A Strong Partner for Sustainable Development

Module in
THC8

Legal Aspect in Tourism and

Hospitality

College of Business and Management

BSHM
 Module No. 2

Hospitality Business

1st Semester AY 2020-2021

Abraham P. Cea, MAM

Instructor I

ii
Table of Contents (Chapter Contents, Page)
Title page ii
Table of Contents iii
Instruction to the User iv
Introduction v
Chapter 1 1
Learning Outcomes 1
Overview 1
Pre-test 2
Lesson 1 4
Exercises/Activities 13
References 15
Student information 16
Vision, Mission and Core Values of WPU 17

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INSTRUCTION TO THE USER

This module would provide you an educational experience while

independently accomplishing the task at your own pace or time. It aims
as well to ensure that learning is unhampered by health and other
challenges. It covers the topic about Legal Aspect in Tourism and
Hospitality.

Reminders in using this module:

1. Keep this material neat and intact.

2. Answer the pretest first to measure what you know and what to be
learned about the topic discussed in this module.
3. Accomplish the activities and exercises as aids and reinforcement
for better understanding of the lessons.
4. Answer the post-test to evaluate your learning.
5. Do not take pictures in any parts of this module nor post it to
social media platforms.
6. Value this module for your own learning by heartily and honestly
answering and doing the exercises and activities. Time and effort
were spent in the preparation in order that learning will still
continue amidst this Covid-19 pandemic.
7. Observe health protocols: wear mask, sanitize and maintain
physical distancing.

Hi! I’m Blue Bee, your WPU Mascot.

Welcome to Western Philippines University!

Shape your dreams with quality learning
experience.

STAY SAFE AND HEALTHY!

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INTRODUCTION

Amidst of the pandemic that we are experiencing education shall

continue in or out of our classroom. The advancement of technology makes
learning accessible in any location at any time.
This module will serve as an alternative learning material to that of
regular classroom teaching and learning delivery. It is designed to cater your
needs in making the most out of the new normal created to reach out you
away from the school vicinity
This material discusses the introduction about law and constitutional
provisions in the hospitality world. The instructor will facilitate and explain
the module to the students to achieve its expected learning outcomes,
activities and to ensure that they will learn amidst this pandemic

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Chapter 1

Title of the Chapter: Hospitality Business

Learning Outcomes

At the end of this chapter, you can:

a) increase level of appreciation on the complexity of business organization in

its dealing with the State, its members and the public;
b) understand the general overview of business organization, particularly on
partnership and corporation, and how these organizations are governed by
Philippine laws and
c) be aware of the social responsibility of these business organizations and
transaction.

Overview

This chapter focuses on law governing partnership and corporation as types

of business organizations. It describes general matters relating to the partnership
form of business organization. Topics include: sole proprietorship, partnership,
corporation, advantages and disadvantages of corporation, classification of
corporation and the distinction between corporators and incorporators.

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Pre-test
Instructions: Choose the letter of the correct answer. Write your answer on separate
sheet of paper.
1. It 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.
a) Partnership
b) Business
c) Corporation
d) Sole proprietorship

2. What is the nature of partnership?

a) Consensual
b) Mutual
c) Fiduciary
d) Symbiotic

3. Which of the following is the principle in partnership wherein a person has

the right to choose the person or persons he wants to become his partners?
a. Succession
b. Delectus
personae
c. Comity
d. Limited liability

4. What is the composition of a corporation?

a. 5 to 15 persons
b. 2 or more
persons
c. 2 to 5 persons
d. 5 persons only

5. Which of the following refers to the case when a director or officer of the
corporation is presented with business venture which can be profitably
handled by the corporation??
a. Trust fund
b. Business opportunity
c. Piercing
d. All

6. What is the composition of a partnership?

a. 5 to 15 persons
b. 2 or more persons
c. 2 to 5 persons
d. 5 persons only

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7. What kind of corporation consist of five or more persons assume to act as a
corporation, knowing that it has no authority to operate as such. In this case,
all the persons involved will be liable as general partners?
a. Corporation by Estoppel
b. Public corporation
c. Sole Corporation
d. Open Corporation
8. What kind of corporation is formed or organized for the government of a
portion of the state?
a. Private corporation
b. Public corporation
c. Quasi-public
d. Corporation sole
9. Which of the following corporation is organized on one state or country but
extends its corporate business in other territories or countries
a. Private
corporation
b. Multinational
corporation
10. Which of the following is the classification of corporation that are formed or
organized for the government of a portion of a state?
a. Public corporation
b. Private corporation
c. Quasi-public corporation

