Business Organization

Coblaw2 Day 1
Common Type of Business Organizations
1. Sole Proprietorship – A form of business organization with
only one proprietary owner; a single individual who
conducts business under his own name or a business
name (Aquino)
2. Joint Accounts (cuentas en participation) – A business
arrangement whereby merchants may interest
themselves in the transactions of other merchants,
contributing thereto the part of the capital they may
agree upon, and participating in the favorable or
unfavorable results thereof in the proportion they may
determine (Art. 239 Code of Commerce).
3. Partnership – a business arrangement 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 NCC).
4. Joint Venture – an association of persons or companies
jointly undertaking some commercial enterprise;
generally all contribute assets and shares risks. It requires
a community 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 profit and losses (Kilosbayan,
Inc. vs. Guingona).
5. Cooperative – 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 benefits of the undertaking in
accordance with universally accepted cooperative
principles (RA No. 6938, as amended by RA No. 9520).
6. Business Trust – a business arrangement whereby one or
more persons, called trustors, convey their property or
business to another person, called a trustee, so that the
latter may use such properties, or manage such
business, for the benefit of the trustor or a third person,
called the cesui que trust (Art. 1440 NCC).
7. Syndicate – a group of people who come together to
work for a common aim; this unincorporated business
association is often encountered among insurance
companies who may be underwriting a large risk or
banks that are lending a huge amount (Aquino).
9. Corporation – an artificial being created by operation of
law, having the right of succession and the powers,
attributes, and properties expressly authorized by law or
incidental to its existence (Sec. 2 RCC).
Partnership vs. Corporation
As to Governing Law
´ Partnership is governed by the New Civil Code (NCC).
´ Corporation is governed by the Revised Corporation
Code (RCC).
Partnership vs. Corporation
As to Creation
´ Partnership is created by mere agreement of the parties
(Art. 1784 NCC).
´ Corporation is created by operation of law (Sec. 2 RCC).
Partnership vs. Corporation
As to Numbers of Organizers
´ Partnership may be organized by at least two persons
(Art. 1767 NCC).
´ Corporation may be organized by not more than fifteen
(15) persons (Sec. 10 RCC). Also, a single person may
form a corporation called a One Person Corporation
(Sec. 116 RCC).
Partnership vs. Corporation
As to Commencement of Judicial Personality

´ Partnership acquires a separate juridical personality from

the perfection of the contract of partnership (Art. 1768
NCC).
´ Corporation acquires juridical personality from the date
the SEC issues the certificate of incorporation under the
official seal (Sec. 18 RCC).
Partnership vs. Corporation
As to Firm Name

´ The partnership shall operate under a firm name which

may or may not include the name of one or more of
partners, provided a person whose name appears on
the firm name is presumed to be a general partner (Art.
1815 NCC).
´ Limited partnership is required by law to add the word
“Ltd.” to its name (Art. 1844 NCC).
Partnership vs. Corporation
As to Firm Name

´ No corporate name shall be allowed by the Commission

if it is not distinguished from the already reserved or
registered for the use of another corporation, or if such
name is already protected by law, or when its use is
contrary to existing law, rules and regulations (Sec. 17
RCC).
´ A One Person Corporation shall indicate the letters “OPC” either
below or at the end of its corporate name
Partnership vs. Corporation
As to Management

´ In a partnership, unless agree upon every partner is an

agent of the partnership (Art. 1803 NCC).
´ In a corporation, unless otherwise provided in this Code,
the board of directors or trustees shall exercise the
corporate powers, conduct all the business, and control
all the properties of the corporation (Sec. 22 RCC).
Partnership vs. Corporation
As to Extent of Liability to Third Persons

´ Partners, except limited partners, are liable pro rate with

all their property for all partnership debts and liabilities
(Art. 1816, 1824, 1848 NCC).
´ Stockholders are liable only to the extent of the shares
subscribed by them [limited liability feature] (Bustos vs.
Millaris Shoes).
Partnership vs. Corporation
As to Transfer of Interest

