Sole Proprietorship in the Philippines PDF

MODULE 5 Sole Proprietorship A sole proprietorship is the simplest form of business organization in the Philippines. It is owned and managed by one person, called the sole proprietor. Key features include: 1. Single Ownership: ○ The business and the owner are considered the same legal...

MODULE 5 Sole Proprietorship A sole proprietorship is the simplest form of business organization in the Philippines. It is owned and managed by one person, called the sole proprietor. Key features include: 1. Single Ownership: ○ The business and the owner are considered the same legal entity. 2. Assets and Liabilities: ○ The owner’s personal assets and business assets are not separate. ○ The owner is personally liable for all debts and obligations of the business. 3. Ease of Formation: ○ Simple to establish and requires minimal documentation. 4. Control: ○ The sole proprietor has complete control over the business operations. Key Difference from a Corporation Legal Personality: ○ Sole Proprietorship: No separate legal personality; the owner and the business are one. ○ Corporation: Separate legal personality; liability is limited to corporate assets. Liability: ○ Sole Proprietorship: Unlimited personal liability. ○ Corporation: Limited liability. Advantages and Disadvantages of Sole Proprietorship Advantages Disadvantages Simple creation Personal Liability Efficient decision-making No Asset Separation Less paperwork Business Ends with Death No double taxation No Partnership or Ownership Sharing Ease of dissolution Registering a sole proprietorship in the Philippines involves several steps to ensure legal compliance and proper operation. Here's a concise guide: 1. Register Your Business Name with the Department of Trade and Industry (DTI): ○Choose a unique business name and verify its availability through the DTI. ○Register the name online via the DTI Business Name Registration System or visit a DTI office. ○ Upon approval, you'll receive a DTI Certificate of Registration. 2. Obtain Barangay Clearance: ○Proceed to the Barangay Hall where your business is located. ○Submit the DTI Certificate, proof of address, valid IDs, and other required documents. ○ Pay the necessary fees to acquire the Barangay Clearance, certifying compliance with local regulations. 3. Secure a Mayor’s Permit from the Local Government Unit (LGU): ○Visit the Business Permits and Licensing Office (BPLO) of your city or municipality. ○ Provide the Barangay Clearance, DTI Certificate, lease contract or proof of business address, and other pertinent documents. ○ After processing and fee payment, you'll receive the Mayor’s Permit, authorizing your business to operate locally. 4. Register with the Bureau of Internal Revenue (BIR): ○ Go to the BIR Revenue District Office (RDO) where your business is situated. ○ Fill out and submit BIR Form 1901 (Application for Registration for Self-Employed and Mixed Income Individuals, Estates/Trusts). ○ Present the Mayor’s Permit, DTI Certificate, Barangay Clearance, valid IDs, and proof of address. ○ Pay the Annual Registration Fee and Documentary Stamp Tax. ○ Register your Books of Accounts and have your Official Receipts or Sales Invoices printed. ○ Attend the required taxpayer's briefing, if applicable. ○ Upon completion, the BIR will issue a Certificate of Registration (BIR Form 2303), indicating your tax obligations. Partnership Definition: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. Key Characteristics:  1. Entity Taxation: ○ Partnerships are taxed at the "entity level," meaning income is first taxed as a partnership, and then partners are taxed individually on their share. 2. Separate Legal Personality: ○ The partnership is a distinct entity, capable of owning property, suing, and being sued independently of the partners. A. Requisites for Forming a Partnership 1. Minimum Requirements: ○ At least two individuals. ○ A valid contract with consent, a lawful object, and a clear purpose. ○ Contributions to a common fund (money, property, or expertise). ○ The intent to divide profits from lawful activities. 2. Registration: ○ While partnerships can exist without formal registration, registering with the Securities and Exchange Commission (SEC) gives public notice and avoids legal complications. ○ Registration involves drafting the Articles of Partnership and reserving a name with the SEC. 3. Effect of Non-Registration: ○ Non-registration does not invalidate the partnership or absolve liability to third parties. ○ Failure to meet formalities, such as for immovable property contributions, can void the partnership. B. Written Agreements Public Instrument Requirement: ○ A notarized written agreement is necessary if the capital exceeds ₱3,000 or if immovable property is contributed. C. Legal Personality A partnership has a legal identity separate from its partners: ○ Ownership: Assets contributed to the partnership belong to it, not individual partners. ○ Liabilities: Partnership debts are first satisfied from its assets, and partners are liable pro-rata with personal assets after partnership assets are exhausted. D. Who May Be a Partner 1. Principle of Delectus Personae: ○ Partners are chosen based on trust; all must consent to new partners. 