Sole Proprietorship Basics
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Questions and Answers

What are the key features of a sole proprietorship in the Philippines? (Select all that apply)

  • Limited Liability
  • Single Ownership (correct)
  • Unlimited Personal Liability (correct)
  • Legal Personality Separate from the Owner
  • Ease of Formation (correct)

Which of the following statements about a corporation's legal personality is true?

  • A corporation's legal personality is only recognized after it has generated a significant amount of profit.
  • A corporation's assets and liabilities are directly tied to the owner's personal assets.
  • A corporation's legal personality is dependent on the number of shareholders it has.
  • A corporation is considered a separate legal entity from its owners, with distinct assets and liabilities. (correct)

What is the main difference between a general partnership and a limited partnership?

  • General partners have unlimited liability, while limited partners have limited liability. (correct)
  • General partners have unlimited liability, while limited partners have no liability.
  • General partners are exempt from paying taxes, while limited partners are taxed.
  • General partners have limited liability, while limited partners have unlimited liability.
  • General partners are responsible for all business decisions, while limited partners have no say in the business.

Match the following types of corporate shares with their corresponding characteristics:

<p>Common stock = Provides basic ownership rights, including voting rights and dividends. Preferred stock = Entitled to priority in dividends and liquidation, but typically do not have voting rights. Founders' shares = May carry exclusive rights, often for a limited time, such as voting rights. Redeemable shares = The corporation can buy back these shares under certain conditions, as outlined in the Articles of Incorporation. Treasury shares = Previously issued shares that have been reacquired by the corporation.</p> Signup and view all the answers

Which of these options are considered to be advantages of a sole proprietorship? (Select all that apply)

<p>No double taxation (B), Ease of dissolution (D), Simple creation (E), Efficient decision-making (F), Less paperwork (I)</p> Signup and view all the answers

What is the primary difference between a sole proprietorship and a corporation in terms of legal personality?

<p>A sole proprietorship does not have a separate legal personality, meaning the owner and the business are considered one entity. In contrast, a corporation has separate legal personality, meaning it exists as a distinct entity separate from its owners.</p> Signup and view all the answers

In a sole proprietorship, the owner is personally liable for all debts and obligations of the business.

<p>True (A)</p> Signup and view all the answers

What government agency is responsible for registering a business name in the Philippines?

<p>Department of Trade and Industry (DTI)</p> Signup and view all the answers

A partnership requires a notarized written agreement if the capital exceeds PHP 3,000 or if immovable property is contributed.

<p>True (A)</p> Signup and view all the answers

Which of the following is NOT an accurate characteristic of a partnership? (Select only one)

<p>Partnerships must be registered with the Securities and Exchange Commission (SEC) to be considered legally valid. (A)</p> Signup and view all the answers

What does the term "Delectus Personae" refer to in the context of partnerships?

<p>The principle of Delectus Personae implies that partners are chosen based on trust, and generally, all partners must consent to new partners being added to the partnership.</p> Signup and view all the answers

What is the primary purpose of the Trust Fund Doctrine in corporate law?

<p>The Trust Fund Doctrine ensures that a corporation's assets are treated as a &quot;trust fund&quot; for its creditors, protecting their financial interests in case of the corporation's inability to pay its debts.</p> Signup and view all the answers

Which of these is NOT considered a type of corporate share? (Select only one)

<p>Venture Capital Shares (B)</p> Signup and view all the answers

What is the main purpose of the Business Judgment Rule in corporate law?

<p>The Business Judgment Rule protects corporate directors and officers from personal liability for business decisions made in good faith, with due diligence, and within their authority. The Rule assumes that directors have the best interests of the corporation at heart.</p> Signup and view all the answers

Which of the following would NOT be considered a limitation on the powers of the board of directors in a corporation? (Select only one)

<p>The board can unilaterally make fundamental changes to the corporation, such as amending the Articles of Incorporation. (D)</p> Signup and view all the answers

A corporation formed to operate a restaurant can legally decide to engage in unrelated activities like mining, without any amendments to its Articles of Incorporation.

