CORPORATION LAW September 21, 2021

Group 3: Atty. Mary Grace R. Hicban

Estonido | Lecaroz
Manlapig | Marques
Orlino | Panlaqui
Piñera | Ramiento
Salut | Torralba
Villaranda

Corporation as Compared to Other Business Media

A. Sole Proprietorships

I. Definition
- A business structure owned by an individual who has full control/authority
of its own and owns all the assets, personally owes and answers all
liabilities or suffers all losses but enjoys all the profits to the exclusion of
others (Philippine Board of Investments (2018)1).
- The law merely recognizes the existence of a sole proprietorship as a form
of business organization conducted for profit by a single individual and
requires its proprietor or owner to secure licenses and permits, register its
business name, and pay taxes to the national government court (Rabuya,
The Law on Persons and Family Relations (2017)).
2

II. Comparison Between Sole Proprietorship and Corporation

As to Juridical Personality

A sole proprietorship is neither a natural person or a juridical person. It does not

possess a juridical personality separate and distinct from the personality of the
owner of the enterprise. The law does not vest a separate legal personality on
the sole proprietorship or empower it to file or defend an action in court (Rabuya,
The Law on Persons and Family Relations (2017)). However, in a corporation,
one of its attributes is that it is an artificial being, separate and distinct from each
of the members composing it. It may acquire and possess property of all kinds,
as well as incur obligations and bring civil or criminal actions (Art. 46, NCC).

1
Philippine Board of Investments (2018)
2
The Law on Persons and Family Relations (2017) by Elmer Rabuya
3

As to Liability

In a corporation, the law grants it a juridical personality that is separate and

distinct from that of each shareholder. One advantage of a corporate business
organization is the limitation of an investor’s liability to the amount of the
investment, which flows from the legal theory that a corporate entity is separate
and distinct from its stockholders (San Juan Structural and Steel Fabricators, Inc.
v. Court of Appeals, 296 SCRA 631, 645 (1998)). However, in a sole
proprietorship, the law does not grant it a juridical personality hence not separate
and distinct from the owner of the business making the owner shoulder unlimited
liability in the sense that creditors of his business may proceed not only against
the assets and property of his business but after his own personal assets and
property.

As to Control and Ownership

In a corporation, it is the board of directors who possess all the powers and
control the corporation and the shareholders who possess ownership of the
corporation. It is the board of directors or trustees that shall exercise the corporate
powers, conduct all business, and control all properties of the corporation (Sec. 22,
R.A. 11232)4. In a sole proprietorship, it is the owner who has ownership and
control over the business.

As to Governing Law

A corporation is governed by the Revised Corporation Code of the Philippines

while a sole proprietor, not encumbered by the strict regulatory laws, is
governed/regulated by the Bureau of Trade Regulation and Consumer Protection
of the Department of Trade and Industry (DTI).

ALPS TRANSPORTATION AND/OR ALFREDO E. PEREZ v. ELPIDIO M.

RODRIGUEZ, G. R. No. 186732, June 13, 2013

3
Article 46 of the New Civil Code of The Philippines

4
San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998 )
FACTS

Elpidio Rodriguez was previously employed as a bus conductor. He entered into

an employment contract with Contact Tours Manpower and was assigned to work with
bus company ALPS Transportation, a sole proprietorship owned by Alfredo Perez.
During the course of his employment, Rodriguez was found to have committed
irregularities in April and October 2003, and January 2005. The latest irregularity report
dated January 26, 2005 stated that he had collected bus fares without issuing
corresponding tickets to passengers, annotated with the word “Terminate.” 5

Rodriguez alleged that he was dismissed from his employment on January 27,
2005, or the day after the issuance of the lastest irregularity report. However, no written
notice of termination was given to and received by him. When he went back to the bus
company a number of times, the latter refused to readmit him.

In response, petitioners stated that they did not have any prerogative to dismiss
Rodriguez, as he was not their employee, but of Contact Tours.