2. Mutual Agency: ○ Each partner is an agent of the partnership, binding it through actions within the scope of its business. 3. Corporate Partners: ○ Corporations can participate as partners under the Revised Corporation Code. E. Rights and Obligations of Partners 1. Profit and Loss Sharing: ○ As agreed in the partnership contract; if unspecified, shared in proportion to contributions. 2. Liabilities: ○ Partners share liabilities pro-rata after partnership assets are exhausted. 3. Limited Partnerships: ○ Limited partners’ liability is restricted to their contributions unless they engage in management. F. Management 1. Mutual Agency: ○ All partners can bind the partnership unless limited by agreement. 2. Restrictions: ○ Acts outside usual business (e.g., renting tractors for a coffee shop) require consent from all partners. G. Advantages and Disadvantages Advantages:  1. Easy to form and manage compared to corporations. 2. Not subject to stringent reporting requirements. 3. Separate legal personality allows for independent property ownership and litigation. Disadvantages: 1. Unlimited Liability: ○ General partners risk personal assets for partnership debts. 2. Double Taxation: ○ Income taxed at the partnership level and upon distribution to partners. 3. Continuity Issues: ○ Withdrawal or death of a partner dissolves the partnership. ○ If someone leaves the partnership, the partnership is dissolved 4. Restricted Transferability: ○ Transferring partnership interests requires consent from all partners. Conclusion Partnerships provide flexibility and shared resources but come with significant risks, especially unlimited liability and potential dissolution upon partner withdrawal. While easier to establish than corporations, partnerships are less stable and require mutual trust among partners. Detailed Summary: Section Three – Corporation Overview Governed by Republic Act No. 11232 (Revised Corporation Code of the Philippines). Applicable to large corporations with numerous shareholders but also includes provisions for one-person corporations and close corporations. Corporations are "artificial beings" created by law with distinct legal personality, perpetual succession, and certain powers. A. Legal Attributes of Corporations 1. Artificial Being: ○ Separate juridical personality distinct from owners.  ○ Corporation owns its properties; shareholders’ personal properties cannot be used for corporate liabilities and vice versa. ○ Case Example: Francisco Motors Corporation (FMC): The Court ruled that the personal liabilities of FMC’s directors did not extend to FMC, affirming the corporation’s separate personality. ○ Piercing the Veil of Corporate Fiction: Courts may disregard the separate personality if it is used to: Commit fraud, justify wrong, circumvent the law, or protect crime. Factors that indicate abuse include inadequate capitalization, lack of independent business operations, or treating the corporation as an alter ego. 2. Creation by Law: ○ Corporations derive existence only after SEC approval and issuance of a Certificate of Registration. ○ No private party can question its validity; only the Solicitor General can challenge via a quo warranto proceeding. 3. Right of Succession: ○Shares are transferable, and the death of a shareholder does not affect the corporation’s existence. ○ Corporations now have perpetual existence unless limited by their Articles of Incorporation. 4. Powers and Attributes: ○ Express Powers: Sue and be sued, amend Articles, adopt by-laws, issue stocks, and make donations for public purposes. ○ Implied Powers: Engage in business activities necessary for its purpose as stated in its Articles of Incorporation. ○ Ultra Vires Acts: Actions outside the scope of corporate purpose are voidable but may be ratified by shareholders. Advantages of Corporations 1. Strong Legal Personality:  ○ Corporation exists independently of its owners. 2. Limited Liability: ○ Shareholders are only liable up to their capital contributions. 3. Perpetual Existence: ○ Continuity despite changes in ownership. 4. Ownership Transferability: ○ Shares can be sold without affecting operations. 5. Centralized Management: ○ Directors with specialized knowledge manage the corporation. Disadvantages of Corporations 1. Complex Formation: ○ Requires SEC registration and compliance with stringent laws. 2. Double Taxation: ○ Corporate profits taxed at the entity level; dividends taxed again at the shareholder level. 3. Conflicts of Interest: ○ Potential for disputes between majority and minority shareholders. 4. Costly Setup: ○ High organizational and operational expenses. Illustrations and Applications 1. Piercing the Veil: ○ If a parent corporation exercises undue control over a subsidiary (e.g., shared finances, inadequate capitalization), the Court may treat both entities as one. 2. Ultra Vires Example: ○ A corporation operating outside its defined purpose (e.g., garment manufacturer producing movies) is committing an ultra vires act, but it may be ratified if agreed upon by shareholders. Capital and Kinds of Shares in Corporations Capital in Corporations Definition: ○ 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 the subscribed capital that has been fully paid.  