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Lesson 1. The Law on Partnership and Corporation

A. Learning Outcomes

At the end of this lesson, you can:

a) differentiate the various kinds of partnerships and

corporations and the responsibilities of partners and corporation;
b) identify the requirements in the formation and dissolution of partnership
and corporations and
c) Understand the main differences between partnership and corporation.

B. Time Allotment
3 hours/week

C. Discussion

For any partnership to work, the element of trust is essential and is more
important than the resources or skills that the partners actually bring into
the business. For corporations, Good Governance and transparency is
essential because of public trust. (Professor frank Cavico, Nova
Southeastern University)

Sole proprietorship is a form of business ownership wherein the owner is in

command of his whole business and stands to lose as much as he puts in and even
more to the extent of all his personal holdings. The establishments, operations and
management of this form of business organization is not governed by a special law,
unlike in the case of partnerships and corporations. Meanwhile, the general laws
governing civil obligations and contracts or business and commercial transactions
may be resorted in case of dispute.
Generally, aliens are not restricted or limited to form a single proprietorship
business in the Philippines. However, in the case that they will not be allowed to
form single proprietorship business in a particular industry, he is not barred to
have business venture through other forms of business such as corporation,
partnership or joint venture.
The route for the registration of sole proprietorship business is simple. The
department of trade and Industry through the Bureau of Trade and regulation and
Consumer Protection may issue the registration to the applicant.
Being in control of the entire business, the sole proprietor has unlimited liability
because the assets and property of his business may be proceeded by the creditors.
The law does not make any distinction between the personal affairs of the
proprietor and his business interest. Before the eyes of the law, they are one and the
same; the business is being an extension of his being.

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Law of Partnership
A partnership is association of two or more person to carry on as co-
owners of a business for profit. They bind themselves to contribute money, property
or industry to a common fund, with intention of dividing the profits among
themselves.
Two or more persons may also form a partnership for the exercise of
profession (Article 1767, Civil Code of the Philippines)
Partnership has a juridical personality separate and distinct from that each
of the partners, even in the case of failure to comply with the requirements of
Article 1772 (Article 1768). It is required to operate under a firm name in order to
manifest this juridical personality (Article 1815, CC). With their separate
property, partners (except in limited partnership) are personally liable pro rata for
the debts of the partnership (ART 1813, CC)

Types of Partners
1. General Partners. They have obligation of strict liability to third parties
injured by the partnership. Joint liability or joint and several liability may be
imposed depending upon circumstances.
2. Limited Partners. In this form of partnership, certain limited
partners relinquish their ability to manage the busines in
exchange for limited liability for the partnership’s debt.
3. Silent Partners. Partners who usually provide capital to the business. They
still share in the profits and losses of the business, but they are uninvolved in
the management, and or/ whose association with the business is not publicly
known.
Notes:
1. Money means legal tender;
2. Property pertains to the real or personal acceptable to all the partners;
3. Industry involves human faculties as intellectual or physical traits;
4. Common fund pertains to all contributions made by the partners that will be
pooled together as one capitalization of the partners for the usage, common
benefit and interest of the partners;
5. There is an intent to divide the profit among them.
6. Partnership must be dissolved upon the death of one of its general partners.
7. A partnership is taxed like corporation.
8. Foreigners cannot be a partner in a partnership which owns a land.
9. The word “Limited” or “Ltd” must be added to the partnership name in case
of limited partnership.
10. There is a need for the Philippine Embassy or Consulate to authenticate the
documents signed outside the Philippines.

Nature of Partnership
Partnership is fiduciary in character. It means that all partners must have
trust and confidence in one another. It is not ideal to organize a partnership with
people whom you do not know or whom you cannot give your complete trust and
confidence.

Delectus Personae
In partnership, a person has the right to choose the person or persons he
wants to become his partner/s, taking into consideration such as sterling qualities
as honesty, integrity, and more importantly are trust and confidence.