<p>False (B)</p> Signup and view all the answers

In the context of a corporation, which of the following is NOT a fiduciary duty of directors? (Select only one)

<p>Duty to maximize shareholder profits (D)</p> Signup and view all the answers

A corporation with public interest must have independent directors comprising at least 20% of their board.

<p>True (A)</p> Signup and view all the answers

What are the two ways that the Securities and Exchange Commission (SEC) can remove directors or trustees from a corporation?

<p>The SEC can remove directors or trustees either through Motu Proprio, acting on its own initiative, or based on a verified complaint filed against the director or trustee.</p> Signup and view all the answers

Stockholders can remove directors through a vote with a simple majority.

<p>False (B)</p> Signup and view all the answers

What is the primary purpose of the underlying principle of the "gratuitously" provided services by directors?

<p>This principle ensures that directors prioritize their long-term interest in the corporation's success, rather than seeking personal gain from their positions. The expectation that their returns on their shares will be sufficient motivation encourages directors to act in the company's best interests.</p> Signup and view all the answers

Which of these situations would NOT result in a director being held liable for damages in a corporation? (Select only one)

<p>A director makes a decision that is within their authority and in good faith, but the project ultimately fails. (A)</p> Signup and view all the answers

A director can be held liable for all damages suffered by the corporation, stockholders, or other affected parties, if they are found guilty of willingly participating in unlawful acts.

<p>True (A)</p> Signup and view all the answers

What is the main distinction between a de jure corporation and a de facto corporation?

<p>A de jure corporation is legally valid and recognized as a corporation under the law, having fully complied with all applicable requirements. A de facto corporation, on the other hand, operates as though it were legally incorporated, but may not have met all the formal requirements. It is generally considered valid in dealings with third parties, but its existence can be challenged in court.</p> Signup and view all the answers

A One Person Corporation (OPC) in the Philippines requires a minimum capital stock.

<p>False (B)</p> Signup and view all the answers

Which of these is NOT a key characteristic of a One Person Corporation (OPC)? (Select only one)

<p>It requires a minimum capital stock. (A)</p> Signup and view all the answers

Flashcards

Sole Proprietorship

Simplest business structure in the Philippines, owned and managed by one person.

Sole Proprietor

The owner and manager of a sole proprietorship.

Unlimited Liability

Sole proprietor is responsible for all business debts with personal assets.

No Asset Separation

Business and personal assets are not legally separated.

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Ease of Formation (sole prop)

Simple and requires minimal documentation to start a sole proprietorship.

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Complete Control (sole prop)

Sole proprietor has full authority over business decisions and operations

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Legal Personality (sole prop)

Sole proprietor and the business are seen as one entity.

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Partnership

Business formed by two or more people pooling resources for profit sharing.

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Entity Taxation (partnership)

Partnership income is taxed first, then distributed to partners.

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Separate Legal Personality (partnership)

Partnership exists independently from its partners like a separate entity

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Articles of Partnership

Written agreement defining partnership terms and conditions.

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De Jure Corporation

Corporation formed in complete legal accordance with the law.

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De Facto Corporation

Corporation formed with flaws but operates legally like proper corp for business dealings.

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Perpetual Term

A corporation's existence that is unlimited.

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One Person Corporation (OPC)

Corporation with a single shareholder.

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Limited Liability (corp)

Shareholders' liability is limited to their share investment.

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Authorized Capital Stock

Maximum amount of shares a corporation can issue.

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Subscribed Capital

Total amount of shares committed by investors.

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Paid-up Capital

Amount of shares fully paid for.

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Trust Fund Doctrine

Corporate assets are protected for creditors before shareholder distributions.

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Common Stock

Basic ownership shares with voting rights and dividend eligibility.

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Preferred Stock

Shares with priority in dividends and liquidation, often no voting rights.

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Independent Directors

Directors without conflicts of interest, crucial for certain publicly listed entities.