Key Requirements Under the Corporation Code: ○ Authorized Capital Stock: The maximum amount of shares a corporation is allowed to issue. ○ No minimum authorized capital is required under current law (as of 2019). ○ Pre-2019 requirements mandated: 25% of shares must be subscribed. 25% of subscribed shares must be paid-up. Minimum paid-up capital of PHP 5,000. Trust Fund Doctrine: The Trust Fund Doctrine is a principle in corporate law that ensures the assets of a corporation are treated as a "trust fund" for the benefit of its creditors. This doctrine safeguards corporate creditors by restricting the distribution of corporate assets to shareholders if it would harm the creditors' ability to recover what they are owed. ○ Subscriptions to capital are treated as a fund for creditors. ○ Corporations cannot release subscribers from paying their commitments without valuable consideration or to the prejudice of creditors. Key Points of the Trust Fund Doctrine 1. Corporate Assets as a Trust Fund: ○ The capital stock and other assets of the corporation are considered a trust fund. ○ These assets are primarily meant to pay the corporation's debts and obligations before being distributed to shareholders. 2. Restriction on Asset Distribution: ○ No distribution of assets (e.g., dividends, stock buybacks, liquidation proceeds) to shareholders is allowed unless all corporate debts have been fully satisfied or provisions have been made to pay them. 3. Fraud on Creditors: ○ If a corporation distributes its assets to shareholders while ignoring its debts, this act is deemed fraudulent. ○ Creditors can challenge such distributions, and the shareholders who received the assets may be required to return them to satisfy the corporation's debts. 4. Unimpaired Capital Rule: ○ The capital stock of the corporation must remain unimpaired to protect creditors. This means the corporation cannot reduce its capital stock through distributions that would leave it unable to pay its debts. Purpose of the Doctrine Protect Creditors: Ensures creditors have a claim on the corporation's assets before shareholders.  Maintain Corporate Solvency: Prevents shareholders from draining corporate assets and leaving creditors unpaid. Promote Corporate Responsibility: Encourages corporations to act responsibly in managing their financial resources. Kinds of Shares Corporations can issue different types of shares, each with specific rights and characteristics: 1. Common Stock: ○ Basic ownership shares with: 1. Voting rights. 2. Rights to dividends. 3. Access to inspect corporate books. ○ You get paid last after creditor and preferred shareholders 2. Preferred Stock: ○ Entitled to preference in: 1. Priority in dividends 2. Priority in liquidation 3. No voting rights ○ Can only be issued with a par value. ○ Sometime can be convertible to common stock or callable (company can repurchase them after a certain date) ○ Preferences must be detailed in the Articles of Incorporation and registered with the SEC. 3. Founders' Shares: ○ May have exclusive rights (e.g., voting rights) for a limited period (max 5 years) subject to SEC approval. 4. Redeemable Shares: ○Shares the corporation can buy back upon certain conditions, as outlined in the Articles of Incorporation. 5. Treasury Shares: ○ Previously issued and fully paid shares reacquired by the corporation. ○ Can be resold by the corporation at a price determined by the board. Sample Problem: Subscription Example Scenario: Nicole Fury is forming a corporation with a target minimum capital of PHP 30,000,000. The following people have subscribed to shares: Subscriber Shares Value (PHP) Subscribed Sandra Rogers 1,000 30,000 Alexa Stark 20,000 600,000 Donabeth Blake 3,000 90,000 Brenda Banner 1,000 30,000 Hillary Barton 1,000 30,000 Nathaniel Romanova 2,000 60,000 Questions: 1. What is the authorized capital stock? ○Authorized capital is the maximum amount of shares the corporation can issue, typically set based on business needs (not provided in problem). 2. What is the subscribed capital stock? ○ Subscribed capital is the total value of shares committed by subscribers: 30,000+600,000+90,000+30,000+30,000+60,000=PHP840,00030,000 + 600,000 + 90,000 + 30,000 + 30,000 + 60,000 = PHP 840,000. Explanation of De Jure and De Facto Corporations 1. De Jure Corporation Definition: A corporation that is created in strict compliance with the law. It meets all mandatory statutory requirements for incorporation. Key Features: ○ It is legally valid and recognized under the law. ○ Its right to exist as a corporation cannot be questioned by any party, including the state. ○ Created through full adherence to the rules set by the Corporation Code or similar legislation. Example:  ○ ABC Corp. files its Articles of Incorporation with the Securities and Exchange Commission (SEC), submits all required documents, pays the necessary fees, and follows all legal requirements. It becomes a de jure corporation. 