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Essential Elements of Partnership
1. Valid and voluntary contract to become partners.
The persons forming the partnership must be capacitated to enter into a
contractual relationship. Likewise, the contracting parties must give their free
and voluntary will to become partners.

2. Contributions of money, property or industry to the common fund, to be

used exclusively for the common interest and benefit of the partnership.
3. It must be an association for profit, with the intention of dividing the profits
among themselves.
4. The partners must be mutual agents of each other. As an agent of his co-
partners, a partner can enter into a contract and bind the partnership,
provided he is acting within the scope of his authority and for the best
interest of the partnership.
5. Lawful purpose
6. Articles of partnership must not be kept secret.
7. Juridical personality, separate and distinct from the individual personality of
each partner. This is acquired by the partnership once it is legally established

Article 1772

Every contract of partnership, having a capital of Php 3,000 or move in

money or property, shall appear in public instrument, which must be recorded in
the Office of SEC.

Failure to comply with the requirements of the preceding paragraph shall

not affect the liability of the partnership and the members thereof to third persons.

Corporation Defined
Under Sec.2 of the Batas Pambansa 68, otherwise known as the Corporation
Code of the Philippines, Corporation was defined as an artificial being created by
operation of law, having the right of succession and powers, attributes and
properties expressly authorized by law or incident to its existence.

Based on the definition provided by law, it can be deduced that a corporate

form of business has the following attributes: it is artificial being; it is created by
operation of law; it has the power of succession; it has the power, attributes and
properties expressly authorized by law or incident thereto.

Be it noted that artificial being pertains to the fiction of law which creates the
person of the corporation. By operation of law, it becomes a being with the
attributes of an individual with full capacity to enter into contractual relations. It is
a legal or juridical person with a personality separate and distinct from its
individual members.

Creature of law on the other hand pertains to the juridical existence of a

corporation which is dependent on the consent or grant of the sovereign. From a
strict legal point of view, a corporation cannot come into being by mere consent of
the parties; there must be a law granting it. Once granted, it forms the primary
franchise of the corporation.

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 It must be given emphasis also that there must be first an underlying
contract among the individuals forming the corporation upon which the state grant
may be conferred.

Another important attribute of a corporate form of business is the right of

succession. This pertains to the capacity for continuous existence despite the death
or replacement of its shareholders or members, for it has a personality separate and
distinct from those who compose it. The strong legal personality of the corporation
is an attribute that has made it most attractive to businessmen when compared to
other media.

Figure 1.2 People are corporation

Advantages of Corporate Form of Business

The following are the advantages of a corporate form of a business:

Strong Legal Personality. The corporation has legal capacity to act and contract
as a distinct unit in its own name. It has continuity of existence. As distinguished
from partnership, it has a strong legal personality having separate and distinct
personality from the members composing it, unaffected by death, resignation, or
insolvency of any of its stock holders or members.

Limited Liability to Investors. One of the advantages of a corporate form of

business organization is the limitation of an investor’s liability to the amount of the
investment. This feature flows from the legal theory that a corporate entity is
separate and distinct from its stock holders

Free Transferability of Units of Investment. In a corporate setting, as a

general rule, the shares of stocks can be transferred without the consent of the other
stockholders. This would assure investors of a ready mechanism to dispose of their
investments when their personal or financial situation may require it and therefore
places more liquidity in the corporate setting and would better encourage irvestors
to channel their investments through corporate vehicles.

Centralized Management. Corporation management is centralized in the board

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of directors. Shareholders are not agents of the corporation, nor can they bind the
corporations. Unlike in the partnership setting, each partner may bind the
partnership even without the knowledge of the other partners. Therefore in its legal
relationship, a corporation presents more stable and efficient system of governance
and dealing a With third parties, since management prerogatives are centralized in
its Board of Directors.

Advantages of a Corporate Form of Business over the Unregistered

Associations

1. It enjoys perpetual succession under its corporate name and in an artificial

form.
2. It has the capacity to take and grant property, and contract obligations.
3. It can sue and be sued in its corporate name as a juridical person.
4. It has the capacity to receive and enjoy common grants of privileges and
immunities.
5. Its stockholders or members generally have no personal liability beyond the
value of their shares.

