WELCOME TO THE NEW SCHOOL YEAR 2020-2021, and welcome

to LAWS 1023: Business Laws and Regulations!

 
As future Public Accountants and Managerial Accountants, you need to be well-versed with
the law, especially those that are used in business and trade. You have already finished a law
course, LAWS 1013, in which you have learned about Obligations and Contracts, which form
part of the very foundation of Business Transactions. From there, we take it up a notch as we
discuss Business Organizations, particularly Partnerships and Corporations, and the laws
governing them. A vast majority of business organizations are of these types, and therefore
there is a huge chance that you will be employed in these kinds of organizations, or better yet,
start your own Partnership or Corporation
As Partnerships and Corporations are types of business organizations that involve multiple
persons, certain conflicts can arise. Being knowledgeable in the laws governing these
business organizations is a huge help in settlement of disputes or conflicts that arise. This
course is filled with legal provisions, principles, and concepts that apply in certain situations
involving Partnerships and Corporations. The underlying philosophies behind the letters of the
law are also discussed here for deeper understanding and appreciation of these provisions. It
is important for you also to be aware and familiar with the rights and remedies of certain
parties, which as future Accountants, will help you give sound advice to clients or to members
of senior management in your future workplaces, or to your own businesses, as the case may
be.
Expect a student-centered approach to be employed by your respective instructors. This
entails accomplishing the lessons and tasks within a given time frame, to ensure learning. You
are lucky to still be given the opportunity to study, while others are no longer able to do so. So,
grab this opportunity to learn and understand as much as you can. It may be normal to feel
anxious at certain points in this semester, especially with the kind of situation we are in, but
always remember that we, your instructors, are willing to help you in your learning journey. Let
us embrace this new normal way of learning, and together, we shall overcome the challenges
come with this situation we are in.
We can only hope for a smooth-sailing, fruitful, and fun learning experience, and so we ask for
your cooperation. After all, this is for you as you prepare to be future professionals. May God
be with us all as we embark in the continuation of our learning journeys, albeit made colorful
by the setback that is surely difficult, but nothing we can't overcome.

Grading System
In this "new normal" way of learning, we are adjusting the weights of the different learning
activities we will be doing in this course. The usual 50-50 sharing between Class Standing and
Major Exams will no longer be applied. Instead, a heavier weight is given to Class Standing as
greater emphasis is given to this component to ensure maximum class interaction. Class
Standing is now 60% of the grades of each term (Preliminary, Midterm, and Final). Major Exams
is now 40% of each term's grade.
 
Breaking down further the Class Standing, we have:
 
a. Class Participation and Self-directed Activities (20%). This is where certain simple questions
are given to you to enrich your basic knowledge and understanding of the lessons. The aim of
this activity is to substitute the Socratic method of teaching that is usually employed in law
courses. Certainly, the pressure is not there, so you will be able to answer the questions with a
more relaxed predisposition.
b. Case Studies (20%). You must learn how to apply the knowledge you have just acquired. This
grade component ensures just that. Certain situations will be simulated, and you will be asked
to resolve issues, decide cases, or analyze cases, applying the concepts learned in every
lesson.
c. Quizzes (20%). You will be asked to answer multiple-choice questions, or judge the truth
values of different statements. These types of questions will surely be misleading, but this is
only to ensure that your knowledge and understanding is already deeply rooted, and hard to
sway.
To summarize, here are the components of your grade for each term:
Class Standing
   Class Participation  20%
   Case Studies           20%
   Quizzes                   20%
Major Examinations   40%
TOTAL                      100%
The cumulative nature of our grading system remains. One-third of your Prelim Raw Score
(PRS), and two-thirds of your Moving Midterm Raw Score (MMRS) make up your Midterm Raw
Score (MRS), which when transmuted (base 50), is your Midterm Grade. One third of your MRS
and two-thirds of your Moving Final Raw Score (MFRS) make up your Final Raw Score (FRS),
which when transmuted, is your Final Grade.

Learning Plan
This semester, just like the previous ones, will take 18 weeks to complete. The following is how
our lessons shall flow over the next 18 weeks:
Week Lesson
1 General Provisions of the Partnership Law
2 Rights and Obligations of the Partners
3 Dissolution and Winding up
4 Limited Partnership
5 Private Corporations
6 Incorporation and Organization of Private Corporations
7
Board of Directors/Trustees, Officers, and Meetings
8
9
Powers of a Corporation
10
11 Capitalization and Financing of Corporations
12
Stocks and Stockholders
13
14
Corporate Reorganization
15
 16
17 Foreign Corporations, Non-Stock / Special Corporations
18