The labor arbiter dismissed the illegal dismissal complaint for lack of merit. No
evidence had been adduced to support the contention of Rodriguez that the latter had
been terminated on January 27, 2005. The labor arbiter concluded that Rodriguez had
not been illegally dismissed, and was actually an employee of Contact Tours, and not of
ALPS Transportation.

The NLRC set aside the decision of the labor arbiter and held that in case the
parties fail to prove either abandonment or termination, the employer should order the
employee to report back for work, accept the latter, and reinstate the employee to the
latter’s former position. However, an award for backwages is not warranted, as the
parties must bear the burden of their own loss.

The CA concluded that the NLRC acted with grave abuse of discretion in
rendering the assailed decision. The appellate court ruled that it is the employer who
bears the burden of proving that the employee was not illegally dismissed. The CA
found that ALPS Transportation failed to present convincing evidence that Rodriguez
had indeed collected bus fares without issuing corresponding tickets to passengers.
Before the illegal dismissal complaint was filed, more than six months had lapsed since
the respondent was last given a bus assignment. Thus, the CA concluded that the
argument of the bus company was only an excuse to cover up the latter’s mistake in

5
Section 22 of Republic Act 11232
terminating him without due process of law. The CA then ordered ALPS Transportation
to reinstate Rodriguez and to pay him full backwages.

ISSUES

1. Whether respondent Rodriguez was validly dismissed

2. Assuming that respondent was illegally dismissed, whether ALPS Transportation
and/or Alfredo Perez is liable for the dismissal

HELD

1. No.

For a dismissal to be valid, the rule is that the employer must comply with both
substantive and procedural due process requirements. Substantive due process
requires that the dismissal must be pursuant to either a just or an authorized cause
under the provisions of Labor Code. Procedural due process, on the other hand,
mandates that the employer must observe the twin requirements of notice and hearing
before a dismissal can be affected.

A mere accusation of wrongdoing or a mere pronouncement of lack of

confidence is not sufficient cause for a valid dismissal of an employee. Thus, the failure
of the petitioners to convincingly show that the respondent misappropriated the bus
fares renders the dismissal to be without a valid cause. If doubt exists between the
evidence presented by the employer and the employee, the scales of justice must be
tilted in favor of the latter.

On the issue of procedural due process, both parties are in agreement that
Rodriguez was not given a written notice specifying the grounds for his termination and
giving him a reasonable opportunity to explain his side; a hearing which would have
given him the opportunity to respond to the charge and present evidence in his favor;
and a written notice of termination indicating that after considering all the
circumstances, management has concluded that his dismissal is warranted.

2. Yes.

Since ALPS Transportation is a sole proprietorship owned by Alfredo Perez, it is

he who must be held liable for the payment of backwages to Rodriguez. A sole
proprietorship does not possess a juridical personality separate and distinct from that of
the owner of the enterprise. Thus, the owner has unlimited personal liability for all the
debts and obligations of the business, and it is against him that a decision for illegal
dismissal is to be enforced.

B. Partnerships and Other Associations

I. Definition

Partnerships - A contract where 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).
“A partnership is a contract of two or more competent persons to place their
money, effects, labor and skill, or some or all of them, in lawful commerce or business
and to divide the profits and bear the losses in certain proportions.” (40 Am. Jur. 126,
474; 68 C.J.S. 398.)

II. Comparison Between Corporations and Partnerships

According to Article 1768, A partnership has a juridical personality separate and

distinct from that of each partner, even in case of failure to comply with the requirements
of Art. 1772, first paragraph.
The most important distinction between a partnership and a corporation is their
legal capacities. A corporation has a stronger legal capacity. Enabling it to continue
despite death, insolvency, or withdrawal of any of its stockholders or members. In
partnerships, the death of a partner can result in the dissolution of the partnership (Art.
1830[5]).
Limited Liability is a main feature in a corporate setting, whereas partners are
liable personally for partnership debts. Generally, every partner is an agent of the
partnership and by his sole act, he can bind the partnership whereas in a corporation,
only the Board of Directors or its agents can bind the corporation.