Disadvantages of Corporate Form

1. Complicated and costly formation and maintenance

2. Lack of personal element
3. Abuse of corporate management
4. Limited liability hits innocent victims
5. Double taxation

Distinction between Corporation and Sole Proprietorship

In corporation, the control belongs to the Board of Directors. There is also a

limited liability on the part or shareholders. On the contrary, the owner in the sole
proprietorship is in command of the whole business and stands to lose as much as
he puts in and even more to the extent of all his personal holdings.

Distinction between Corporation and Partnership as to Legal Capacity

Corporation has a stronger legal personality, enabling it to continue despite the

death, insolvency or withdrawal of any of its stockholders or members.

Partnership, the withdrawal, death or insolvency of any partner5 would

automatically bring about the dissolution of partnership.

Limited liability is the main feature in a corporate setting whereas partners are
liable personally for partnership deb ts not only to what they have invested in the
partnership but even as to their other properties.

Generally, every partner is an agent of the partnership, and by this sole act, he can
bind the partnership.

Nationality of Corporation

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 There are two tests to identify the nationality of a corporation. These are the
Place of Incorporation Test and the Control Test.

The Place of Incorporation Test is the principal doctrine on the test of

nationality of corporation in the Philippines. It adheres to the belief that a
corporation is a nationality test of the country under whose laws it has been
organized and registered. On the other hand, the Control Test adheres that the
nationality of the corporation is determined by the nationality of the majority of the
stockholders on whom the control is vested.

Classifications of Corporation in Relation to the State

Corporation in relation to the state may be classified into the following:

Public, Private, Quasi Public Corporation.

Public Corporations are those formed or organized for the government of a

portion of the State. Example: Municipality for government functions

Private Corporations are those formed for some private purpose, benefit or end.
Examples: ABS CBN Corporation, Jollibee Food Corporation, San Miguel
Corporation

Quasi-Public Corporation is a cross between private corporations and public

corporation. Examples: School districts, water districts, PLDT

Classification of Corporation as to the Place of Incorporation

Corporation may be classified as to the place where they were incorporated,

to wit: Domestic Corporation and Foreign Corporation.

Domestic Corporation. This kind of corporation obtained personality through

incorporation under the Philippine laws.

Foreign Corporation is licensed by SEC to do business in the Philippines under

the principle of RECIPROCI'I'Y, after securing a certificate of authority from the
Board of Investments under E0 226 0h the Omnibus Election Code and after
complying with the conditions fob issuance of the license or application forms,
structural organizations and capitalization. The reasons for this are: a. to place
them on equality with domestic corporations; b. to subject them to inspection so
that their condition May be known; c. to protect the residents of the state doing
business with them by subjecting them to the courts of the state.

Classifications of Corporation as to Stock

Stock Corporation. Private corporations which have capital stock divided into
shares and the stockholders are entitled to their shares of dividends or allotment of
the corporate surplus profits based on their stockholdings or subscriptions.

Non-stock Corporation. These are corporations which do not issue stocks and
are composed of members, not stockholders. They may be civic, charitable,

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religious or professional organizations.

Other Kinds of Corporation

De Jure Corporation. It is a corporation which complied with the requirements

of the law.

De Facto Corporation. Those who failed to comply with one or two legal
requirements of the law.

Corporation Sole. It is composed of one member or corporator and generally

applies to religious denominations. For example: The Corporation sole of the
Catholic Church is Cardinal Sin and his successor.

Close Corporation. This is usually owned and managed by a family! All the
outstanding stocks are owned and managed by a family; Stock? are not open for
public subscription.

Open Corporation. All the members or corporations exercise their right to vote
to elect the directors and other officers of the corporation; the stocks are open for
public subscription.

Eleemosynary Corporation. This corporation is established for the charitable

purposes.

Ecclesiastical Corporation. This corporation is established for religious

purposes.

Lay Corporation. This corporation is established for any purpose other than
religion.

Corporation Aggregate. This is composed of one member or corporator.

Corporation by Estoppel. This is a kind of corporation wherein members

assume to act as corporation despite the knowledge of the nonexistence of
corporate personality. In this case all the persons involved will be liable as general
partners.