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Business Judgment Rule

Directors aren't liable for bad business decisions made in good faith and due diligence.

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Intra Vires Acts

Acts within a corporation's legal authority.

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Ease of Formation (Sole Proprietorship)

Setting up a sole proprietorship is straightforward and requires minimal paperwork.

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Complete Control (Sole Proprietorship)

The sole proprietor has full decision-making power and authority over the business's operations.

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No Asset Separation (Sole Proprietorship)

The owner's personal assets and business assets are not legally distinct.

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Perpetual Term (Corporation)

A corporation that has an unlimited lifespan and doesn't have a set expiration date.

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Limited Liability (Corporation)

The shareholders' liability for the corporation's debts is capped to the amount they invested in the shares.

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Power to Amend Articles of Incorporation

The board can make changes to the corporation's foundational document, but it requires stockholder approval for significant changes.

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Powers Limited to Those of the Corporation

The board cannot go beyond the corporation's authorized powers, as defined by its purpose and the law.

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Duty of Care (Directors)

Directors must exercise the same level of care and diligence as a prudent person would in similar situations, managing the corporation's affairs.

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Liability for Willful Participation (Directors)

Directors can be held personally liable for damages if they knowingly participated in illegal acts of the corporation.

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Liability for Conflict of Interest (Directors)

Directors can be held liable for any profits derived from actions that conflicted with their duty to the corporation.

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Overissued Stocks

Stocks issued beyond the authorized limit specified in the corporation's articles.

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Watered Stocks

Shares issued at a price lower than their par value or agreed subscription price.

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Pre-emptive Rights (Shareholders)

Existing shareholders have the right to purchase new shares before they are offered to the public to maintain their proportional ownership.

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Appraisal Rights (Shareholders)

Shareholders who disagree with certain corporate actions have the right to sell their shares back to the corporation at a fair price.

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Derivative Suits (Shareholders)

Shareholders can sue on behalf of the corporation to address wrongful acts or breaches of fiduciary duty by directors or officers.

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OPC's Separate Legal Personality

An OPC is treated as a distinct legal entity from its single shareholder.

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Study Notes

Sole Proprietorship

  • A sole proprietorship is the simplest form of business organization in the Philippines
  • Owned and managed by one person, called the sole proprietor
  • The business and the owner are considered the same legal entity
  • The owner's personal assets and business assets are not separate
  • The owner is personally liable for all debts and obligations of the business
  • Simple to establish and requires minimal documentation
  • The sole proprietor has complete control over the business operations
  • No separate legal personality
  • Unlimited personal liability

Key Difference from a Corporation

  • Sole Proprietorship: No separate legal personality, owner and business are one
  • Corporation: Separate legal personality; liability is limited to corporate assets
  • Sole Proprietorship: Unlimited personal liability
  • Corporation: Limited liability

Advantages of Sole Proprietorship

  • Simple creation
  • Efficient decision-making
  • Less paperwork
  • No double taxation
  • Ease of dissolution

Disadvantages of Sole Proprietorship

  • Personal liability
  • No asset separation
  • Business ends with death
  • No possibility of ownership sharing

Registering a Sole Proprietorship

  • Register business name with the Department of Trade and Industry (DTI)
  • Choose a unique business name and verify its availability
  • Register the name online or in person
  • Upon approval, receive a DTI Certificate of Registration
  • Obtain Barangay Clearance (from the Barangay Hall)
  • Provide DTI Certificate, proof of address, IDs, and required documents
  • Secure a Mayor's Permit from the Local Government Unit (LGU)
  • Provide Barangay Clearance, DTI Certificate, lease contract, proof of address, and other pertinent business documents
  • Register with the Bureau of Internal Revenue (BIR)
  • Fill out BIR Form 1901 (Application for Registration)
  • Present relevant documents such as Mayor's Permit, DTI Certificate, valid IDs, and proof of address
  • Pay the applicable fees
  • Receive a Certificate of Registration (BIR Form 2303)