´ Partner cannot transfer his interest in the partnership so

as to make the transferee a partner without the
unanimous consent of all the existing partner (Art. 1804
NCC).
´ Stockholder has generally the right to transfer his shares
without prior consent of the other stockholders (Sec. 62
RCC).
´ Exception: Non-Stock Corporation and Close Corporation.
Partnership vs. Corporation
As to Term of Existence

´ Partnership may be established for any period of time

stipulated by the partners except that it shall be
dissolved even before such agreed term upon any
cause under Art. 1830 and 1831 (Art. 1785, 1828 NCC).
´ A corporation shall have perpetual existence unless its
articles of incorporation provides otherwise (Sec. 11
RCC).
Partnership vs. Corporation
As to Right of Succession

´ Partnership has no succession as it is dissolved when any

partner ceases to be associated in the carrying on of
the partnership business (Art. 1828 NCC).
´ Corporation has right of succession (Sec. 2 & 11 RCC).
Partnership vs. Corporation
As to Dissolution
´ Partnership is dissolved by any of the causes
enumerated under Art. 1830 and 1831 which may be
voluntary or involuntary on the part of the partners (Art.
1828 NCC).
´ For a corporation, in all cases, dissolution requires the
consent of the State (Sec. 133-139 RCC).
Partnership
Obligations of a Partner
Coblaw2 Day3
Obligations to the Partnership and
Other Partners
´ TO GIVE HIS CONTRIBUTION
a. Unless there is a stipulation to the contrary, the partners shall contribute
equal shares to the capital of the partnership.
b. As a rule, the contribution must be provided upon perfection of the
contract, except if the partners stipulate otherwise.
c. A partner who has undertaken to contribute a sum of money and fails to
do so become a debtor for the interest and damages from the time he
should have complied with his obligation. Thus, no demand shall be
necessary since the law specifically provides for the liability in case of
delay.
d. A partner is likewise liable similar to a vendor:
i. He is bound to deliver the fruits thereof from the time
they should have been delivered, without need of
demand (Art. 1786).
ii. A partner must exercise due diligence in preserving
the thing promised to be contributed; otherwise, he
shall be liable for loss and deterioration.
iii. Warrant the thing delivered against eviction.
´ Risk of Loss: LOSS BORNE BY THE PARTNER
a. Thing contributed is specific and determinate which Is NOT fungible and
only their use and fruits may be fore the common benefit; and
b. There is stipulation that he shall bear the loss of the thing brought and
appraised in the inventory.
´Risk of Loss: LOSS BORNE BY THE PARTNERSHIP
a. Things contributed are:
i. Fungible;
ii. Cannot be kept without deteriorating;
iii. They were contributed to be sold;
iv. There was appraisal in the inventory and no
stipulation that partner will bear the loss.
´ TO GIVE ADDITIONAL CONTRIBUTION IN CASE OF IMMINENT LOSSES: In case
of imminent loss of the business of the partnership, any partner who refuses
to contribute additional share to the capital to save the venture, shall be
obliged to sell his interest to the other partners. EXCEPT:
a. Industrial partners (unless if there is stipulation that he will likewise
contribute)
b. If there is a stipulation to the contrary.
´ PROHIBITION TO ENGAGE IN OTHER BUSINESSES
a. Industrial Partners – cannot engage in business for himself except when
the capitalist partners permit him to do so.
Effect of non-compliance: The capitalist partner may either
i. Exclude him from the firm, or
ii. Avail themselves of the benefit which he may have obtained in violation
of this provision.
b. Capitalist Partners – the prohibition is limited to businesses in the same
industry as that of the partnership which may result in competition.
Exceptions:
i. When it is expressly stipulated that the capitalist partner can so engage
himself.
ii. When the other partners allow him to do so, whether expressly or impliedly/
iii. During the period of liquidation and winding-up, when the partnership is
already non-existent.
iv. When the general-capitalist partner becomes a limited partner in a competing
enterprise.
Effect of non-compliance:
i. He shall bring to the partnership all the profits illegally obtained.
ii. He is liable, personally, for all the losses.
iii. He may be ousted for loss of trust and confidence.
´ CREDIT TO THE FIRM THE PAYMENT MADE BY A DEBTOR WHO OWES BOTH THE
PARTNERSHIP AND THE MANAGING PARTNER (Art. 1792) Managing Partner
collecting from a common debtor: To prevent the managing partner
from furthering his personal interest to the detriment of the firm, if such
managing partner collects a sum from a common debtor who owes
money both to said partner and to the partnership:
1. If the managing partner issued a receipt in the name of the
partnership: The payment shall be applied to the partnership credit.
2. If the managing partner issued a receipt in his name: The payment
shall be applied proportionate to the amounts of the two debts.
EXCEPT: When the debt owed by the debtor to the managing partner
is more onerous, the debtor may choose to apply the payment
exclusively to such.
Illustration:

´ David owed ABC Partnership and Antonio, the managing partner, P7,000
and P3,000, respectively. Antonio was able to collect P5,000 from David.
´ If Antonio issued a receipt in the name of the partnership, the whole
amount of P5,000 will be applied to the partnership credit.
´ If A issued a receipt in his own name, the P5,000 shall be applied as follows:
´ P3,500 (P5,000 *P7,000 / P10,000) to the partnership credit
´ P1,500 (P5,000 *P3,000 / P10,000) to Antonio’s credit.
´ OTHER OBLIGATIONS OF PARTNERS TO THE PARTNERSHIP AND TO OTHER
PARTNERS:
a. Not to convert partnership funds/property for his own use (Art. 1788).
b. To account for and hold as trustee, unauthorized (or secret) personal
profits (Art. 1807).
c. Pay for damages caused by his fault (Art. 1794).
d. Share with other partners the share of the partnership credit which he has
received from an insolvent firm debtor (Art. 1173).
e. Keep the partnership books in the principal office (except when otherwise
agreed) and allow other partners to have access, inspect and copy the
same.
f. Reimburse the partnership of damages suffered by it through his fault.
i. The liability for damages is not compensable with profits and benefit earned
for the partnership.
ii. Damages, however, may be decreased by courts if through the partner’s
extraordinary efforts, the partnership earned unusual profits.
g. To inform the other partners on all matters affecting the partnership or
relative to partnership affairs.
h. To observe the diligence of a good father of a family in all the dealings.
i. To adhere to the partnership agreement and decisions of appointed
managing partner(s).
Obligations of Partners to Third Parties

´ FIRM NAME: Every partnership shall operate under a firm name, which may
or may not include the name of one or more of the partners.

´ Strangers who include their name in the firm are liable as partners because
of estoppel but do not have the rights of partners – this is to protect
customers from being misled.

´ Under Art. 1846, if a limited partner include his name in the firm name, he
shall be liable as a general partner.
´ LIABILITY AFTER EXHAUSTION OF PARTNERSHIP ASSETS: All partner, including
industrial ones, shall be liable pro-rata with all their property and after all the
partnership assets have been exhausted, for the contracts which may be
entered into in the name and for the account of the partnership, under its
signature and by a person authorized to act for the partnership. However,
any partner may enter into a separate obligation to perform a partnership
contract.
´ Any stipulation to the contrary shall be void, except as to the partners.
Illustration:

A, B, C and D partners of ABCD Partnership agreed on equal distribution of

profits. As regards third parties, however, they exempted C, an industrial
partner. Total assets of the partnership amounted to P200,000 while the
remaining liabilities to X amounts to P800,000. In this case:
Ø The liabilities can be settled first through the remaining partnership assets of
P200,000
Ø The P600,000 shall be borne by all partners: A, B, C and D and they shall
share pro-rate. Each shall be liable for P150,000.
Ø C may also be made liable by the creditor since as to X, the stipulation
exempting C is void.
Ø C, however, if made to pay P150,000 can seek reimbursement from A, B
and D, since the agreement exempting his is valid as to the partners.
´ AUTHORITY TO ACT FOR AND IN BEHALF OF THE PARTNERSHIP: Every partner
is an agent of the partnership for the purpose of its business.
´ The AUTHORITY of the partners to act in behalf of the partnership may be:
a. Express – those expressly granted to the partner; or
b. Implied – those which may be implied from the express authority; or
c. Apparent – when he apparently carries onthe usual business of the
partnership and the person to whom he is dealing has no knowledge of
the fact that he has no such authority.
If the partner is not carrying on the usual business of the partnership, the act
will not bind the partnership unless it is authorized by the other partners.
´ Consent of ALL partners necessary to:
a. Assign the partnership property in trust for creditors or on the assignee’s
promise to pay the debts of the partnership.
b. Dispose of the good-will of the business.
c. Do any other act which would make it impossible to carry on the ordinary
business of a partnership.
d. Confess a judgment
e. Enter into a compromise concerning a partnership claim or liability.
f. Submit a partnership claim or liability to arbitration.
g. Renounce a claim of the partnership.
***Except when authorized by the other partners or unless they have
abandoned the business.
´ Admission of Partners: An admission made by one partner within the scope
of his authority is evidence against the partnership.

´ Notice to a Partner: Operates as notice to the partnership, except in case

of fraud committed by such partner.
 ´ EFFECTS OF CONVEYANCE OF REAL PROPERTY:

Property is in the Conveyance is in Who conveyed Effect

name of the name of the property
PARTNERSHIP PARTNERSHIP Partner Valid Conveyance but
partnership may recover,
One or more One or more One or more except (no right to recover):
partners partners partners a. When the transfer binds
the partnership.
b. Transferee had no
knowledge of lack or
excess of authority.
Property is in the Conveyance is in Who conveyed the Effect
name of the name of property
Partnership Partner Partner Passes only the
One or more Partner/Partnership Partner equitable title or
partners/third interest of the
persons (in trust) partnership if within
the authority (if not,
nothing transfers)
All Partners All Partners All Partners Valid Transfer
Illustration:

´ John, Paul, George and Ringo are partners of Beatles Company. The land is
titled under the name of Beatles Company. If John sells the land with
authority and in the name of the partnership to Elvis, Elvis gets valid title.
´ If John sells the land to Elvis in the name of Beatles Company, but without
authority, title passes to Elvis; however, Beatles Company may recover the
land from Elvis, unless the partner acts in the usual way of business and
the buyer did not know of the partner’s lack of authority OR when
the real property has already been validly conveyed to a third
person who is in good faith and for value.
´ In the previous example, if Paul sell the land with authority and in the usual
way of business, but in his own name, buyer Elvis will only get the equitable
interest in the land, but not the title.
´ Suppose the land is registered in the name of John and George, without
disclosing the right of ownership of Beatles Company. Then John and
George sold the land to Elvis. Elvis gets valid title, however, Beatles
Company, may still recover the land from Elvis, if John and George’s act
does not bind the partnership for the same being not done in the usual way
of the business, unless Elvis is a buyer in good faith and for value.
´ Suppose the land of the partnership is registered in the name of Michael (a
third person) in trust for Beatles Company. Then Michael sells the land to
Elvis in the name of the partnership. Elvis, the buyer, in this case, acquires
only the equitable interest in the land. To get a valid title, Beatles
Company, must ratify the sale.
´ SOLIDARY LIABILITY FOR TORT/QUASI-DELICT: Where, by any wrongful act or
omission of any partner acting in the ordinary course of the business of the
partnership of with the authority of co-partners, loss or injury is caused to
any person, not being a partner in the partnership, or any penalty is
incurred, the partnership is liable therefor to the same extent as the partner
so acting or omitting to act.
´ All partners are solidarily liable with each other and the partnership.
´ SOLIDARILY LIABILITY FOR MISAPPROPRIATION: The partnership is bound to
make good the loss, in two situations:
a. Pertains to partner as receiver: Where one partner acting within the scope
of his apparent authority receives money or property of a third person and
misapplies it.
b. Pertains to partnership as receiver: Where the partnership in the course of
its business receives money or property of a third person and the money or
property so received is misapplied by any partner while it is in the custody
of the partnership.
* All partners are solidarily liable with each other and the partnership.
´ Partner by Estoppel
a. One who represents himself as a partner of an existing partnership with or
without consent of the partnership.
i. When the partnership consented – a partnership by estoppel is created
between the original members and the deceiver. A partnership liability results.
ii. When the partnership did not consent – deceiver becomes a partner by
estoppel where he is liable as a partner but does not acquire the rights thereof.
No partnership liability exists. Only those who consented shall be liable.
b. One who represents himself as a partner of a NON-EXISTENT partnership.
Liability of parties is pro rata, since there is no partnership liability.