2. De Facto Corporation Definition: A corporation that exists and operates as though it were legally incorporated but has not fully complied with the statutory requirements for incorporation. Key Features: ○ It is treated as a corporation in practice for the protection of third parties who deal with it in good faith. ○ However, its existence can be challenged by the state in a quo warranto proceeding (a legal action questioning its right to act as a corporation). ○ It is not fully legal and lacks all the protections of a de jure corporation. Requirements for De Facto Status: ○ A valid law under which incorporation is possible. ○ Good faith attempt to comply with the incorporation requirements. ○ Exercise of corporate powers as though it were properly incorporated. Example: ○ DEF Corp. files its Articles of Incorporation with the SEC but forgets to pay the filing fee. The SEC has not officially issued a certificate of incorporation, but DEF Corp. begins operating as a business. While it is not a de jure corporation, it may be treated as a de facto corporation in dealings with third parties. Explanation of the Term of a Corporation (Philippines) Under the Revised Corporation Code of the Philippines (RA 11232), the rules regarding the term of a corporation have been modernized. Here's a breakdown of the key points: 1. Perpetual Term as the Default The default term of a corporation is now perpetual (unlimited duration) unless a specific term is indicated in the Articles of Incorporation (AOI). ○ Why Perpetual? To eliminate the need for corporations to renew their existence periodically (previously limited to 50 years with renewable extensions). It simplifies corporate operations and planning. 2. Option for a Specific Term Corporations may still specify a fixed term in the AOI, which can now exceed 50 years.  ○ Extension: The term may be extended beyond 50 years by amending the AOI. Extensions require a vote of stockholders representing at least two-thirds of the outstanding capital stock. 3. Automatic Perpetual Term for Existing Corporations As of February 23, 2019 (the effectivity date of the Revised Corporation Code): ○ Existing corporations with a term specified in their AOI are automatically granted perpetual existence, regardless of the term originally indicated. ○ Exception: A corporation may opt to retain the term specified in its AOI by securing a vote of stockholders holding a majority of the outstanding capital stock. 4. Stockholders' Rights in Case of Term Adjustment Stockholders who dissent to changing the term (e.g., from specific to perpetual) may exercise their appraisal right: ○ Appraisal Right: The right to demand the corporation to buy back their shares at a fair value if they disagree with certain corporate decisions. Example: A stockholder votes against extending the term to perpetual and opts to sell their shares back to the corporation. Illustration 1. Existing Corporation (Specific Term): ○XYZ Corporation was incorporated in 2000 with a 50-year term set to expire in 2050. ○ Under the Revised Corporation Code (2019), its term is now perpetual unless the stockholders vote to retain the original expiration of 2050. 2. New Corporation (Perpetual Term): ○ ABC Corporation is incorporated in 2023. It does not indicate a specific term in its AOI, so its term is automatically perpetual. 3. Stockholder Dissent:  ○ If XYZ Corporation’s stockholders vote to amend the term to perpetual, dissenting stockholders can exercise their appraisal right and sell their shares back to the corporation. Key Points to Remember 1. Default Term: Perpetual (unlimited duration). 2. Specific Term: May be indicated in the AOI and can exceed 50 years. 3. Automatic Conversion: Existing corporations as of February 23, 2019, automatically have perpetual existence unless stockholders vote otherwise. 4. Appraisal Right: Dissenting stockholders can sell back their shares if they oppose the change in term. Let me know if you'd like further examples or details! Powers of the Board of Directors in a Corporation The board of directors (or trustees in the case of non-stock corporations) is the governing body of a corporation, entrusted with the exercise of its powers, the management of its business, and control over its property. Here's a detailed breakdown: 1. Key Powers and Functions of the Board of Directors 1. Exercise of Corporate Powers: ○ The board acts as the corporate entity's decision-making authority. ○ The corporation itself cannot act except through its board. 2. Control Over Corporate Property: ○ The board oversees and controls the use, management, and disposition of corporate property. 3. Conduct of Business: ○ The board decides on business strategies, policies, and key operations. 4. Delegation of Authority: ○ While the board holds general powers, it may delegate specific functions to officers or committees, such as the CEO or an executive committee, as authorized in the corporation’s by-laws. 2. Election and Relationship with Stockholders 1. Election by Stockholders: ○ Stockholders elect the board of directors during annual meetings. 2. Autonomy of the Board: ○ Once elected, directors have autonomy in managing the corporation. ○ Stockholders cannot directly control or bind the corporation in day-to-day operations. ○ Example: If stockholders disagree with a board decision, they cannot reverse it through a resolution unless specifically allowed by the corporation’s by-laws. 3. Indirect Control Through Votes: ○ Stockholders influence the corporation by: Electing or removing directors. Voting on specific matters like mergers or amendments to the Articles of Incorporation. 