Partnership

  • A partnership is a contractual arrangement where two or more persons agree to contribute money, property, or expertise to a common fund, with the goal of sharing profits.
  • Partners are chosen based on trust
  • Each partner is an agent of the partnership, binding it through actions within the scope of its business.
  • Corporations can participate as partners under the Revised Corporation Code

Entity Taxation

  • Partnerships are taxed at the "entity level"
  • Income is first taxed as a partnership, then partners are individually taxed on their shares.
  • The partnership is a distinct legal entity, capable of owning property, suing, and being sued independently of the partners.
  • Non-registration does not invalidate the partnership; failure to meet formalities may void the partnership for immovable property contributions.
  • A notarized written agreement required if capital exceeds 3,000 or if immovable property is contributed
  • Partnership's assets are first used to pay debt, followed by personal assets

Corporation

  • A corporation is an artificial being
  • Governed by Republic Act No. 11232 (Revised Corporation Code of the Philippines)
  • It has separate juridical personality distinct from its owners
  • Owns its own properties
  • Owners' personal properties cannot be used for corporate liabilities (vice versa)
  • Strong legal personality
  • Perpetual existence, regardless of ownership changes
  • Perpetual succession, continuity despite changes in ownership
  • Shares are transferable without affecting operations
  • Liability limited to contributions, shareholders not personally liable for corporate debts
  • Centralized management, specialized directors manage corporation
  • Corporations derive existence after SEC approval and issuance of Certificate of Registration.

Disadvantages of Corporations

  • Complex formation
  • Requires stringent reporting requirements
  • Double taxation (taxes on corporate profits and dividends to shareholders)
  • Possible conflicts of interest among shareholders

Types of Shares

  • Common stock: Basic ownership shares with voting rights and rights to dividends
  • Preferred stock: Shares having priority in dividends and liquidation
  • Founders' shares: Shares with exclusive rights (e.g., specific voting rights) for a limited period
  • Redeemable shares: Shares that the company may repurchase
  • Treasury shares: Previously issued and fully paid shares reacquired by the corporation

Capital

  • Capital refers to the total value of the property or assets of a corporation.
  • Subscribed capital is the total amount shareholders have agreed to contribute
  • Paid-up capital is the portion of subscribed capital fully paid

Trust Fund Doctrine

  • The corporation's assets are considered a trust fund for the benefit of creditors
  • The protection of creditors' rights is paramount
  • Distributions to shareholders are limited if it harms creditors' ability to recover debts
  • No distribution of assets (e.g., dividends, stock buybacks) unless all corporate debts and obligations are satisfied

Powers and Attributes of Corporations

  • Express Powers: Sue, be sued, amend articles, make donations
  • Implied Powers: Necessary for stated corporate purpose
  • Ultra Vires Acts: Actions outside corporate purpose (not valid)

Business Judgment Rule

  • Applies to directors and officers in good faith
  • Protects directors from personal liability for their corporate decisions

Limitations on the Powers of the Board of Directors

  • Must comply with laws, regulations, and corporate documents
  • Cannot unilaterally make fundamental changes that require stockholder approval
  • Cannot exercise powers beyond those of the corporation
  • Must act collectively in meetings

Fiduciary Duty of Directors

  • Duty of Good Faith: Directors must act in the best interest of the corporation
  • Duty of Care: Directors must exercise diligence, prudence, and skill in managing corporate affairs
  • Liability for Breach: Personal liability for damages if they commit acts of gross negligence or bad faith or have conflicts of interest

One Person Corporation (OPC)

  • Formed by a single stockholder
  • The stockholder acts as the sole director and president
  • Has separate legal personality from the stockholder
  • Simpler setup and less bureaucratic than traditional corporations

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Sole Proprietorship in the Philippines PDF

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This quiz covers the key features, differences, and advantages of sole proprietorships as a business organization in the Philippines. Understand how sole proprietorship functions compared to corporations and the implications of personal liability. Test your knowledge on this fundamental business structure.

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