This applies whenever the third person is misled by the representation.

´ Liability of New or Incoming Partner
a. Debts incurred prior to admission: liable up to his contribution (except if
there is a stipulation).
b. Debts incurred after admission: liable up to his personal assets.
Limited Partnership
Coblaw2 Day 6
• Limited Partnership: is one formed by two or more persons having
as members one or more general partners and one or more limited
partners.
• Limited Liability: a limited partners’ liability is limited only to his
capital contribution. Such that, after exhaustion of partnership
assets, he cannot be made to contribute to answer the remaining
liabilities to third parties.
Formation:

• Two or more persons desiring to form a limited partnership shall

sign and swear to a Certificate.
• The said Certificate will be filed with the SEC and a limited
partnership is formed if there has been substantial compliance in
good faith with the foregoing requirements.
• If such Certificate is not filed, the partnership may be liable in the
same manner as a general partnership.
Formation: Contents of Certificate

• Two or more persons desiring to form a limited partnership shall

sign and swear to a Certificate, which shall state:
1. The name of the partnership, adding thereto the word LIMITED;
absence of the word Limited or LTD in the firm name, the
partnership will be treated as a general partnership.
2. The character of the business.
3. The location of the principal place of business.
4. The name and place of residence of each member, general and
limited partners being respectively designated.
5. The term for which the partnership is to exist.
6. The amount of cash and a description of and the agreed value of
the other property contributed by each limited partner.
7. The additional contributions, if any, to be made by each limited
partner and the times at which or events on the happening of
which they shall be made.
• #6 and # 7 are important because as to any difference (in amount
stated in the certificate and actual contributions, or failure to
provide additional contributions), the limited partner will be
liable as a debtor to the partnership.
8. The time, if agreed upon, when the contribution of each limited
partner is to be returned.
Note, however, that the limited partner may nevertheless demand
the return of his contribution.
i. After he has six months’ notice to all other members, if no time
is specified in the certificate, either for the return of the
contribution or for the dissolution of the partnership; or
ii. On the dissolution of a partnership.
* The above is still subject to availability of funds after partnership
debts are paid.
9. The share of the profits or the other compensation by way of
income which each limited partner shall receive by reason of his
contribution.
10.The right, if given, of a limited partner to substitute an assignee
as contributor in his place, and the terms and conditions of the
substitution.
• However, the assignee does not necessarily become a substitute
limited partner.
1. Substitute Limited Partner: A Substitute Limited Partner is a
person admitted to all the rights of a limited partner who has
died or has assigned his interest in a partnership: Provided:
i. All the partners consent;
ii. The assignor (Limited Partner), being thereunto empowered by the
certificate, gives the assignee that right.
2. The substitute has all the rights and powers and is subject to all the
restrictions and liabilities of his assignor except those liabilities of
which he was ignorant at the time he became a limited partner and
which could not be ascertained from the certificate.
i. The substitution does not release the original limited partner from liability to
the partnership.
ii. If the assignee does not become a substitute, he has no right to require any
information or account of the partnership books; he is only entitled to
receive the share of the profits or other compensation by way of income or
the return of his contribution to which his assignor would otherwise be
entitled; The assignee is still an OUTSIDER to the partnership.
• Limited Partner’s Interest: Or his share in the profits and surplus
may likewise be the subject of assignment or attachment /
execution. However, unlike the interest of a general partner, a
limited partners’ interest may only be redeemed with the general
partners’ property and not with partnership property.
11.The right, if given, of the partners to admit additional limited
partners;
12.The right, if given, of one or more of the limited partners to
priority over other limited partners, as to contributions or as to
compensation by way of income, and the nature of such priority.
13.The right, if given, of the remaining general partner or partners
to continue the business on the death, retirement, civil
interdiction, insanity or insolvency of a general partner; and
14.The right, if given, of a limited partner to demand and receive
property other than cash in return to his contribution.
Limitations on a Limited Partner:
1. A Limited Partner cannot be an industrial partner. His contribution must
always be money or property.
2. The surname of a Limited Partner shall not appear in the partnership
name unless (A) It is also the surname of a General Partner, or (B) Prior to
the time when the Limited Partner became such, the business has been
carried on under a name in which his surname appeared.
3. The Limited Partner cannot take part in the management of the
partnership.
***If a Limited Partner contributed industry, or his name appears in the
partnership (unless for the above exceptions) and/or took part in the
management of the partnership, he shall be liable as if he is a General
Partner.
Rights of a Limited Partner:

1. Have the partnership books kept at the principal place of

business of the partnership, and at a reasonable hour to inspect
and copy any of them.
2. Have on demand true and full information of all things affecting
the partnership, and a formal account of partnership affairs
whenever circumstances render it just and reasonable.
3. Have dissolution and winding up by decree of court.
4. Receive a share of the profits or other compensation by way of
income, and to the return of his contribution. However, a limited
partner shall not receive any part of his contribution until:
a. All liabilities of the partnership, except liabilities to general partners and
to limited partners on account of their contributions, have been paid or
there remains property of the partnership sufficient to pay them;
b. The consent of all members is had, unless the return of the contribution
may be rightfully demanded as provided in No. 5.
c. The certificate is cancelled or so amended as to set forth the withdrawal
or reduction.
5. Rightfully demand for his contribution:
a. On the dissolution of a partnership; or
b. When the date specified in the certificate for its return has arrived, or
c. After he has six months’ notice in writing to all other members, if no time
is specified in the certificate, either for the return of the contribution or
for the dissolution of the partnership.
6. Have his written consent or ratification be sought by the general
partner/s in order to:
a. Do any act in contravention of the Certificate.
b. Do any act which would make it impossible to carry on the ordinary business
of the partnership;
c. Confess a judgement against the partnership;
d. Posses partnership property, or assign their rights in specific partnership
property, for other than a partnership purpose;
e. Admit a person as a general partner;
f. Admit a person as a limited partner, unless the right to do so is given in the
certificate;
g. Continue the business with partnership property on the death, retirement,
insanity, civil interdiction or insolvency of a general partner, unless the right
to do so is given in the certificate.
7. A limited partner may loan money and to transact other business
with the partnership, subject to the following restrictions:
a. He cannot receive or hold as collateral security any partnership property;
b. He cannot receive any payment, conveyance or release from liability if at
the time the assets of the partnership are not sufficient to discharge
partnership liabilities to persons not claiming as general or limited
partners.
** Any violation of the above restrictions would be in fraud of
creditors and may be treated as a rescissible contract.
General Limited Partner:

• A person may be a general partner and a limited partner in the

same partnership, provided that this fact is stated in the
certificate.
• He shall have the rights and powers and be subject to all the
restrictions of a general partner.
• Except that, in respect of his contribution, he shall have the rights
against the OTHER PARTNERS which he would have had if he were
not also a general partner.
Dissolution & Winding Up

• Grounds: The retirement, death, insolvency, insanity or civil

interdiction of a General Partner dissolves the partnership.
EXCEPT: if the partnership business is continued by the remaining
general partners under a right to do so as stated in the Certificate
of Limited Partnership OR with the consent of all the partners.
• A limited partner may have the partnership dissolved and its
affairs wound up when he rightfully but unsuccessfully demands
the return of his contribution.
Distribution of Assets of a Limited Partnership

1. Those owing to creditors under than partners.

2. Those owing to the limited partners, other than capital and profits.
3. Those owing to the limited partners in respect of profits.
4. Those owing to the limited partners in respect of capital.
5. Those owing to general partners other than for capital and profits.
6. Those owing to general partners in respect of profits.
7. Those owing to general partners in respect of capital.