3. Limitation on Stockholders' Authority Stockholders cannot directly bind or obligate the corporation by their actions. Case Reference: ○ Ramirez v. Orientalist Co. (38 Phil 634): A shareholder resolution repudiating a board’s act was deemed ineffective. This underscores the principle that stockholders' decisions do not supersede the powers of the board unless expressly authorized. 4. Legal and Fiduciary Responsibilities of the Board 1. Duty of Loyalty: ○ Directors must act in the best interests of the corporation and avoid conflicts of interest. 2. Duty of Care: ○ Directors must exercise diligence, prudence, and skill in managing corporate affairs.  3. Liability for Mismanagement: ○ Directors may be held personally liable for acts of gross negligence or bad faith that harm the corporation. 5. Practical Example Scenario: Stockholders' Role: ○ Shareholders of XYZ Corp. elect a board to manage the corporation. ○ A group of stockholders disagrees with a board decision to invest in a risky project. They pass a resolution to stop the investment. Board's Role: ○ The board proceeds with the project because stockholders cannot bind the corporation directly. Their resolution is ineffective unless specific provisions in the by-laws empower stockholders to override board decisions. Key Takeaways 1. The board of directors/trustees exercises the corporation’s powers, manages its business, and controls its property. 2. Stockholders elect the board but cannot directly control its actions or bind the corporation through resolutions. 3. Directors have fiduciary duties to act in the best interests of the corporation, and their acts are subject to the law and corporate governance rules. The Business Judgment Rule: Applications The Business Judgment Rule is a legal principle protecting corporate directors and officers from liability when they act in good faith, within their authority, and in the best interests of the corporation. Here's a breakdown of its two main applications: 1. Intra Vires Acts of the Board of Directors Definition:  ○ Intra vires acts are actions taken by the board that fall within the corporation’s lawful authority as outlined in its Articles of Incorporation, by-laws, and applicable laws. Application: ○ Courts will not interfere with or reverse the intra vires decisions of the board, even if such decisions are unpopular with stockholders, as long as the decisions are made in good faith and within the board's authority. Rationale: ○ Directors are presumed to have better knowledge of the corporation’s needs and operations than courts or stockholders. ○ This rule prevents frivolous lawsuits and promotes efficient corporate management. Example: ○ The board of directors of XYZ Corp. decides to invest a significant portion of corporate funds into a risky venture. Some stockholders object, claiming it is a bad decision. ○ Outcome: Courts will uphold the board’s decision as long as it was made in good faith, with due diligence, and within the corporation’s lawful purpose, even if the venture ultimately fails. 2. Protection from Personal Liability for Good Faith Decisions Definition: ○ Directors and officers are shielded from personal liability for the consequences of their decisions if they acted: 1. In good faith: With honest intentions and without conflicts of interest. 2. With due care: Using reasonable skill and diligence. 3. In the best interests of the corporation. Application: ○ If directors or officers make decisions that result in corporate losses, they are not personally liable as long as they exercised reasonable judgment and complied with their fiduciary duties. Rationale: ○ This protection encourages directors to take calculated risks for the corporation’s benefit without fear of personal liability for business failures.  Example: ○ The directors of ABC Corp. approve a new product line that ultimately fails and causes financial losses. Stockholders sue the directors for mismanagement. ○ Outcome: The directors are not personally liable as long as they acted in good faith, conducted proper due diligence, and had reasonable grounds to believe the product line would succeed. Limitations of the Business Judgment Rule The protection under the Business Judgment Rule does not apply if: 1. Bad Faith: The directors acted dishonestly or with fraudulent intent. 2. Conflict of Interest: Directors prioritized personal gain over the corporation’s interests. 3. Gross Negligence: Directors failed to exercise due diligence or acted recklessly. Key Takeaways 1. Intra Vires Acts: Courts will not reverse lawful, good-faith decisions of the board, even if stockholders demand it. 2. Good Faith Decisions: Directors and officers are protected from personal liability for business losses resulting from good-faith decisions. 