Law on Business Organizations (Partnership & Private Corporations)

Different Types of Business Organizations

1. Sole Proprietorship / Single Proprietorship

 It is a form of business organization which is owned by one person. The owner personally manages his
business.

ADVANTAGES DISADVANTAGES
Easy to form Difficult to raise capital
Not expensive Unlimited liability
Low government regulation Limited life of the firm
No corporate taxation on the business

2. Partnership
 It is a form of business organization in which two or persons bind themselves to contribute money, property,
or industry to a common fund, with the intention of dividing the profits among themselves.

ADVANTAGES DISADVANTAGES
Easy to form Difficult to raise capital
Less expensive Limited life
Moderate government regulation s Unlimited liability in general partnership

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 incidental to its existence.

ADVANTAGES DISADVANTAGES
Unlimited life Double taxation
Easy transferability Complex and time-taking charter filing process

Easy to raise capital

FORMATION REQUIREMENTS

1. Sole Proprietorship
 Since it is the simplest form of business it is the easiest to register. It is registered through the Bureau of
Trade Regulation and Consumer Protection (BTRCP) of the Department of Trade and Industry (DTI).
 A sole proprietor must register with the DTI and secure a Certificate of Registration. DTI Registration is valid
for 5 years.
2. Partnership
 Partnerships are recorded with the Securities & Exchange Commission (SEC). The following requirements
must be submitted with the SEC:
a. Name Verification Slip with the reservation of the partnership name
b. Articles of Partnership
c. Registration Data Sheet
d. Affidavit of partner undertaking to change partnership name
e. Certificate Bank Deposit
3. Corporation
 In order to set up a corporation in the Philippines, the incorporation process is lodged with the Securities &
Exchange Commission (SEC).

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APPLICABLE LAWS

Sole proprietorship

 Republic Act No. 9178 Barangay Micro Business Enterprises (BMBEs) Act of 2002
 Effective February 2003

Partnership

 Republic Act 386 Civil Code of the Philippines Art. 1767 to 1842
 Effective August 30, 1950

Corporation

 Republic Act No. 11232 Revised Corporation Code of the Philippines

 Effective February 23, 2019

ORIGIN OF BUSINESSES ORGANIZATION

 The need to satisfy human needs made people trade and exchange goods, things and services with others.
This has led people to establish business organization in order to provide people the things and services they
need.

DEFINITION OF TERMS

1. Business
 A business is an organization that provides goods and services for human needs.
 A business (also known as an enterprise, a company, or a firm) is an organizational entity and legal
entity made up of an association of people, be they natural, legal, or a mixture (people and company) of
both who share a common purpose and unite in order to focus their various talents and organize their
collectively available skills or resources to achieve specific declared goals and are involved in the provision of
goods and services to consumers.
2. Organizations
 It includes businesses and other groups of people not organized for commercial purposes.
 Ex. Clubs and sports teams are examples of non-business organizations.
3. Business Organizations
 Is an individual or group of people that collaborate to achieve certain commercial goals. Some business
organizations are formed to earn income for owners. Other business organizations, called nonprofits, are
formed for public purposes. These businesses often raise money and utilize other resources to provide or
support public programs.

BUSINESS OBJECTIVES

1. Profit – businesses sell products or services to generate revenue and earnings.

2. Nonprofit organizations exist mainly to provide help or resources to a target audience with a specific need.
A nonprofit organization is mission-driven, which requires the management and board to set objectives aimed at
achieving the organization’s mission statement.

PARTNERSHIP

Article 1767

 By the contract of partnership 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.

Two or more persons may also form a partnership for the exercise of a profession.

Article 1768

 A partnership has a juridical personality which is separate and distinct from that of the partners.

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ELEMENTS OF A PARTNERSHIP

1. There shall be a partnership whenever:

2. There is a meeting of the minds;
3. To form a common fund;
4. With intention that profits (and losses) will be divided among the contracting parties.

ESSENTIAL FEATURES OF A PARTNERSHIP

1. There must be a VALID CONTRACT

2. The parties must have LEGAL CAPACITY to enter into the contract.
3. There must be a mutual contribution of money, property, or industry to a COMMON FUND.
4. There must be a LAWFUL OBJECT
5. The purpose or primary purpose must be to obtain PROFITS and DIVIDE the same among the parties.

CHARACTERISTICS OF A PARTNERSHIP

1. Essentially consensual in nature

 Consensual- as it is perfected by mere consent, express or implied;
2. Separate juridical personality
 Article 1768. The partnership has a juridical personality separate and distinct from that of each of the
partners, even in case of failure to comply with the requirements of article 1772, first paragraph.
3. Delectus personae
 Delectus Personae (choice of persons) a person has the right to select persons with whom he wants to be
associated with is the very foundation and essence of partnership.
4. Mutual Agency
 Mutual agency is the right of all partners to represent the company’s normal business operations and the
authority to bind it to mutual contracts and agreements.
5. Personal liability of partners for Partnership debts
 GENERAL PARTNER – shared liability
 LIMITED PARTNER – liability is limited

