Law On Business Organization PDF

LAW ON BUSINESS ORGANIZATION 3 Known Forms of Business Organization 1. Sole proprietorship 2. Partnership 3. Corporation  SOLE PROPRIETORSHIP The oldest, simplest, and most prevalent form of business enterprise. It is an unorganized business owned by ONE PERSON. The S...

LAW ON BUSINESS ORGANIZATION 3 Known Forms of Business Organization 1. Sole proprietorship 2. Partnership 3. Corporation  SOLE PROPRIETORSHIP 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.  SOLE PROPRIETORSHIP ADVANTAGES DISADVANTAGES Sole enjoyment of profit Sole proprietor is personally Sole proprietor can decide to liable to all debts and continue or stop the operation obligations of the business of the business anytime All decisions and undertakings Low capitalization are to be carried out by the Filing of taxes is generally less proprietor alone complicated than corporations Limited ability to raise capital  PARTNERSHIP Article 1767, Civil Code: “By contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing profits among themselves. Two or more persons may also form a partnership for the exercise of a profession.”  PARTNERSHIP It exists when: WHEN DOES A Two or more persons agree to place PARTNERSHIP their money, property, labor/skill in lawful commerce or business EXISTS? With the understanding that there shall be a proportionate sharing of the profits and losses among them.  Question: WHEN DOES A PARTNERSHIP BEGIN? A Partnership begins from the moment of the execution of a contract, unless it is otherwise stipulated. Essential Requisites of a Partnership: 1. There must be a valid contract; 2. There should be contribution to the common fund of either: money, property, or industry; 3. The business, object, or purpose of the partnership must be lawful; 4. The purpose of the partnership is for profit and with intention of dividing the same among the partners; and 5. There must be 2 or more persons with legal capacity to enter in the contract of partnership.  Example: Jose, Pedro and Santi were classmates Pedro – will contribute Php 50,000.00 back in their college years. On December 15, 2023, Jose approached Jose – will contribute kitchen utensils; the two and discussed the possibility and of establishing a restaurant business Santi – will be the chef since he named Super Trio’s Grill. Pedro and finished culinary arts. Santi agreed. Thereafter, Jose, Pedro and Santi executed a contract of partnership which states among others that:  Example: They also agreed that any Pedro – 60% of the profits profits obtained in the Jose – 30% of the profits business will be divided in: Santi – 10% of the profits IN THIS EXAMPLE, ARE ALL OF THE ESSENTIAL REQUISITES OF A PARTNERSHIP PRESENT?  PARTNERSHIP ADVANTAGES DISADVANTAGES It is easy to form since generally, a The partners are liable for the partnership is formed by mere actions of their co-partners. consent. Easy to dissolve Easy to make a decision. If the partnership is unable to pay More capital is available in the the debts, the personal assets of the business. general partners are liable. Internal conflicts or personal interests of certain partners is always probable.  Classifications of a Partnership Partnerships are classified according to: A. Liability B. Duration  A. Partnership as to Liability: 1. General Partnership All the partners are GENERAL PARTNERS – they are all liable to the extent of their personal property after the partnership assets have been exhausted. 2. Limited Partnership The GENERAL PARTNER – will be held liable beyond his contribution; While a LIMITED PARTNER – is liable only to the extent of his contribution.  B. Partnership as to Duration: 1. Partnership at Will A partnership without a fixed duration set by the partners; It may be terminated depending upon the will of the partners. 2. Partnership for a Specific Period A partnership which is agreed upon to exist only for a specific term or period, or for the accomplishment of a particular undertaking.  Types of Partners A. Capitalist Partner B. Industrial Partner C. General Partner D. Limited Partner E. Managing Partner  Capitalist Partner One who contributes capital (property or money). Under the law: He is not exempt to any losses. Cannot engage in another business which is of the same kind of business of the partnership, unless there is a stipulation to the contrary. He shall receive a share in the profit equivalent to the amount stipulated in the contract. If there is no stipulation, he shall receive profit which is proportionate to his contribution.  Example: Capitalist Partner Lenin and Mark formed a partnership to operate a restaurant business. Lenin contributed 1 Million Pesos, while Mark contributed his industry as the chef of the restaurant. QUESTION: Who is the Capitalist Partner in this case?  Answer: As between Lenin and Mark, Lenin is the Capitalist Partner because he was the one who contributed money to the business.  Example: Capitalist Partner Suppose Lenin wanted to put up another restaurant business in another place, but this time, as a SOLE PROPRIETOR. QUESTION: Is Lenin allowed to do so?  Answer: No, Lenin as a capitalist partner cannot engage in another business which is of the same kind of business of the partnership. However, if Mark will give his consent, then Lenin may establish his own restaurant business.  Example: Capitalist Partner Alternatively, Lenin wants to operate his own car wash business, separate from his and Mark’s restaurant business. QUESTION: Is Lenin allowed to do so even without the consent of Mark?  Answer: Yes, Lenin may operate his own car wash business even without the consent of Mark because the car wash business is not of the same kind of the restaurant business of his and Mark’s.  Industrial Partner One who contributes industry or skills Under the law: He cannot engage in any kind of business for himself, unless the partnership permits him to do so. As for the profits, he shall receive such share as may be just and equitable under the circumstances. He shall not be liable for losses.  