3. Encourages Risk-Taking: The rule supports directors in making bold but calculated business decisions without undue fear of personal lawsuits. This principle ensures a balance between allowing directors the freedom to manage the corporation effectively and holding them accountable for actions made in bad faith or with gross negligence. Let me know if you'd like further clarification! Limitations on the Powers of the Board of Directors While the board of directors has broad powers to manage and oversee the operations of a corporation, its authority is not unlimited. Here are the key limitations and the principles underlying them: 1. Observance of Legal and Regulatory Restrictions  Limitation: ○ The board must operate within the framework of: The Constitution (e.g., limits on foreign ownership for certain industries). Statutes and Regulations (e.g., compliance with the Revised Corporation Code, labor laws, tax laws, and SEC regulations). The corporation’s Articles of Incorporation and by-laws, which may impose additional restrictions. Examples: ○ A corporation cannot engage in activities prohibited by law, such as violating foreign investment restrictions under the Foreign Investments Act. ○ If the corporation’s Articles of Incorporation state that it exists to engage in manufacturing, the board cannot decide to engage in unrelated activities, like real estate. 2. Inability to Perform Constituent Acts Without Stockholder Approval Limitation: ○ The board cannot unilaterally decide on actions involving fundamental changes to the corporation. These actions require the approval of stockholders, often by a two-thirds vote of outstanding capital stock. Examples of Constituent Acts: ○ Amendments to the Articles of Incorporation: Example: Changing the corporate name or extending the corporate term. ○ Mergers and Consolidations: Example: Approving the merger of the corporation with another company. ○ Dissolution of the Corporation: Example: Deciding to cease operations and liquidate assets. ○ Sale or Disposal of Substantially All Assets: Example: Selling the company’s primary business without stockholder consent. Reason: ○ These actions affect the fundamental structure or nature of the corporation, so stockholders must have a say in the decision. 3. Powers Limited to Those of the Corporation  Limitation: ○The board cannot exercise powers that the corporation itself does not possess. ○A corporation’s powers are defined by: The Articles of Incorporation. The law under which it is incorporated. Examples: ○ A corporation formed to operate a restaurant cannot decide to engage in unrelated activities like mining unless its Articles of Incorporation are amended. ○ A corporation cannot donate funds to political campaigns if such activity is not authorized by its purpose or the law. Fiduciary Duty of Directors Directors are fiduciaries of the corporation, meaning they must act in the corporation’s best interest, with loyalty, care, and diligence. 1. Duty of Good Faith: ○ Directors must act honestly and in the best interest of the corporation. 2. Duty of Care: ○ Directors must exercise the same diligence, care, and skill that an ordinarily prudent person would use in similar circumstances. 3. Liability for Breach: ○Directors are personally liable for damages if they: Commit acts of gross negligence or bad faith. Engage in self-dealing or prioritize personal interests over the corporation’s. Examples of Breach: ○ A director approves a transaction with a company they own, at the expense of the corporation. ○ A director negligently fails to monitor significant risks, resulting in corporate losses. Summary 1. Limits on Powers of the Board:  ○ Must comply with laws, regulations, and corporate documents. ○ Cannot unilaterally make fundamental changes (requires stockholder approval). ○ Cannot exercise powers beyond those of the corporation. 2. Fiduciary Duties: ○ Directors must act in good faith and with due care. ○ They are personally liable if they breach their fiduciary responsibilities. The board of directors must act collectively at a meeting with a quorum to bind the corporation. This ensures decisions are made after full discussion and deliberation. Directors, unlike officers, are not individual agents of the corporation and cannot act alone to bind it; their authority exists only as a collective body. The board of directors may delegate powers to executive committees or management companies, except for powers that special laws require the board itself to exercise. Purely ministerial duties can be delegated. In stock corporations, directors serve for one year, while in non-stock corporations, trustees may serve terms of 1 to 3 years, depending on the Articles of Incorporation and by-laws. Qualification to be director: ○ Must own at least one share of the corporation’s capital stock, registered in their name. ○ Share ownership must be continuous throughout the director's term. ○ A majority of directors must be Philippine residents. ○ Must meet any additional qualifications stated in the by-laws, provided these do not conflict with the above. ○ Must not have any disqualifications under law or the corporation's rules. Independent Directors Corporations with public interest must have independent directors comprising at least 20% of their board. These include: 1. Corporations under Sec. 17.2 of the Securities Regulation Code (R.A. 8799): ○ Companies whose securities are registered with the SEC. ○ Corporations listed on a stock exchange. ○ Entities with ₱50 million or more in assets and 200 or more shareholders, each holding at least 100 shares. 