Week 1: General Provisions of the Partnership Law

You had your first encounter with partnerships as a type of business organization in ACCT
1026, or in your FAR course in your very first semester here in the BS Accountancy/BS
Management Accounting Program. In that course, you were introduced to the life of a
partnership (Formation, Operations, Dissolution, Liquidation), and how to account for each part
of a partnership’s life.
You will discover that the rules you have learned in ACCT 1026 are derived from the Civil Code,
particularly Articles 1767 to 1867, which provides for the Law on Partnership. It’s
understandable that at this point, you might have a limited knowledge about Partnerships,
because the situations presented in ACCT 1026 were also limited. In this course, as many
scenarios as can be possibly covered (considering the time we have) related to Partnerships
will be taken up.
Therefore, although limited, you already possess knowledge on Partnerships. That little
knowledge will now be the foundation upon which we will build further knowledge on
Partnerships. It would be of a great advantage if you would be able to recall basic principles in
obligations and contracts in as much as partnership is a contract and parties including the
partnership obligations are govern by contract law.
In this semester also, particularly in TAXN 1016, you will learn about how partnerships are
taxed. Therefore, it is important that Article 1767 must be learned by heart, as this will be the
key to understanding Taxation for Partnerships.
This lesson will cover the General Provisions (Articles 1767 to 1783) of the Partnership Law.
Included in this would be discussions on the characteristics of a partnership, its kinds, and many
more.
----------
Brief Background:
The Law on Partnership did not come out of nowhere. The practice of partnership and
subsequent formulation of the law goes way back in ancient history. The earliest form of
conducting business was the single entrepreneur ownership plan whereby one individual owned
the business, had sole control of the same, reaped all the profits, and suffered all the losses.
Under this system, the growth of an individual business was limited, owing especially to the
limitation of capital and sometimes also to the limitation of skill or knowledge. To permit
combinations of capital, or capital and experience, and to secure economy by eliminating some
of the overhead costs of individual enterprises, the partnership plan of business association was
developed. The partnership may be traced back to ancient history. (De Leon, 2013 The Law on
Partnerships and Private Corporations, citing T.S. Kerr, Business Law: Principles and Cases,
2nd ed.)
The Law on Partnership found in the Civil Code of the Philippines (Art. 1767-1867) is not
something original to the Philippine Legal System. Our Laws on Partnership were mostly taken,
with or without modifications, from the old Civil Code which is Spanish Law in origin and from
two American statutes, namely: the Uniform Partnership Act and the Uniform Limited
Partnership Act. Thus, it has to be made clear that when we study and understand our Law on
Partnership, reference has to be made with these Spanish as well as American laws. 
Definition of Partnership
 The definition of partnership (Article 1767) contains two paragraphs:
 By the 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.
These two paragraphs define the two types of partnerships: Ordinary Business Partnerships
(OBP), and General Professional Partnerships (GPP). These two types differ on the purpose of
forming a partnership.
The first paragraph describes Ordinary Business Partnerships (OBP). These partnerships are
formed to generate profits. Examples of Ordinary Business Partnerships are as follows:
 Google: Sergey Brin and Larry Page took a small search engine over a decade ago and turned it
into the leading search engine in the entire world. Including several billion dollars in sales, having a
combined ownership of 16% of their company gives them a total net worth of 46 Billion dollars.
 Twitter: Founded by Evan Williams, Biz Stone, and Jack Dorsey, Twitter is an excellent example
of successful business partnerships. In less than 3 years, these individuals managed to grow Twitter
from the sound a bird makes to an incredible industry where over 63% of the brands in the world signing
on to use it. From the surface of the earth to the bottom of the oceans and even in orbit, Tweets are
being sent and received across the planet.
 Microsoft: Bill Gates and Paul Allen represent another powerful business partnership that helped
to revolutionize computing. With a wide range of products, services, and patents, Microsoft is one of the
most valuable companies in the world.
 Apple: Steve Job and Steve Wozniak worked together to bring the Apple line of products to
consumers around the world. Starting small and going through a number of challenging hurtles, both
Steve’s are examples of what can be accomplished with a bold and innovate idea.
 Hewlett-Packard (HP): Bill Hewlett and Dave Packard helped lend their name to this iconic
company. Following the tradition of being founded in a small garage, Hewlett Packard has since
expanded and now produces hardware and software for agencies and individuals alike.
 McDonald’s: Started by Richard and Maurice McDonald in 1940, McDonald’s was first a
barbeque stand. Later transitioning to hamburgers in 1948, McDonald’s has seen exploded onto a global
stage.
 Ben & Jerry’s: Ben Cohen and Jerry Greenfield managed to make annual sales of greater than 4
million dollars after less than 5 years in operation. Since 1978, Ben & Jerry’s has grown incredibly to
include an annual profit of $326 million in 2000. With a strong emphasis on charitable giving and moral
business operations, Ben & Jerry continue to pioneer both flavor types and ethical business practices.
 Warner Brothers: Founded in Culver City California by Sam, Jack, Albert, and Harry Warner, the
Warner Brothers company took some time to find its niche. Starting with direct distribution of media, the
brothers soon switched to production when they found how much more lucrative it was. Now they are
linked with some of the most iconic movies of our time.
The second paragraph describes a General Professional Partnership (GPP). Notice that the
word “profit” is not found in the second paragraph. This is because in this type of partnership,
the primary reason for forming the partnership is the exercise of a common profession. Profits
will only be incidental.
Our profession, CPA, is one that usually forms GPPs to practice the profession. Some notable
examples are:
 SyCip, Gorres, Velayo, and company (SGV & Co.): The largest accounting firm in the Philippines is
founded in 1946 by Washington SyCip, Alfredo Velayo, and Vicente Jose, and merged with Henry,
Hunter, Bayne and company (which was sold to Arsenio Reyes and Ramon Gorres) in the 1950s. It now
employs 3,000 professionals, mostly CPAs, and is the only ISO 9002-certified professional services firm
in the country.
 Punongbayan and Araullo (P&A Grant Thornton): Benjamin Punongbayan was a senior partner
at SGV & Co. when he left the firm in 1988 to form P&A with Jose Araullo, a banker. The clientele of
P&A Grant Thornton consists of privately owned enterprises, listed companies, and public sector
 organizations. These organizations go to the well-known firm for its “global scale, quality, industry
insight, and deep technical expertise.”
 
