Business Structures: Sole Proprietorship and Partnership

Sole Proprietorship

• The oldest, simplest, and most prevalent form of business enterprise
• Owned by one person
• The sole proprietor bears full liability for all the business's debts and obligations
• Offers advantages such as sole enjoyment of profit, complete control, and low capitalization
• Disadvantages include sole liability, limited ability to raise capital, and the burden of decision-making

Partnership

• Defined as a contract where two or more individuals agree to contribute money, property, or industry to a common fund, intending to share profits
• Partners can contribute either capital (money or property) or industry (labor/skill)
• A partnership begins from the moment a contract is executed, unless specified otherwise
• Essential requisites include a valid contract, lawful purpose, intent for profit-sharing, and at least two legally capable individuals

Essential Requisites of a Partnership

• A valid contract must exist
• Each partner must contribute money, property, or industry to a common fund
• The partnership's business objective must be legal
• The partnership's purpose must be profit-driven with intention of profit division among partners
• There must be at least two individuals with legal capacity to enter into the partnership agreement

Example of Partnership

• Jose, Pedro, and Santi form a restaurant business named Super Trio's Grill
• Pedro contributes Php 50,000.00
• Jose contributes kitchen utensils
• Santi, a culinary arts graduate, acts as the chef
• They agree to divide profits as follows:
  • Pedro: 60%
  • Jose: 30%
  • Santi: 10%

Advantages of Partnership

• Easily formed by mutual consent
• Simple dissolution process
• Easy decision-making
• Increased capital availability

Disadvantages of Partnership

• Partners are liable for co-partners' actions
• Personal assets of general partners are liable if the partnership cannot meet its debts
• Potential for internal conflicts and disagreements

Partnership Classifications

• Liability:
  • General Partnership: All partners are liable to the full extent of their personal assets after partnership assets are exhausted
  • Limited Partnership: Only the general partner is liable beyond their contribution
• Duration:
  • Partnership at Will: No fixed duration, termination can be based on partner's will
  • Partnership for a Specific Period: Established for a specific term or to complete a particular task

Types of Partners

• Capitalist Partner: Contributes capital (money or property)
  • Not exempt from losses
  • Cannot engage in the same type of business as the partnership unless agreed upon
  • Receives a share of profits proportionate to their contribution
• Industrial Partner: Contributes industry or skills
  • Cannot engage in any type of business for themselves unless the partnership allows
  • Receives a just and equitable share of profits
  • Not liable for losses
• General Partner: Liable beyond their contribution
  • Can incur personal liability apart from the partnership
• Limited Partner: Liable only to the extent of their contribution
• Managing Partner: Manages the partnership's business affairs
  • If no managing partner is appointed, all partners share management responsibilities

Example of Capitalist Partner

• Lenin and Mark form a restaurant business
• Lenin contributes Php 1 million
• Mark contributes his culinary skills as the chef
• Lenin is the capitalist partner.

Example of Industrial Partner

• Lenin and Mark form a restaurant business
• Lenin contributes Php 1 million
• Mark contributes his culinary skills as the chef
• Mark is the industrial partner.

Corporation

• A legal construct created by law, possessing the right of succession and authorized powers
• It is an artificial being with separate legal personality from its founders
• Managed by a Board of Directors or Board of Trustees

Attributes of a Corporation

• Created by operation of law
• Artificial being
• Possesses the right of succession
• Has express and implied powers

Management of a Corporation

• A corporation, being an artificial being, needs individuals to govern its affairs
• The Board of Directors or Board of Trustees manage its operations

Corporate Existence

• A corporation commences its existence and juridical personality from the date the SEC issues the certificate of incorporation

Doctrine of Corporate Entity

• A corporation has a distinct legal personality separate from its creators
• It can acquire property and enter into contracts in its own name
• The corporation's assets are not owned by its directors, officers, or stockholders, and vice versa

Example of Separate Legal Personality

• ZZZ Corporation, a hotel and restaurant business, suffers damage from a typhoon
• Its Board of Directors, through a resolution, contracts YYY Construction, Inc. for repairs
• After several payments, ZZZ Corporation defaults
• YYY Construction sues the directors in their personal capacities to collect the remaining payment
• The lawsuit is improper because the corporation's liability is separate from its officers' personal liability

Doctrine of Piercing the Veil of Corporate Entity

• This doctrine is an exception to separate legal personality
• It allows courts to disregard the corporate structure and hold individuals liable if there's evidence of abuse, fraud, or unjust actions using the corporate shield for personal gain.