2. Financial Institutions: ○ Includes banks, quasi-banks, non-stock savings and loan associations (NSSLAs), pawnshops, money service businesses, preneed companies, trust companies, and insurance companies. 3. Other Public Interest Corporations:  ○ Corporations engaged in businesses similar to those above, as determined by the SEC. Requisites for a Valid Board Meeting: 1. Meeting of the board assembled as a body in a lawful meeting. 2. Presence of a quorum. 3. Decisions are made by majority of the quorum or in some cases, a majority of the board. 4. Meeting at the place, time and in the manner provided in the by-laws. Proxies are not allowed in board meetings. Removal of Directors/Trustees by the SEC The SEC may remove directors or trustees after due notice and hearing in two ways: 1. Modes of Removal: ○ Motu Proprio: The SEC acts on its own initiative. ○ Upon Verified Complaint: A formal complaint is filed. 2. Grounds for Removal: ○ The director/trustee was elected despite being disqualified. ○ The disqualification arose after the election. ○ The disqualification was discovered after the election. 3. Sanctions: ○ The SEC may impose penalties on directors or trustees who, despite knowing the disqualification, failed to act to remove the disqualified person. Removal of Directors by Stockholders 1. Removal by Stockholders: ○ Directors may be removed by a vote of at least two-thirds (2/3) of the stockholders. ○ This must occur during a meeting called for the purpose of removal. 2. Grounds for Removal: ○ Removal can be for any reason but must not prejudice the rights of minority shareholders.  ○ Directors representing minority shareholders may only be removed for cause and after due process. Filling Up Board Vacancies 1. When the Board Can Fill Vacancies: ○ If the vacancy arises from reasons other than removal or an increase in the number of directors, and the board still has a quorum, the remaining directors may fill the vacancy. 2. Emergency Vacancies: ○ If the vacancy prevents a quorum and emergency action is required to prevent grave and irreparable loss, the vacancy may be temporarily filled: From among the corporation's officers. By a unanimous vote of the remaining directors or trustees. ○ The emergency-appointed director’s actions are limited to addressing the emergency. ○ Their term ends when: The emergency ends, or A replacement is elected by the stockholders. 3. Notification to the SEC: ○ The corporation must notify the Securities and Exchange Commission (SEC) within 3 days of creating an emergency board, explaining the reason for its formation. 4. Stockholder or Membership Meeting: ○ For vacancies due to removal or other cases, stockholders or members must fill the vacancy in a meeting. 5. Term of Replacement: ○ The replacement director or trustee will serve only the remaining term of the predecessor. Summary: Compensation of Directors 1. No Automatic Compensation: ○ By default, directors do not receive compensation unless: Provided in the by-laws, or Approved by a majority of the stockholders. 2. Per Diems Allowed: ○ Directors may receive reasonable per diems for attending board meetings. 3. Limits on Compensation: ○ If compensation is approved, the total yearly compensation for directors cannot exceed 10% of the corporation's net income before tax for the previous year.  4. Bonuses: ○ Directors cannot give themselves bonuses unless authorized by stockholders. 5. Underlying Principle: ○ Directors are presumed to render their services gratuitously, with the expectation that the return on their shares is sufficient motivation. This ensures directors act in the corporation’s interest without excessive personal financial gain. When Directors Can Be Held Liable for Damages Directors can be held liable in the following situations: 1. Willful Participation in Unlawful Acts: ○ When a director willfully and knowingly votes or assents to patently unlawful acts of the corporation. 2. Gross Negligence or Bad Faith: ○ When a director is guilty of gross negligence or acts in bad faith while managing the corporation’s affairs. 3. Conflict of Interest: ○ When a director acquires personal or pecuniary interests that conflict with their duty to the corporation. 4. Misappropriation of Corporate Opportunity: ○ When a director takes for themselves a business opportunity that rightfully belongs to the corporation, unless ratified by 2/3 of stockholders. Consequences For Cases 1 and 2: ○ Directors are held jointly and severally liable for all damages suffered by the corporation, stockholders, or other affected parties. For Cases 3 and 4: ○ The director must account for and refund all profits derived from the conflict or misappropriated opportunity. Summary: Corporation Code – Stocks and Stockholders Stocks and Stock Certificates 1. Issuance of Stocks:  ○ Corporations can issue shares only up to the amount specified in their authorized capital stock. ○ Overissued Stocks: Shares issued beyond the authorized limit are void, and holders are not recognized as stockholders. 2. Watered Stocks: ○ Shares issued below their par value or agreed subscription price are considered watered stocks. ○ Liability for the deficiency is solidary (joint and several) between the consenting director/officer and the stockholder. 