CORPORATION PARTNERSHIP

1. Creation

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

2. Number of Incorporators
Generally there must be at least 5 May be formed by 2 or more natural
incorporators persons

3. Powers

Can exercise only such powers and Can do anything by agreement of the
functions expressly granted to it by law parties provided only that it is not contrary
and those necessary or incident to its to law, morals, good customs, public
existence policy and public order

4. Commencement of Juridical Personality

Acquires juridical personality from the Acquires juridical personality from the
date of issuance of the certificate of moment of execution of the contract of
incorporation by the Securities and partnership
Exchange Commission

5. Management

Unless validly delegated expressly or In absence of agreement to the contrary,

impliedly, must transact its business any one of the partners may validly bind
through the board of directors the partnership

6. Right of Succession

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
Based on mutual trust and confidence
such that the death, incapacity,
insolvency, civil interdiction or more
withdrawal of one partner would result in
its dissolution

8. Transferability of Interest

Any stockholder can ordinarily transfer, A partner cannot transfer his rights or
sell or assign his shares of stock without interest in the partnership so as to make
the consent of the other stockholders or the transferee a partner without the
members consent of the other partners

9. Extent of Liability to Third Persons

The liability of the stockholders or All partners are liable pro rata with all
members in is limited to the extent of their their property and after all the partnership
subscription or their promised contribution property has been exhausted, for all
partnership liability

10. Term of Existence

 Term of existence is limited only to 50 May exist for an indefinite period
years unless extended

11. Dissolution

Consent of the State is necessary for its Partners may dissolve at will
dissolution

12. Governing Law

Governed by the Corporation Code Governed by the Civil Code

III. Other Associations Under Art. 1775

Under Art. 1775, Associations and societies, whose articles are kept secret
among the members, and wherein any one of the members may contract in his own
name with third persons, shall have no juridical personality, and shall be governed by
the provisions relating to co-ownership. An example of an association that fails to
comply with the statutory requirement in partnerships under Art. 1775 are
co-ownerships.

IV. Comparison Between a Corporation and Other Associations Under Art.

1775

Corporations have a strong juridical personality, which means that it has a right of
succession, as opposed to other associations under Article 1775 which states that,
associations whose articles or agreements are kept secret among the members (i.e.,
known to some members only but withheld from the rest) and wherein anyone of them
may contract in his own name with third persons are, by this article, deprived of juridical
personality for evidently such.
Does a defective corporation can at least result in a partnership? The answer
depends on whether or not there is a clear intent to participate in the management of
the business affairs on the part of the investor. Parties who intend to participate or have
actually participated in the business affairs of the proposed corporation would be
considered as partners under a de facto partnership. On the other hand, parties who
took no part notwithstanding their subscriptions do not become partners with other
subscribers. (Pioneer Insurance v. CA, G.R. No. 84197, July 28, 1989)
 C. Joint Ventures:

I. Definition

A Joint Venture: Is an association of persons or companies jointly undertaking

some commercial enterprise; generally, all contribute assets and share risks which
requires a community of interest in the performance of the subject matter, a right to
direct and govern the policy in connection therewith, and a duty, which may be altered
by agreement to share both in profit and losses.

II. Comparison between a Joint Venture and a Corporation:

A. As to the formation

Under the Philippine setting, a corporation is formed by operations of the law. While joint
ventures may be formed through any of the following schemes, among others: a)
incorporation of a new company; b) entering into a contractual joint ventures; or c)
acquiring shares in an existing joint ventures entity.

B. Laws/codes regulating it

A joint venture is regulated by the Joint Venture Guidelines (JV Guidelines) published by
Philippine Competition Commission (PCC). However, before the said guidelines, joint
ventures were regulated by general contract laws and partnership laws to determine the
rights and liabilities of the parties. (Aurbach v Sanitary Wares Manufacturing
Corporation, GR No. 75875, 15 December 1989)

Kilosbayan v. Guingona 232 SCRA (1994):

Facts:

Philippine Charity Sweepstakes Office (PCSO), pursuant to Section 1 of its

charter, (R.A. No. 1169, as amended by B.P. Blg. 42), has the authority to hold and
conduct "charity sweepstakes races, lotteries and other similar activities." The PCSO
decided to establish an on- line lottery system for the purpose of increasing its revenue
base and diversifying its sources of funds.
 The Berjaya Group Berhad- a multinational company became interested in
offering its services and resources to PCSO. With some Filipino investors, they created
the Philippine Gaming Management Corporation (PGMC) and entered into a contract of
lease with PCSO; which was intended to be the medium through which the technical
and management services required for the project would be offered and delivered to
PCSO.