FORM OF PARTNERSHIP CONTRACT

GENERAL RULE: No special form is required for the validity or existence of the contract of partnership. (Art. 1356)

EXCEPTIONS:

1. Where immovable property or real rights are contributed, the partnership contract shall be void unless:
a. It is reduced to writing in a public instrument (Art. 1771).
b. An inventory of the property contributed is made, signed by the parties and attached to the public
instrument. (Art.1773).
2. When the contract falls under the coverage of the Statute of Frauds ( Art.1403)

CONTRACTS FALLING UNDER THE STATUE OF FRAUDS

a) An agreement that by its terms is not to be performed within a year from the making thereof
b) Aspecial promise to answer for the debt, default, or miscarriage of another;
c) An agreement made in consideration of marriage, other than a mutual promise to marry;
d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the
buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action
or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the
auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price,
names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum;
e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest
therein;

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RULES TO DETERMINE THE EXISTENCE OF A PARTNERSHIP

RULE #1

 Persons who are NOT partners as between themselves, CANNOT be partners as to third persons. (Art. 1769(1))

EXCEPTION:

 Partnership by Estoppel under Article 1825

Who is a partner by estoppel?

One who, by words or conduct does any of the following:

1. Directly represents himself to anyone as a partner in an existing partnership or in a non- existing partnership.
2. Indirectly represents himself by consenting to another representing him as a partner in an existing partnership or in a
non-existing partnership.

Liability of a Partnership in case of Estoppel

 If all actual partners consented to the representation, then the liability of the person who represented himself to be a
partner or who consented to such representation and the actual partner is considered a partnership liability.
1. Pro-rata
 When Liability is PRO RATA. When there is no existing partnership and all those represented as partners consented to
the representation, then the liability of the person who represented himself to be a partner and all who made and
consented to such representation, is pro-rata.
2. Separate
 When Liability is SEPARATE. When there is no existing partnership and not all but only some of those represented as
partners consented to the representation, or none of the partnership in an existing partnership consented to such
representation, then the liability will be separate.

RULE #2

 Co-ownership or co-possession does not of itself establish a partnership.

RULE #3

 The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them
have a joint or common right or interest in any property from which the returns are derived

RULE #4

 The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the
business, UNLESS such were received in payment:
a. As debt by installments or otherwise;
b. As wages or rent;
c. As annuity; (a fix amount paid each year)
d. As interest on loan;
e. As consideration for sale of goodwill of business/other property by installments

WHO MAY BE PARTNERS?

GENERAL RULE: Any person capacitated to contract may enter into a contract of partnership.

EXCEPTIONS:

1. Persons who are prohibited from giving each other any donation or advantage cannot enter into a universal
partnership. (Art. 1782)
2. Persons suffering from civil interdiction.
3. Persons who cannot give consent to a contract.
a. Minors
b. Insane persons

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 c. Deaf-mutes who do not know how to read and write

PERSONS WHO CANNOT GIVE DONATION TO EACH OTHER

Art. 739. The following donations shall be void:

a. Those made between persons who were guilty of adultery or concubinage at the time of the donation;
b. Those made between persons found guilty of the same criminal offense, in consideration thereof;
c. Those made to a public officer or his wife, descendants and ascendants, by reason of his office.

CLASSIFICATION OF PARTNERSHIP

1. As to extent of its subject matter

a. UNIVERSAL PARTNERSHIP OF ALL PRESENT PROPERTY
Comprises of the following:
 Property which belonged to each of the partners at the time of the constitution of the partnership.
 Profits which they may acquire from all property contributed.
 In a universal partnership of all present property, the property which belongs to each of the partners at the time of
the constitution of the partnership, becomes the common property of all the partners, as well as the profits which
they may acquire therewith.
b. UNIVERSAL PARTNERSHIP OF PROFITS
 Comprises all that the partners may acquire by their industry or work during the existence of the partnership.
 A universal partnership of profits is one which comprises all that the partners may acquire by their industry or work
during the existence of the partnership and the usufruct of movable or immovable property which each of the
partners may posses at the time of the celebration of the contract.
 Art. 562. Usufruct gives a right to enjoy the property of another with the obligation of preserving its form and
substance, unless the title constituting it or the law otherwise provides.
 Movable or immovable property which each of the partners may posses at the time of the celebration of the contract
shall continue to pertain exclusively to each, only the usufruct passing to the partnership.

PRESUMPTION FAVOR UNIVERSAL PARTNERSHIP OF PROFITS

 Where the articles of partnership do not specify the nature of the universal partnership, whether it is one of “present
property” or of “profits” only, it will be presumed that the parties intended merely a partnership of profits.
 Future properties cannot be contributed such as property subsequently acquired by (1) inheritance, (2) legacy
or (3) donation cannot be included by stipulation except the fruits thereof.

ARE ALL PROFITS OF PARTNERSHIP INCLUDED IN UNIVERSAL PARTNERSHIP OF PROFITS?

 Not all profits included in universal partnership of profits. Profits acquired by their partners through chance (i.e.
lottery) without employment of any physical or intellectual efforts are not included.