The legal profession is another profession that forms partnerships to exercise their profession.
Notable examples are ACCRA Law, Divina Law, Quisumbing Torres, and SyCip Salazar
Hernandez and Gatmaitan.
This distinction between OBPs and GPPs will be important in your study of how Partnerships
are taxed, which you will learn in your TAXN 1016 course.
 
Characteristics of Partnership
From the definition of partnership as provided by Article 1767, we can extract the characteristics
of partnerships which are basically also found in contracts, which are:
 Consensual – You have learned about contracts in your first law course (LAWS 1013), and you
have also learned that a contract is a meeting of minds of the contracting parties. A partnership, aside
from being a type of business organization, is also a contract. A partnership is perfected by mere
consent. This is because of the principle of delectus personae (literally, “choice of the person”)
or delectus personarum (plural) wherein each partner is entitled to exercise their choice and preference
of partners.
 Principal – Principal contracts, as you have learned last school year, are those that can stand by
itself, without dependence on other contracts for validity or existence.
 Bilateral – Bilateral contracts are those wherein all parties are required to give or do something.
A partner will contribute money, property or industry, and in return, he expects to receive the share of
profits from partnership operations. Also, the persons entering the partnership have rights and
obligations that are reciprocal to each other.
 Nominate – Nominate contracts are those that have a name. This contract has a name,
“Partnership”.
 Preparatory – Preparatory contracts are those that used as a means of entering another contract.
If a partnership is hired to audit the financial statements of another company, that is another contract (an
audit engagement) which the partnership would not have been able to enter into without forming a
partnership first.
 Onerous – The contract of partnership is an onerous one because the parties have to give up
something, which is generally the money, property, or industry that they will contribute.
 
Essential requisites of partnership
 There must be a valid contract. For the contract of partnership to be valid, the essential elements
of a contract (consent, object, and cause) must be present.
 There must be a mutual contribution of money property, or industry to a common fund. There is no
limit on the monetary contribution; the property to be contributed may be tangible (may be real or
personal) or intangible. Industry may be physical or intellectual.
 It must have a lawful object or purpose. As you already know, a contract must have the essential
elements present for it to be valid. If any one of these essential elements is missing, the contract is void.
The object of the contract of partnership must be lawful. Otherwise, it is void.
 The partnership must be established for the common benefit or interest of the partners. The
purpose of an OBP is for the generation of profit, and the partnership must be established for that
purpose, and all partners must share in the profit generated. Any stipulation that excludes a partner from
profit sharing is void. For GPPs, the primary purpose is the exercise of a common profession. A lawyer,
physician, CPA, and engineer cannot together form a GPP, because only one of them will be able to
practice his profession, which is in his interest, but not of the other three.
 
 Form of a partnership contract
Generally, a partnership contract can be in any form (oral or written), EXCEPT in the following
cases:

1. If real property is contributed – the partnership contract must be in a public instrument; an

inventory of the said property must be made, signed by the parties and attached to the public instrument.
2. If the capital of the partnership is Php 3,000 or more (either money, property, or both) – the
partnership contract must be in a public instrument and must be registered with the Securities and
Exchange Commission (SEC).
3. If the partnership is a limited partnership, a certificate signed under oath by the partners and
recorded with SEC is required.