On 4 November 1993, petitioner (KILOSBAYAN) sent an open letter to the

President opposing the setting up to the on-line lottery system because:

1. PCSO cannot validly enter into the assailed Contract of Lease with the PGMC
because it is an arrangement wherein the PCSO would hold and conduct the on-line
lottery system in "collaboration" or "association" with the PGMC.
This is in violation of Section 1(B) of R.A. No. 1169, as amended by B.P. Blg. 42,
which prohibits the PCSO from holding and conducting charity sweepstakes, races,
lotteries, and other similar activities "in collaboration, association or joint venture with
any person, association, company or entity, foreign or domestic."

Petitioner also added that:

2. PGMC does not meet the nationality requirement because it is 75% foreign
owned (Berjaya Group Berhad)

3. The Online-Lottery system is a telecommunications network. Under the law

(Act No. 3846), a franchise is needed to be granted by the Congress before any person
may be allowed to set up such;

4. PGMC’s articles of incorporation, as well as the Foreign Investments Act (R.A.

No. 7042) does not allow it to install, establish and operate the on-line lotto and
telecommunications systems.

PCSO alleged that PGMC is not a collaborator but merely a contractor for a piece of
work,( i.e., the building of the network;) and that PGMC is a mere lessor of the network
it will build as evidenced by the nature of the contract agreed upon, (i.e., Contract of
Lease.)

Issue:
Whether the Contract of Lease executed by respondent PCSO and PGMC is contrary to
law and invalid.
Held:

Yes.

A careful analysis of the provisions of the contracts of the PCSO and PGMC
disclose that the contract is not in reality a contract of lease under which the PGMC is
merely an independent contractor for a piece of work, but one where the statutorily
proscribed collaboration or association, in the least, or joint venture, at the most, exists
between the contracting parties.

Collaboration is defined as the acts of working together in a joint project.

Association means the act of a number of persons in uniting together for some special
purpose or business.

Joint venture is defined as an association of persons or companies jointly

undertaking some commercial enterprise; generally all contribute assets and
share risks. It requires a community of interest in the performance of the subject
matter, a right to direct and govern the policy in connection therewith, and duty, which
may be altered by agreement to share both in profit and losses.

The only thing PCSO has is its franchise or authority to operate the on-line lottery
system; with the rest, including the risks of the business, being borne by PGMC.
Undoubtedly, then, the Berjaya Group Berhad knew all along that in connection with an
on-line lottery system, the PCSO had nothing but its franchise. However, from the very
inception, the PCSO and the PGMC mutually understood that any arrangement
between them would necessarily leave to the PGMC the technical, operations,
and management aspects of the on-line lottery system while the PCSO would,
primarily, provide the franchise.

The Contract of Lease is not what it purports to be. Its denomination as such is a
crafty device, carefully conceived, to provide a built-in defense in the event that the
agreement is questioned as violative of the exception in Section 1 (B) of the PCSO’s
charter. The acuity or skill of its draftsmen to accomplish that purpose easily manifests
itself in the Contract of Lease. Yet, woven therein are provisions which negate its title
and betray the true intention of the parties to be in or to have a joint venture for a period
of eight years in the operation and maintenance of the on-line lottery system.
 So in Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42, is indisputably
clear with respect to its franchise or privilege "to hold and conduct charity sweepstakes
races, lotteries and other similar activities." Meaning, the PCSO cannot exercise it "in
collaboration, association or joint venture" with any other party. Thus, the challenged
Contract of Lease violates the exception provided for in paragraph B, Section 1 of R.A.
No. 1169, as amended by B.P. Blg. 42, and is, therefore, invalid for being contrary to
law.