Example: Industrial Partner Lenin and Mark formed a partnership to operate a restaurant business. Lenin contributed 1 Million Pesos, while Mark contributed his industry as the chef of the restaurant. QUESTION: Who is the Industrial Partner?  Answer: As between Lenin and Mark, Mark is the Industrial Partner because he was the one who contributed his skills or industry to the business.  Example: Industrial Partner Suppose Mark, while being an industrial partner in the restaurant business, also wants to establish his own restaurant. QUESTION: Is Mark allowed to do so?  Answer: No, Mark as an industrial partner is not allowed to engage in any kind of business for himself. However, if Lenin will give his consent, then Mark may establish his own restaurant business. NOTE! It should be noted that an industrial partner did not contribute money or property, but he contributed his skills or industry in the business. As such, an industrial partner must devote his time to the business.  Example: Industrial Partner Alternatively, Mark wants to establish his own car wash shop, in addition to his and Lenin’s restaurant business. QUESTION: Is Mark allowed to do so?  Answer: No, unlike a capitalist partner, Mark as an Industrial Partner is not allowed to engage in any kind of business whether the business is of the same kind or not. However, if Lenin consents, then Mark can put up his own car wash business.  Other Types of Partners: General Partner – a partner who Managing Partner – a partner is liable beyond the extent of who manages the business of what he has contributed. He can affairs of the partnership. also incur personal liability apart from the partnership. If there is no managing Limited Partner – a partner who partner appointed, all is liable only to the extent of partners shall manage the what he has contributed to the business. partnership.  CORPORATION It 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 incident to its existence. Attributes of a Corporation: It is an artificial being. It is created by operation of law. It has a right of succession; and It has express and implied powers.  QUESTION: WHO MANAGES THE CORPORATION?  Management of the Corporation Since a corporation is an artificial being/person, it cannot act alone. Hence, there should be somebody who should govern its affairs: Here, it can either be the Board of Directors or Board of Trustees who manages the affairs of the corporation.  QUESTION: WHEN DOES THE CORPORATION COMMENCE/BEGIN ITS CORPORATE EXISTENCE?  Answer: A corporation commences its corporate existence and juridical personality from the date that the Securities and Exchange Commission (SEC) issues the certificate of incorporation.  DOCTRINE OF CORPORATE ENTITY Since a corporation is an artificial being, it has a juridical personality which is separate and distinct from the persons who created it. Under the Civil Code, the law recognizes 2 types of persons: 1. Natural Persons – individual human beings; 2. Juridical Persons – corporations, companies duly registered.  DOCTRINE OF CORPORATE ENTITY From the moment a corporation acquires its juridical personality, it becomes separate and distinct from the persons who created it. As such: A corporation can acquire properties in its own name. The property so acquired by the corporation is not the property of the Board of Directors, officers or stockholders. Similarly, the properties of the Board of Directors, officers, or stockholders are not properties of the Corporation. DOCTRINE OF CORPORATE ENTITY A corporation can also enter into different contractual obligations. General Rule: Obligation incurred by the Corporation is the Corporation’s sole liability. Its Directors, officers, or stockholders are not liable.  Example: Mr. A, Mr. B, Mr. C, Mr. D, and Mr. E are Board of Directors of ZZZ Corporation, a corporation engaged in hotel and restaurant business. Sometime on July 15, 2024, Super Typhoon Glenda hits Metro Manila and caused severe damage to one of the corporation’s hotels. Thereafter, the Board of Directors by virtue of a board resolution engaged the services of YYY Construction, Inc., to repair the hotel. The contract price is 1 Million Pesos to be paid in 5 installments or Php 200,000.00 per billing.  Example: However, on the 5th billing, ZZZ Corporation failed to pay. As such, YYY Construction, Inc. demanded payment against the Board of Directors of ZZZ Corporation in their personal capacities and filed a lawsuit against them. QUESTION: IS THE CIVIL CASE FILED FOR COLLECTION AGAINST THE BOARD OF DIRECTORS PROPER?  Answer: No, because under the Doctrine of Corporate Entity, a corporation is an entity separate and distinct from its directors, officers, and stockholders. The liability of the corporation is its sole liability and not a personal liability of its directors, officers, and stockholders. Therefore, the liability should be shouldered by the corporation itself.  DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY This is an exception to the general rule of Doctrine of Corporate Entity. If a corporation is used as a means to perpetrate fraud or an illegal act, or as a vehicle to evade an existing obligation, or when the corporation is used to justify a wrong, protect fraud, or defend a crime: The corporate entity (or the “veil”) that separates the board, officers, and stockholders from the corporation shall be “pierced”. When it is pierced, the corporation and its directors, officers, and stockholders shall be treated as ONE PERSON – such that all of them will be liable, too.  CORPORATIONS ADVANTAGES DISADVANTAGES It has a strong legal personality. The process of forming a Centralized management (there is corporation is complicated. a Board) It is always subject to the control It has perpetual (limitless) and regulation of the existence, unless its Articles of government. Incorporation provides A corporation cannot engage in a otherwise. business other than what is specified under the Articles of Incorporation.