3. Balance of Subscription: ○ Payable on the date specified in the subscription agreement or, if not indicated, on the date stated in a call by the board. ○ Shares become delinquent if unpaid within 30 days of the specified date. Transfer of Stocks 1. Requirements: ○ Indorsement and Delivery of the stock certificate. ○ Recording in the corporate books to bind third parties. 2. Restrictions: ○ Shares with unpaid claims by the corporation cannot be transferred. Rights of Shareholders 1. Voting Rights: ○ Shareholders can vote on corporate matters, such as electing directors or approving amendments to the Articles of Incorporation. 2. Right to Dividends: ○ Shareholders are entitled to receive dividends if declared by the board. 3. Pre-emptive Rights: ○ Existing shareholders have the right to purchase newly issued shares to maintain their proportional ownership. 4. Information Rights: ○ Shareholders have the right to inspect corporate books and records.  5. Appraisal Rights: ○ Shareholders can demand the corporation buy back their shares at fair value if they dissent from certain corporate actions. 6. Right to File Derivative Suits: ○ Shareholders can sue on behalf of the corporation for wrongful acts or breaches of fiduciary duty by directors or officers. This framework ensures orderly management of stocks, protection of shareholder interests, and accountability in corporate governance. Let me know if you'd like further clarification! Summary: Powers of a Corporation Inherent Powers of a Corporation (Section 35): 1. To sue and be sued in its corporate name. 2. Succession by its corporate name for the duration of its term. 3. Adopt and use a corporate seal. 4. Amend the Articles of Incorporation. 5. Adopt, amend, or repeal by-laws that comply with law and public policy. 6. Issue and sell stocks to subscribers or sell treasury stocks. 7. Exercise ownership over its assets. 8. Enter into partnerships, joint ventures, mergers, or consolidations. 9. Make reasonable donations, except to political parties or candidates. 10. Establish pension, retirement, and other benefit plans for its personnel. 11. Exercise other powers necessary or incidental to achieve its purposes. Classification of Powers 1. Express Powers: ○ Those explicitly granted by law, such as Section 35 powers. 2. Implied Powers: ○ Necessary to execute express powers or conduct business. 3. Inherent Powers: ○ Powers that naturally arise from corporate existence (e.g., Section 35). Ultra Vires Acts Definition:  ○ Acts that are beyond the powers of a corporation, as defined by law or the Articles of Incorporation. Key Points: ○ Ultra vires acts are not inherently illegal unless they violate the law. ○ The validity of an ultra vires act depends on its performance status. Effects of Ultra Vires Acts (If Not Illegal) 1. Executory: ○ If the act has not been performed by either party, it cannot be enforced. 2. Fully Performed: ○ If fully performed on both sides, it cannot be set aside or recovered. 3. Partially Performed: ○ If performed by one party, the performing party can recover from the other. Presumption of Validity: A corporate act or contract is presumed valid unless there is clear proof it is beyond the corporation's powers. Key Takeaways Corporations derive powers from the law, their Articles of Incorporation, and incidental needs. Ultra vires acts are not automatically invalid but are unenforceable unless fully or partially performed. Corporate acts are presumed valid unless proven otherwise. Let me know if you need more details! Summary: One Person Corporation (OPC) A One Person Corporation (OPC) is a corporation formed by a single stockholder, distinct from sole proprietorships. Key features include: 1. Single Stockholder: ○ Only a natural person, trust, or estate can form an OPC. ○ The single stockholder serves as the sole director and president.  2. Separate Legal Personality: ○ The OPC has a distinct legal identity, separate from the stockholder. 3. Restrictions on Roles: ○ The stockholder cannot be the corporate secretary but can serve as treasurer. ○ If the stockholder is also the treasurer, they must provide a surety bond to the SEC. 4. Nominees for Continuity: ○The stockholder must appoint a nominee and alternate nominee to manage the OPC in case of their incapacity or death. 5. Key Characteristics: ○ Always a stock corporation. ○ No minimum capital is required. ○ The term can be perpetual or specific, with the flexibility to change. 6. Corporate Name: ○ The corporation must include "OPC" in its name. 7. Simplified Requirements: ○ OPCs are exempt from filing by-laws. ○ They can be converted to an ordinary stock corporation or vice versa. Comparison with Single Proprietorship Legal Personality: ○ OPC: Separate and distinct from the owner. ○ Single Proprietorship: No separate legal personality; the owner and the business are the same. Liability: ○ OPC: Limited to the corporation's assets. ○ Single Proprietorship: Unlimited personal liability. This structure provides flexibility and limited liability for entrepreneurs, combining the benefits of incorporation with the simplicity of sole ownership. Let me know if you'd like further clarification!