D. Cooperatives

I. Definition under Article 3 of R.A. 6938

A cooperative is a duly registered association of persons, with a common

bond of interest, who have voluntarily joined together to achieve a lawful
common social or economic end, making equitable contributions to the capital
required and accepting a fair share of the risks and benefits of the undertaking in
accordance with universally accepted cooperative principles.6

II. Juridical Personality and Limited Liability Feature

A cooperative, like an ordinary corporation, has a juridical personality

separate and distinct from its members, and has limited liability features.7

III. Principle of Democratic Control

Unlike ordinary corporations, cooperatives are governed by principles of

democratic control where the members in primary cooperatives shall have equal
voting rights on a one-member-one-vote principle;8 where the Board of Directors
manages the affairs of the cooperative, but it is the General Assembly of full
membership that exercise all the rights and performs all of the obligations of the
cooperative;9 and are under the supervision and control of the Cooperative
Development of Authority and not the SEC.

IV. Self-help: The Primary Objective of Every Cooperative

6
Article 3 of R.A. 6938 as amended by R.A. 9520, Philippine Cooperative Code
7
Arts. 12 and 13, Philippine Cooperative Code
8
Art. 4(2), Philippine Cooperative Code
9
Arts. 5(3) and 34, Philippine Cooperative Code
 Unlike an ordinary sock corporation which is organized for profit, and a
nonstock corporation which can be organized for any eleemosynary purpose and
no part of the net income is to be distributed to the officers and members thereof,
the primary objective of every cooperative is self-help: “The primary objective of
every cooperative is to help improve the quality of life of its members. Towards
this end, the cooperative shall aim to provide goods and services to its members
and thus enable them to attain increased income and savings, investments,
productivity, and purchasing power and promote among them equitable
distribution of net surplus through maximum utilization of economies of scale,
cost-sharing and risk-sharing; provide optimum social and economic benefits to
its member; teach them efficient ways of doing things in a cooperative manner.”10

COOPERATIVE CORPORATION

Separate and distinct juridical capacity

Limited Liability of investors

Primary Objective is self help to provide Organized for profit

goods and services to its members and thus
enable them to attain increased income and
savings

Governed by principles of democratic Centralized management

control where the members in primary
cooperatives shall have equal voting rights
on a one-member-one-vote-principle

E. Business Trusts

I. Definition of a Business Trust:

10
Art. 7, Philippine Cooperative Code
 - An unincorporated business organization created by a legal document, a
declaration of trust, and used in place of a corporation or partnership for
transaction of various kinds of business with limited liability. (Legal Dictionary).

- When certain persons entrust their property or money to others who will
manage the same for the former, a business trust is created. The investors
are called cestui que trust; the managers are the trustees.

- In a true business trust, the cestui que trust (beneficiaries) does not at all
participate in the management; hence, they are exempted from personal
liability, in that they can be bound only to the extent of their contribution.

II. Comparison between a Business Trust and a Corporation:

As to creation

- According to RA 11232 of the Revised Corporation Code, a corporation is

created by operation of law. A corporation is not created by mere
agreement of the parties. A corporation is a person created by fiction of
law and given a distinct and separate personality from its members.

- While a business trust is simply a deed of trust which is easier and less
expensive to constitute for it is not bound by any legal requirements. A
business trust is mainly governed by contractual doctrines and common
law principles on trust.

As to Juridical Personality

- Based on RA 11232, one of the four attributes of a corporation is it has a

strong juridical personality. A corporation has the right of succession. A
corporation has a separate and distinct personality from its members. A
business trust on the other hand does not have a separate juridical
personality.

As to what governs them

- Under the New Civil Code, Art 1442, The principles of the general law of
trusts, insofar as they are not in conflict with this Code, the Code of
commerce, the Rules of Court and Special Laws are hereby adopted.

- While a Corporation under the New Civil Code, Art 45, Juridical persons
mentioned in Nos. 1 and 2 of the preceding articles are governed by the
laws creating or recognizing them. (Those governed are other
corporations, institutions and entities for public interest or purpose,
created by law, their personality begins as soon as they have been
constituted according to law. Private corporations are regulated by laws of
general application on the subject.