Multi National Corporation. A corporation organized in one state or country

but extends its corporate business in other territories or countries.

Powers of Corporation
The powers of corporation can either be expressed or implied. The power is
expressed if the corporation can perform functions as stipulated in the By Laws,
Corporation Code and such other statutes pertinent to the corporations. In implied
power, the power is inherently necessary in the exercise of its corporate function in
the pursuit of its corporate existence.
Different Corporation Doctrines

Doctrine of Piercing the Veil of Corporate Existence. It is a general

10
principle under the law that a corporation has a personality which is separate and
distinct from its members. However, the said principle would not apply to some
instances as held in the case of San Juan Structural and Steel Fabricators, Inc. 'v.
Court of Appeals. Corporate Law recognizes the value of creditors. In cases where
the corporation uses the fiction of corporate personality as a means of perpetuating
a fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of a monopoly or generally
the perpetration of knavery or crime, then the ”veil which the law covers and
isolates the corporation from the members of stockholders who compose it will be
lifted to allow for its consideration merely as an aggregation of individuals.

In several cases, the doctrine of piercing the veil of corporate fiction has been
applied by the Supreme Court in the following cases: when the corporate entity is
used to commit fraud or to justify wrong, or to defend crime; when the corporate
entity is used to defeat public convenience, or a mere farce, since the corporation is
merely the alter ego, business conduit or instrumentality of a person or another
entity ‘ and when the piercing of the corporate fiction is necessary to achieve justice
or equity.

Doctrine of Business Opportunity. This doctrine refers to the Case when a

director or officer of the corporation is presented with a business venture which can
be profitably handled by the corporation. He must give that business opportunity to
the corporation; he shall be held liable to refund to the corporation whatever profits
and benefits he may have derived from such business opportunity.

Trust Fund Doctrine. When the directors of the solvent or insolvent corporation
distribute all corporate assets to the stockholders without reserving any assets for
payment of corporate debts and liabilities. The directors or officers, together with
the stockholders who received the assets are considered trustees and the
corporation and creditors can recover from the stockholders. Such corporate assets
they received shall be sold at public auction for the settlement of corporate
liabilities.

Distinction between Corporators and Incorporators

Figure 1.2 The distinction between corporation and incorporation

Corporators. These are the total number or persons Who compose the corporation
after its formation which include the incorporators, the stockholders and / or
members.

Incorporators, stock or nonstock. They must be natural persons. A juridical person

cannot be an incorporator. The law provides that the incorporators must be at least

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five (5) but not more than (15).

Registration Requirements in Establishing Business Pertinent to the

Hospitality Industry
Promotion of the different tourist destinations in the country may be well
settled through the opening of various businesses well sup’ ported by the respective
Local Government Units and in coordination with the Department of Tourism. In
making the said mandate possible/ the regulatory power of the State, through
licensing of businesses may be used. In this regard, the public in general (local and
foreign tourists) may be assured of quality service from the hospitality industry,
and in effect, an additive of tourist attractions.

Licensing is very important in the operation of any business in the country.

License is mandated to be displayed in a conspicuous place within the vicinity of
any business establishment, guaranteeing the public that the business wherein they
are the clientele is not nuisance, and is legitimately operated.

Meanwhile, if you would decide to establish partnerships and corporations

as a form of business in the near future, it is necessary that you register with the
SEC or the Securities and Exchange Commission. However, if you would like to
establish a single proprietorship or you want to have the control of everything in
your business, the registration is through the DTI or the Department of Trade and
Industry.
If you would like to avail of the incentives provided under Executive Order
226 or the Omnibus Investment Code, registration with the Board of Investments
(301) is a must.

Registration is also needed if you would like to avail of the incentives of the
following Investment Promotion Agencies, to wit:

PEZA (Philippine Economic Zone Authority), SBMA (Subic Bay

Metropolitan Authority), CDC (Clark Development Corporation), Cagayan
Economic Zone Authority, Phividec Industrial Authority, Zamboanga Economic
Zone Authority
The registration of foreign investments for purposes of capital repatriation
and profit remittances is under the BSP or the Bangko Sentral ng Pilipinas.