Kinds of partnership
a. As to purpose
1. Ordinary Business Partnership
2. General professional Partnership
b. As to extent of its subject matter
1. Universal
i. Universal Partnership of all Present Property (UPPP)
 Property which belonged to each of the partners at the time of the constitution of the
partnership (future properties cannot be contributed, except if stipulated, but if stipulated,
shall not include properties acquired by inheritance, legacy, or donation, but profits
therefrom are included).
 Profits which they may acquire from all property contributed.
ii. Universal Partnership of Profits (UPP) – comprises all that the partners may acquire by their
industry or work during the existence of the partnership.

If silent (no specification), assume UPP.

Person prohibited to enter a universal Partnership: those prohibited from making a donation.

2. Particular – has for its onjects:

 Determine things
 Their use of fruits
 Specific undertaking
 Exercise or profession or vocation
c. As to liability
1. General – partnership where all partners are general partners
2. Limited – partnership where there is at least one general partner and at least one limited partner
d. As to duration
1. Partnership for fixed term – one whose duration is fixed
2. Partnership for a particular undertaking – organized for a certain undertaking, which when completed,
causes the termination of the partnership
3. Partnership at will - one where no duration is fixed, therefore can be terminated anytime the partners
wish.
e. As to legality of existence
1. De jure- existing in law and in fact.
2. De facto- existing in fact only
f. As to representation to others
 1. Ordinary partnership exists among the partners and to third persons
2. Partnership by estoppel- partnership exists as to third persons but not among the partners

Kinds of partners

a. As to liability
1. General – liable even beyond his contributions to the partnership (i.e. separate
properties)
2. Limited – liable only up to the extent of his capital contributions 
b. As to contribution
1. Capitalist – one who contributes money and/or property only
2. Industrialist – one who contributes industry only
3. Capitalist-industrialist – one who contributes money and/or property, and industry
c.  Others
1. Managing – one who manages the affairs of the partnership
2. Liquidating – one who takes charge of liquidating the partnership
3. Nominal – not actually a partner, but may be liable as such to third persons
4. Ostensible – known to the public as a partner because he allowed his name to be
used as part of the partnership name.
5. Secret – actually a partner, but that fact is hidden to the public
6. Silent – also an actual partner, but does not participate in the management of the
business (only receives his share in the profits and losses)
7. Dormant – does not participate in the management of the business, and his being
a partner is also hidden from public knowledge.

1.
 
Rules in determining the existence of a partnership (Article 1769)

1. Except as provided by Article 1825, persons who are not partners as to each other are
not partners as to third persons.
2. Co-ownership or co-possession does not of itself establish a partnership, whether such
co-ownership or co-possessors do or do not share any profits made by the use of the property.
3. The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the
returns are derived.
4. The receipt by a person of a share of the profits of a business is prima facie evidence
that he is a partner in the business, but no such inference shall be drawn if such profits were
received in payment:
a. As debt by installments or otherwise.
b. As wages of an employee or rent to a landlord.
c. As an annuity to a widow or representative of a deceased partner.
d. As interest on a loan, though the amount of payment vary with the profits of the
business.
e. As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise.

Week 2: Rights and Obligations of Partners

RIGHTS AND OBLIGATIONS OF PARTNERS
A. Among themselves (Arts. 1784 – 1809)
1. To contribute capital
Obligations with respect to contribution of property:

1.
1.
1. to contribute at the beginning of the partnership or at the stipulated time the
money, property or industry which he may have promised to contribute (Art. 1786)
2. To answer for eviction in case the partnership is deprived of the
determinate property contributed (Art. 1786)
3. To answer to the partnership for the fruits of the property the contribution of
which he delayed, from the date they should have been contributed up to the time of actual
delivery (Art. 1786)
4. To preserve said property with the diligence of a good father of a family
pending delivery to partnership (Art. 1163)
5. To indemnify partnership for any damage caused to it by the retention of
the same or by the delay in its contribution (Arts. 1788, 1170)
 
What happens when a partner fails to contribute property promised?

o
 That partner becomes a debtor of the partnership (Art. 1169)
 Other partners cannot rescind partnership contract by reason of default in
contributions. Their remedy instead would be specific performance with damages from the
partner who defaults. (Art. 1788)
 
Obligations with respect to contribution of money:

1.
1.
a. To contribute on the date fixed the amount he has undertaken to contribute
to the partnership.
b. To reimburse any amount he may have taken from the partnership (and
converted to his own use)
c. To pay for the agreed or legal interest, if he fails to pay his contribution on
time or in case he takes any amount from the common fund and converts it to his own use
d. To indemnify the partnership for the damages caused to it by delay in the
contribution or conversion of any sum for his personal benefits
 
2. To maintain the trust and confidence given unto him by his partners (fiduciary duty)
 
As mentioned in Lesson #1, a partnership is built on trust, and therefore each partner must
observe the utmost good faith, fairness, and integrity in his dealings with the other partners.
Each partner cannot:

1.
1.
a. directly or indirectly use partnership assets for his own benefit;
b. carry on a business of the partnership for his private advantage;
c. take any profit secretly;
d. obtain for himself anything that he should have obtained for the partnership
(e.g. business opportunity)
e. carry on another business in competition with the partnership; he cannot
avail himself of knowledge or information which may be properly regarded as the property of the
partnership
 
Rules in engaging in other businesses

o
 Industrial partners cannot engage in any business, unless expressly
permitted by the partnership (Art. 1789)
 Capitalist partners cannot engage in other businesses that are in the same
line of business as theirs (Art. 1808)
 
Consequences if industrial partner engages in any business: (Art. 1789)

o
 He can be removed from the partnership, with damages
 The capitalist partners can avail of the benefit he (industrial partner)
obtained from the other business, with damages
 
Consequences if capitalist partner engages in any business that competes with them:
(Art. 1808)

o
 He may be required to contribute the profits he derived from the other
business into the common fund.
 In case of losses, he shall personally bear it.
 He can be removed from the partnership.
 
Obligations with respect to contribution of capital (Art. 1790)

o
 Partners must contribute equally, unless otherwise stipulated.
 Partners must contribute additional capital in the following cases:
o There is an imminent loss of the business of the partnership
o The majority of the capitalist partners are of the opinion that an
additional contribution to the common fund would save the business
In case a partner deliberately refuses to contribute additional capital, an obligation to
sell his interest to the other partner arises.
 
Who bears the risk of loss of things contributed? (Art. 1795)
 
Contribution Who bears the risk?
Specific and determinate things Partner
which are not fungible where only
 the use is contributed
Specific and determinate things the
ownership of which is transferred to Partnership
the partnership
Fungible things Partnership
Things contributed to be sold Partnership
Things brought and appraised in
Partnership
the inventory
Specific and determinate things
which are not fungible where only Partner
the use is contributed
 
 Rules for distribution of profits and losses:
 
With agreement: As agreed
Without agreement (silent):

1.
1.
1. Capitalist partners share in the profits in proportion with their respective
capital contributions. Industrialist partners are given a just and equitable share.
2. If profit sharing is stipulated, apply the same for losses.
3. If there is no profit sharing stipulated,
a. Losses are distributed according to capital contributions
b. Industrialist partners are not liable for losses
 A stipulation which excludes one or more partners from any share in the profits and
losses is void.
 
Obligation of managing partners who collects debt from person who also owed the
partnership (in cases where there are at least 2 debts, one where the collecting partner is
creditor and the other, where the partnership is the creditor; where both debts are
demandable; and where the partner who collects is authorized to manage and actually
manages the partnership)

o
 Apply sum collected to 2 credits in proportion to their amounts
 If he received it for the account of partnership, the whole sum shall be
applied to partnership credit
 
Obligation of partner who receives share of partnership credit

o
 to bring to the partnership capital what he has received even though he
may have given receipt for his share only, provided:
o A partner has received in whole or in part, his share of the
partnership credit
o The other partners have not collected their shares
o The partnership debtor has become insolvent
B. Property rights of a partner (Arts. 1810 – 1814)

1.
1.
1. His rights in specific partnership property
2. His interest in the partnership
3. His right to participate in the management.
Nature of partner's right in specific partnership property

o
 a partner has an equal right to possession which is not assignable and such
right is limited to the share of what remains after partnership debts have been paid.
Nature of partner's right in the partnership

o
 a share in the profits and surplus
 
 C. To third persons (Arts. 1815 – 1827)

1.
1.
1. Every partnership shall operate under a firm name. Persons who include
their names in the partnership name even if they are not members shall be liable as a partner
2. All partners shall be liable for contractual obligations of the partnership with
their property, after all partnership assets have been exhausted:
a. Pro rata
b. Subsidiary
3. Admission or representation made by any partner concerning partnership
affairs within scope of his authority is evidence against the partnership
4. Notice to partner of any matter relating to partnership affairs operates as
notice to partnership, except in case of fraud:
a. Knowledge, of partner acting in the particular matter, acquired while
a partner
b. Knowledge of the partner acting in the particular matter then present
to his mind
c. Knowledge of any other partner who reasonably could and should
have communicated it to the acting partner
5. Partners and the partnership are solidarily liable to 3rd persons for the
partner's tort or breach of trust
6. Liability of incoming partner is limited to:
a. His share in the partnership property for existing obligations
b. His separate property for subsequent obligations
7. Creditors of partnership preferred in partnership property & may attach
partner's share in partnership assets
8. Every partner is an agent of the partnership
 