CAN ANYONE ENTER INTO A UNIVERSAL PARTNERSHIP?

 Not all person can enter into a universal partnership. Persons who are prohibited from giving each other any donation
or advantage cannot enter into a universal partnership. (Art. 739, Art. 87, Family Code discussed above) because the
donation given by them to the partnership will be considered void.

Article 739. The following donations shall be void:

1. Those made between persons who were guilty of adultery or concubinage at the time of the donation;
2. Those made between persons found guilty of the same criminal offense, in consideration thereof;
3. Those made to a public officer or his wife, descendants and ascendants, by reason of his office.

Art. 87. [ Family Code] Every donation or grant of gratuitous advantage, direct or indirect, between the spouses during the
marriage shall be void, except moderate gifts which the spouses may give each other on the occasion of any family rejoicing.
The prohibition shall also apply to persons living together as husband and wife without a valid marriage.

2. PARTICULAR PARTNERSHIP has for its object:

 Particular partnership is formed only to carry out one business venture or to complete one undertaking.
i. Dererminate things
ii. Their use or fruits [natural, civil, and industrial fruits]
iii. Specific undertaking [purpose of the partnership]

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 iv. Exercise of profession or vocation

3. As liabilities to others
a. GENERAL PARTNERSHIP
 Consists of general partners who are liable prorata and separate and sometimes solidarily with their separate
property for partnership debts.
b. LIMITED PARTNERSHIP
 One formed by 2 or more persons having as members one or more general partners and one or more limited partners,
the latter not being personally liable for the obligations of the partnership.

4. As to duration
a. PARTNERSHIP AT WILL
 One in which no time is specified and is not formed for a particular undertaking or venture which may be terminated
anytime by mutual agreement.
b. PARTNERSHIP WITH A FIXED TERM
 The term for which the partnership is to exist is fixed or agreed upon or one formed for a particular undertaking.

5. As to legality of existence
a. DE JURE PARTNERSHIP
 One which has complied with all the legal requirements for its establishment.
b. DE FACTO PARTNERSHIP
 One which has failed to comply with all the legal requirements for its establishment

6. As to representation to others
a. ORDINARY OR REAL PARTNERSHIP
 One which actually exists among the partners and also as to third persons
b. OSTENSIBLE OR PARTNERSHIP BY ESTOPPEL
 One which in reality is not a partnership but is considered a partnership only in relation to those who, by their conduct
or omission, are precluded to deny or disprove its existence.

7. As to publicity
a. SECRET PARTNERSHIP
 One wherein the existence of certain persons as partners is not avowed or made known to the public by any of the
partners.
b. OPEN OR NOTORIOUS PARTNERSHIP
 One whose existence is avowed or made known to the public by the members of the firm.

8. As to purpose
a. COMMERCIAL OT TRADING PARTNERSHIP
 One formed for the transaction of business.
b. PROFESSIONAL OR NON-TRADING PARTNERSHIP
 One formed for the exercise of a procession.

KINDS OF PARTNERS

CAPITALIST

 One who contributes money or property to the common fund

INDUSTRIAL

 One who contributes only his industry or personal service

GENERAL

 One whose liability to third persons extends to his separate property

LIMITED

 One whose liability to third persons is limited to his capital contribution

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MANAGING

 One who manages the affairs or business of the partnership

LIQUIDATING

 One who takes charge of the winding up of partnership affairs upon dissolution

PARTNERS BY ESTOPPEL

 One who is not really a partner but is liable as a partner for the protection of innocent third persons

CONTINUING PARTNER

 One who continues the business of a partnership after it has been dissolved by reason of the admission of a new
partner, retirement, death or expulsion of one of the partners

SURVIVING PARTNER

 One who continues the business of a partnership after it has been dissolved by reason of the admission of a new
partner, retirement, death or expulsion of one of the partners

SUB-PARTNER

 One who is not a member of the partnership who contracts with a partner with reference to the latter’s share in the
partnership

OSTENSIBLE

 One who takes active part and known to the public as partner in the business

SECRET

 One who takes active part in the business but is not known to be a partner by outside parties

SILENT

 One who does not take any active part in the business although he maybe known to be a partner

DORMANT

 One who does not take active part in the business and is not known or held out as a partner

DIFFERENCE BETWEEN CAPITAL AND INDUSTRIAL PARTNER

CAPITALIST PARTNER INDUSTRIAL PARTNER

As to contribution: As to contribution:
Contributes money or property Contributes his industry (mental or physical)
As to prohibition to engage in other business: As to prohibition to engage in other business:
Cannot generally engage in the same or similar enterprise Cannot engage in any business for himself
as that of his firm
As to profits: As to profits:
Shares in the profits according to agreement thereon, Receives a just and equitable share

If no agreement, pro-rata to his contribution

As to losses: As to losses:
First, the stipulations as to losses, Exempted as to losses (as between partners) but is liable
If none, the agreement as to profits to third persons, without prejudice to reimbursement from
If none, pro-rata to his contribution the capitalist partners