Before a business can be fully operated, it is a must that they secure the
following: TIN (Tax Identification Number) under the Bureau of Internal Revenue;
Locational clearance/ business permit for firms in Metro Manila under the MMDA
or Metro Manila Development Authority; employer’s SSS number under the Social
Security System membership in the government health care benefits system
through the Philippine Health Insurance Corporation; electric services connection
through the MERALCO or Manila Electric Co; water services through the Maynilad
Water Company and/ or Manila Water Company for firms locating in Metro
Manila, LWUA or Local Water Utilities Administration for firms outside Metro
Manila; telephone services connection.

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 D. Activities/Exercise

Differentiate the following:

1. Partnership from Corporation

2. Open Corporation from Close Corporation
3. Stock Corporation from Non-Stock Corporation
4. Corporators from Incorporators

This will be the rubrics in giving points in your work task.

Features/Score 1 (0%) 3 (50%) 5 (100%)
Content/Ideas, 50% No Identified the Presented
answer topic and important and
provided accurate
additional information
information
Quality of writing No The information The idea
15% answer presented are presented is
somewhat organized and
organized and highly
clear informative
Understanding/Application No There is The
15% answer understanding understanding
of course about the coarse
theories and theories and
ideas applied to ideas applied to
analysis of case analysis of case
situations situations is
deep
Grammar and usage No Multiple Virtually no
20% answer spelling and spelling or
grammatical grammatical
errors errors

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E. Post test
Instructions: Write T if the sentence is true, F if the sentence is false. Write your
answer on the space provided before each number.

_______ 1) De jure corporation is an invalid corporation for its failure to

comply with the requirements of the law.
_______ 2) Corporator is not the same as incorporator
_______ 3) Stock Corporation is a profit-oriented corporation.
_______ 4) There is Corporation by Estoppel when five or more persons
assume to act as an authority to operate as such. In this case, all
the persons involved will be liable as general partners.
_______ 5) A sole Corporation is a family owned and managed corporation.
_______ 6) San Miguel Corporation is an example of a Multinational
Corporation.
_______ 7) Control Test is not the principal test recognized in the
Philippines in order to determine the nationality of corporation.
_______ 8) Corporation has no right of succession
_______ 9) The artificial being in the definition of corporation is
created by agreement of the contracting parties.
_______ 10) The nature of corporation is fiduciary.
_______ 11) The power of the corporation is implied if it can perform
functions as stipulated in the By Laws, Corporation Code and
such other statutes pertinent to the corporations.
________ 12) PLDT is an example of quasi-public corporation
________ 13) Public corporation is a cross between private corporations and
quasi-public corporations.
________ 14) incorporators are the total number of persons who compose the
corporation after its formation.
________ 15) DTI registration is a must in partnerships and corporations.

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 References:

1. Cabulay, Danny A. and Aldeguer, Christine P., Philippine Tourism Law.

A Comprehensive Guide to studying laws Relevant to the Philippine
Tourism Industry.2nd Edition.2014, Rex Books store, Manila,
Philippines.
2. Maranan Mario H., DPA, LIB, Maranan, Jovid M., DBA, Caluza
Christine N., MBAPertinent Laws on Hospitality Management (Tourism
Laws).2012, Mindshapers Co.,INC. Intramurus, Manila Philippines.
3. Cournoyer, M., Marshall, A., & Morris, K., Clifton Park, Hotel, Restaurant
and Travel Law, 7th Edition (2008)., NY: Thompson Delmar Learning. ISBN

Disclaimer: This module is prepared for instructional purposes only based on

the course syllabus. The teacher does not claim ownership of this module but
patterned the ideas from different authors.

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 Congratulations for completing this
module!

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WPU-QSF-ACAD-82A Rev.
WPU-QSF-ACAD-82A Rev. 00
00 (09.15.20)
(09.15.20)
 Vision 2020
WPU: the leading knowledge center for sustainable
development of West Philippines and beyond.

Mission
WPU commits to develop quality human resource and green
technologies for a dynamic economy and sustainable
development through relevant instruction,
research and extension services.

Core Values (3CT)

Culture of Excellence
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WPU-QSF-ACAD-82A Rev.
WPU-QSF-ACAD-82A Rev. 00
00 (09.15.20)
(09.15.20)