Power of Partner as Agent of the Partnership
 Every partner is an agent and may execute
acts with binding effect even if he has no
Acts for carrying on in the usual way the authority.
business of the partnership
Except: when 3rd person has knowledge of
lack of authority
·      Act w/c is not apparently for the carrying of
business in the usual way
·      Acts of strict dominion or ownership:
·      Assign partnership property in trust for
creditors
·      Dispose of good-will of business
·      Do an act w/c would make it impossible to Does not bind partnership unless authorized
carry on ordinary business of partnership by other partners
·      Confess a judgement
·      Enter into compromise concerning a
partnership claim or liability
·      Submit partnership claim or liability to
arbitration
·      Renounce claim of partnership
Partnership not liable to 3rd persons having
Acts in contravention of a restriction on authority actual or presumptive knowledge of the
restrictions
 
Effects of Conveyance of Real Property Belonging to Partnership

Conveyance passes title but partnership can

recover if:
Title in partnership name,
1. Conveyance was not in the usual way of
Conveyance in partnership name business, or
2. Buyer had knowledge of lack of authority
Conveyance does not pass title but only
equitable interest, unless:
Title in partnership name,
1. Conveyance was not in the usual way of
Conveyance in partner's name business, or
2. Buyer had knowledge of lack of authority
Conveyance passes title but partnership can
recover if:
Title in name of 1/ more partners,
Conveyance in name if partner/partners in 1. Conveyance was not in the usual way of
whose name title stands business, or
2. Buyer had knowledge of lack of authority
Title in name of 1/more/all partners or 3rd
person in trust for partnership,
Conveyance executed in partnership name if in Conveyance will only pass equitable interest
name of partners
Title in name of all partners, Conveyance will pass title
 Conveyance in name of all partners
Assignment of Interest in Partnership
Assignment is subject to three (3) conditions:

1.
1.
1. made in good faith
2. for fair consideration
3. after a fair and complete disclosure of all important information as to its
value
Rights of an Assignee:

1.
1.
1. Get whatever assignor-partner would have obtained
2. Avail usual remedies in case of fraud in the management
3. Ask for annulment of contract of assignment if he was induced to join
through any of the vices of consent
4. Demand an accounting (only in case of dissolution)
 
Responsibility of the Partnership to the Partners

1. To refund the amounts disbursed by partner in behalf of the partnership +

corresponding interest from the time the expenses are made (loans and advances made by a
partner to the partnership aside from capital contribution)
2. To answer for obligations partner may have contracted in good faith in the interest
of the partnership business
3. To answer for risks in consequence of its management

Week 3: Dissolution and Winding Up

Definition of Dissolution
Dissolution is the change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on of the business; partnership is not terminated but continues until
the winding up of partnership affairs is completed
 
Dissolution vs. Winding up vs. Termination (Article 1829)
“Dissolution,” “Winding up,” and “Termination” should not be confused because they are distinct
terms in law. Dissolution “designates the point in time when the partners cease to carry on the
business together: termination is the point in time when all partnership affairs are wound up;
winding up is the process of settling partnership affairs after dissolution.”
 
Causes of Dissolution (Article 1830)

1. Without violation of the agreement between the partners

a. By termination of the definite term/particular undertaking specified in the
agreement
b. By the express will of any partner, who must act in good faith, when no definite
term or particular undertaking is specified
c. By the express will of all the partners who have not assigned their interest/charged
them for their separate debts, either before or after the termination of any specified term or
particular undertaking
d. By the bona fide expulsion of any partner from the business in accordance with
power conferred by the agreement
2. In contravention of the agreement between the partners, where the circumstances do not
permit a dissolution under any other provision of this article, by the express will of any partner at
any time
3. By any event which makes it unlawful for business to be carried on/for the members to
carry it on for the partnership
4. Loss of specific thing promised by partner before its delivery
5. Death of any partner
6. Insolvency of a partner/partnership
7. Civil interdiction of any partner
8. Decree of court under Article 1831.
 
Grounds for Dissolution by Decree of Court (Art. 1831) 

1. Partner declared insane in any judicial proceeding or shown to be of unsound mind

2. Incapacity of partner to perform his part of the partnership contract
3. Partner guilty of conduct prejudicial to business of partnership
4. Willful or persistent breach of partnership agreement or conduct which makes it
reasonably impracticable to carry on partnership with him
5. Business can only be carried on at a loss
6. Other circumstances which render dissolution equitable
 
Upon application by purchaser of partner's interest:

 After termination of specified term/particular undertaking
 Anytime if partnership at will when interest was assigned/charging order issued
 
Effects of Dissolution 
A. Authority of Partner to Bind the Partnership
General Rule: Authority of partners to bind partnership is terminated
Exception:

1. To wind up partnership affairs

2. To complete unfinished transactions
QUALIFICATIONS: 
1. With respect to partners 

a. Authority of partners to bind partnership by new contract is immediately terminated

when dissolution is not due to ACT, DEATH or INSOLVENCY (ADI) of a partner (art 1833);
b. If due to ADI, partners are liable as if partnership not dissolved, when the ff.
concur:
 i. If cause is ACT of partner, acting partner must have knowledge of such
dissolution
ii. If cause is DEATH or INSOLVENCY, acting partner must have
knowledge/notice 

