
the capital. However, this is still subject to the condition that after redemption, the corporation will
not become insolvent.

8.3 Mandatory Redemption. The obligation to redeem must be indicated in the Articles of
Incorporation and the Certificates of Stock. All corporations which have issued redeemable shares
with mandatory redemption are required to maintain a “Sinking Fund.”

8.4 Effect of Redemption:

(a) Shares redeemed are considered retired and no longer issuable unless the AOI
provides otherwise. If the shares are retired, the authorized capital stock of the corporation is in
turn reduced.
(b) On the other hand, redeemed shares can become treasury shares if so provided
in the AOI.
Section 9. Treasury shares. – 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.

Treasury shares can be created not only through redemption but also through other modes
of acquisition like purchase, donation and the like. The rights enjoyed by the corporation as the
holder of the treasury shares are restricted. For instance, there is no voting right and the right to
dividends with respect to treasury shares. Finally, the Board of Directors may provide for a
reasonable price for the transfer of treasury shares.
The corporation also has the option to retire the treasury shares. It shall be effected by
decreasing the capital stock in accordance with Section 38 of the Corporation Code.

REFERENCES:

• De Leon, Hector S. The Law on Partnership and private corporations. 2016 ed.
Manila, Philippines: Rex Bookstore

• Aquino, Timoteo B. Philippine Corporate Law Compendium. 2014 ed. Manila,

Philippines: Rex Bookstore

• Sundiang, Jose R. and Aquino, Timoteo B. Reviewer on Commercial Law. 2014 ed.
Manila, Philippines: Rex Bookstore

• UST Golden Notes for Commercial Law. 2014 ed.