If you are a student of Business Law or an entrepreneur thinking of establishing that dream business, knowing the legal implications of the different business models in the Philippines is an imperative. The four business models in the country are: corporation, sole proprietorship, partnership, and cooperative.

CORPORATION

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 and incidental to its existence. (Sec. 2, Revised Corporation Code of the Philippines)

Advantages and Disadvantages of Corporation

Bar Question

In the 1973 Bar Examinations, the examinees were confronted with the following problem.

The problem: Some businessmen with an available starting capital totalling only P100,000.00 ask you to help organize a business firm. Subject to legal limitations, they have future plans to invite alien investors who are agreeable to rendering financial assistance by way of direct investments and/or loans. Your professional assistance is solicited on the following various questions that may arise.

Bar Question: Considering the above problem, state the form of business organization which you recommend should be created for the purpose, explaining specifically and briefly its advantages and disadvantages.

 Suggested Answer 

“I will recommend that they organize a stock corporation to engage in an industry which is not nationalized under the constitution or existing laws.

The advantages of a corporation over the other forms of business organizations (sole proprietorship and partnership) are the following:

  1. It is easier to raise capital and to attract other persons as investors because of limited liability;
  2. It has the attribute of perpetual succession and a juridical personality independent from stockholders;
  3. It is managed by a group of persons called the board of directors;
  4. Transfer of interest is easier and will not dissolve the enterprise

The disadvantages are:

  1. It takes time to organize;
  2. Business decisions may be stalemated by differences of opinion among the board members.” (Miravite, 2007, p. 531)

Regulatory Body: Securities and Exchange Commission (SEC)

The SEC have jurisdiction and supervision over all corporations, partnerships or associations who are grantees of primary franchises and/or a license or permit issued by the Government. (Sec. 5, Securities Regulation Code, Republic Act. 8799)

SOLE PROPRIETORSHIP

“A sole proprietorship is the oldest, simplest, and most prevalent form of business enterprise. It is an unorganized business owned by one person. The sole proprietor is personally liable for all the debts and obligations of the business.

There is no law authorizing sole proprietorships to file a suit in court.

A sole proprietorship does not possess a juridical personality separate and distinct from the personality of the owner of the enterprise. 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. The law does not vest a separate legal personality on the sole proprietorship or empower it to file or defend an action in court.” (See Excellent Quality Apparel, Inc. vs. Win Multi Rich Builders, Inc., G.R. No. 175048, February 10, 2009).

Bar Question

In the 1949 Bar, the examinees were asked the following question—

Jose Abello wishes to invest P100,000.00 in the business of buying and selling sugar but does not want to risk his properties in the said business.

  1. What kind of legal entity should be created to suit Jose Abello’s plans?
  2. If he does not care to manage the business, and wishes to leave the management to his nephew?
  3. If he insists in keeping for himself the management and control of the business?

 Suggested Answer:

  1. As he does not want to risk his other properties, he can organize a private stock corporation where his liability will be limited to his stock subscription.
  2. If he does not want to manage the business, and wants his nephew to manage, he can form a partnership with his nephew, with himself as capitalist partner, and his nephew as industrial partner, or he can form a stock corporation, make his nephew a director and President or General Manager, and let the latter run the business with the board.
  3. If he wants to manage and control the business, then he should form a sole proprietorship. (Miravite, 2007, p. 533)

Regulatory Body: Department of Trade and Industry (DTI)

A single proprietorship business must be registered with the DTI to provide it with a legal identity and right to use the business name.

PARTNERSHIP

Article 1767 of the Civil Code provides that by a 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. Under Article 1771, a partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary. Article 1784, on the other hand, provides that a partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. (Saludo vs. PNB, G.R. No. 193138, August 20, 2018)

Regulatory Body: Securities and Exchange Commission

Bar Question

Give four differences between a corporation and a partnership (1953 Bar)

Suggested Answer: The four differences between a corporation and a partnership are:

  1. How created: Corporations— by law; partnerships—by agreement.
  2. Powers: corporations can exercise only those powers expressly granted, or fairly inferable from those granted to them; partnerships can exercise any power except those prohibited by law, morals, good customs and public policy.
  3. How managed: Corporations— through a board of directors, partnerships – by all partners, or through a managing partner.
  4. Number of partners or incorporators: corporations— not more than fifteen persons (sec. 10, RCC); partnerships— 2 or more persons.
  5. Extent of liability: Corporations— stockholder’s liability up to unpaid subscription; partnerships— liability or general partners up to private properties.
  6. Effect of death, withdrawal or resignation of stockholder or partner: corporations— no effect; partnerships— dissolved.
  7. Duration: Corporations—perpetual existence (sec. 11, RCC); partnerships— indefinite period.
  8. Transfer of interest: Corporations—transferable without consent of others; partnerships— consent of other partners required. (Miravite, 2007 p. 532)

COOPERATIVE

A cooperative is 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. (Art. 3, RA 9520)

Membership in the Cooperative; Distinguished from Stockholders of Ordinary Corporations—

In the case of BENECO vs. Ferrer-Calleja, the Supreme Court clarified that “membership in a cooperative is not the same as ownership of stocks in ordinary corporations. While cooperatives may exercise some of the rights and privileges given to ordinary corporations provided under existing laws, such cooperatives enjoy other privileges not granted to the latter. Similarly, members of cooperatives have rights and obligations different from those of stockholders of ordinary corporations. It was precisely because the special nature of cooperatives that the Court held in Cooperative Rural Bank of Davao City vs. Ferrer-Calleja that members-employees thereof cannot form or join a labor unior for purposes of collective bargaining. The Court held that: A cooperative… is by its nature different from an ordinary business concern being run either by persons, partnerships, or corporations. Its owners and/or members are the ones who run and operate the business while the others are its employees. As above stated, irrespective of the number of shares owned by each member they are entitled to cast one vote each in deciding upon the affairs of the cooperative. Their share capital earn limited interest. They enjoy special privileges as – exemption from income tax and sales taxes, preferential right to supply their products to State agencies and even exemption from the minimum wage laws.

An employee therefor of such cooperative who is a member and co-owner thereof cannot invoke the right to collective bargaining for certainly an owner cannot bargain with himself or his co-owners.”

Regulatory Body: Cooperative Development Authority (CDA)

The Cooperative Development Authority (CDA) is the government agency in charge of registering and regulating cooperatives in the Philippines so that they can operate legally.