2. With respect to persons not partners (Art.1834) 

a. Partner continues to bind partnership even after dissolution in ff. cases: 

1. Transactions in connection to winding up partnership affairs/completing
unfinished transactions 
2. Transactions which would bind partnership if not dissolved, when the other
party/obligee:
a. Situation 1 -
i. Had extended credit to partnership prior to dissolution &
ii. Had no knowledge/notice of dissolution, or
b. Situation 2 -
i. Did not extend credit to partnership
ii. Had known partnership prior to dissolution
iii. Had no knowledge/notice of dissolution/fact of dissolution not
advertised in a newspaper of general circulation in the place where partnership is regularly
carried on 
b. Partner cannot bind the partnership anymore after dissolution: 
1. Where dissolution is due to unlawfulness to carry on with business (except:
winding up of partnership affairs) 
2. Where partner has become insolvent 
3. Where partner unauthorized to wind up partnership affairs, except by
transaction with one who:
a. Situation 1 -
i. Had extended credit to partnership prior to dissolution &
ii. Had no knowledge/notice of dissolution, or
b. Situation 2 -
i. Did not extend credit to partnership
ii. Had known partnership prior to dissolution
iii. Had no knowledge/notice of dissolution/fact of dissolution not
advertised in a newspaper of general circulation in the place where partnership is regularly
carried on
 
B. Discharge of Liability 
 
Dissolution does not discharge existing liability of partner, except by agreement between:
 Partner and himself
 person/partnership continuing the business
 partnership creditors
 
Rights of Partner Where Dissolution Not in Contravention of Agreement:

1. Apply partnership property to discharge liabilities of partnership

2. Apply surplus, if any to pay in cash the net amount owed to partners
 
 Rights of Partner Where Dissolution in Contravention of Agreement:

1. Partner who did not cause dissolution wrongfully:

a. Apply partnership property to discharge liabilities of the partnership
b. Apply surplus, if any to pay in cash the net amount owed to partners
c. Indemnity for damages caused by partner guilty of wrongful
dissolution
d. Continue business in same name during agreed term
e. Possess partnership property if business is continued
2.  Partner who wrongly caused dissolution:
a. If business not continued by others - apply partnership property to
discharge liabilities of partnership & receive in cash his share of surplus less damages caused
by his wrongful dissolution
b. If business continued by others - have the value of his interest at
time of dissolution ascertained and paid in cash/secured by bond & be released from all
existing/future partnership liabilities
  
Rights of Injured Partner Where Partnership Contract is Rescinded on Ground of
Fraud/Misrepresentation By 1 Party: 

1. Right to lien on surplus of partnership property after satisfying partnership

liabilities
2. Right to subrogation in place of creditors after payment of partnership
liabilities
3. Right of indemnification by guilty partner against all partnership debts &
liabilities
 
C. Settlement of Accounts Between Partners Assets of The Partnership

1. Partnership property (including goodwill)

2. Contributions of the partners

Order of Application of Assets:

1. Partnership creditors
2. Partners as creditors
3. Partners as investors—return of capital contribution
4. Partners as investors—share of profits if any
 
D. When Business of Dissolved Partnership is Continued 

1. Creditors of old partnership are also creditors of the new partnership which
continues the business of the old one w/o liquidation of the partnership affairs
2. Creditors have an equitable lien on the consideration paid to the retiring
/deceased partner by the purchaser when retiring/deceased partner sold his interest w/o final
settlement with creditors
3. Rights if retiring/estate of deceased partner:
a. To have the value of his interest ascertained as of the date of
dissolution
b. To receive as ordinary creditor the value of his share in the dissolved
partnership with interest or profits attributable to use of his right, at his option
 
Persons Authorized to Wind Up

1. Partners designated by the agreement

2. In absence of agreement, all partners who have not wrongfully dissolved the partnership
3. Legal representative of last surviving partner

Week 4: Limited Partnership

Definition of a Limited Partnership (Art. 1843):
Formed by two or more persons under the provisions of the following article (referring to
Art. 1844), having as members one or more general partners and one or more limited
partners.
 
Characteristics:

1. A limited partnership is formed by compliance with the statutory requirements (Art.

1844.);
2. One or more general partners control the business and are personally liable to creditors
(Arts. 1848, 1850.);
3. One or more limited partners contribute to the capital and share in the profits but do not
participate in the management of the business and are not personally liable for partnership
obligations beyond the amount of their capital contributions (Arts. 1845, 1848, 1856.);
4. The limited partners may ask for the return of their capital contributions under the
conditions prescribed by law (Arts. 1844[h], 1857.); and
5. The partnership debts are paid out of common fund and the individual properties of the
general partners.
 
Business reason and purpose of statutes authorizing limited partnerships.

1. Secure capital from others for one’s business and still retain control.
2. Share in profits of a business without risk of personal liability
3. Associate as partners with those having business skill.
 
Distinction between a general partner/partnership and limited partner/partnership
 
GENERAL PARTNER LIMITED PARTNER
Personally liable for partnership Liability extends only to his capital
obligations contribution.
Have equal right in management of No share in management of
partnership partnership.
 May contribute money, property or
May contribute money and property
industry
Proper party to proceedings Not proper party to proceedings
Interest is assignable with assignee
Interest cannot be assigned to
acquiring all rights of the limited
make new partner
partner
His name may appear in the firm
Name not included in firm name
name
Prohibited from engaging in a
No prohibition
business-like partnership’s
His retirement, insolvency and/or
His retirement, insolvency and/or death dissolves the partnership His
death dissolves the partnership retirement, insolvency and death
does not dissolve the partnership
 
Requirements for formation of a limited partnership (Article 1844):

1. The certificate or articles of the limited partnership which states the matters enumerated
in the article, must be signed and sworn to; and
2. Such certificate must be filed for record in the Office of the Securities and Exchange
Commission.
The purpose of requiring the filing of the certificate is to give actual or constructive notice to
potential creditors or persons dealing with the partnership to acquaint them with its essential
features, foremost among which is the limited liability of the limited partners so that they may not
be defrauded or misled.
 
NOTE: In Art. 1849, after a limited partnership has been formed, additional limited partners may
be admitted, provided there is proper amendment to the certificate which must be signed and
sworn to by all of the partners, including the new limited partners, and filed in the Securities and
Exchange Commission pursuant to the requirements of Article 1865.
 
Limited Partner’s Contribution:

1. Medium: A limited partner or special partner is not allowed to contribute services. He can
contribute only money or property; otherwise, he shall be considered an industrial and general
partner, in which case, he shall not be exempted from personal liability.
2. Time: The contribution of each limited partner must be paid before the formation of the
limited partnership (see Art. 1844[f].), although with respect to the additional contributions they
may be paid after the limited partnership has been formed.
 
Limitations of a Limited Partner:

1. Limited partner has no control in business. A limited partner is excluded from any active
voice in the control of the affairs of the firm.
2. Limited partner cannot perform acts of administration. Limited partners may not perform
any act of administration with respect to the interests of the partnership, not even in the capacity
of agents of the managing partners
 
Consequences: A limited partner is liable as a general partner for the firm’s obligations if he
takes part or interfere in the management of the firm’s business.
 
Rights, powers, and liabilities of a general partner in a limited partnership (Art. 1850)
 
1. Right of control/unlimited personal liability.
 
A general partner in a limited partnership is vested with the entire control of the firm’s
business and has all the rights and powers and is subject to all the liabilities and
restrictions of a partner in a partnership without limited partners, i.e., in a general
partnership.
 
It is in consideration of his unlimited personal liability for the obligation of the partnership
that he is granted the general authority to manage the firm’s business.
 
2. Acts of administration/acts of strict dominion.
 
As a rule, he may bind the partnership by any act of administration, but he has no power
to do the specific acts enumerated in Article 1850 (even if agreed to by all the general
partners) without the written consent or at least ratification of all the limited partners
 
The said acts are acts of strict dominion or ownership and are, therefore, beyond the
scope of the authority of a general partner. (Art. 1818.)

a. In No. (1), the act is in violation of the agreement of the partners as contained in
the certificate;
b. In Nos. (2) to (4), the acts are prejudicial to the interests of the limited partners;
c. In Nos. (5) and (6), the rule is based on the highly fiduciary nature of the
partnership relation; and
d. In No. (7), any of the events mentioned results in the dissolution of the
partnership. (see Art. 1860.)
The general partner who violates the requirement imposed by Article 1850 is liable for
damages to the limited partners
 
3. Other limitations:

1.
a. The general partners, of course, have no power to bind the limited partners
beyond the latter’s investment.
b.  Neither do they have the power to act for the firm beyond the purpose and scope
of the partnership, and
c. They have no authority to change the nature of the business without the consent
of the limited partners.
Rights, in general, of a limited partner. (Art. 1851)
  The limited partner, in order to protect his interest in the firm, has the same right to compel the
partners to account as a general partner has.
 
Specific rights of the limited partner in the partnership.

a. To require that the partnership books be kept at the principal place of business of the
partnership (see Art. 1805.);
b. To inspect and copy at a reasonable hour partnership books or any of them (Ibid.);
c. To demand true and full information of all things affecting the partnership (see Art.
1806.);
d. To demand a formal account of partnership affairs whenever circumstances render it just
and reasonable (see Art. 1809.);
e. To ask for dissolution and winding up by decree of court (see Arts. 1831, 1857, par. 4.);
f. To receive a share of the profits or other compensation by way of income (Art. 1856.);
and
g. To receive the return of his contribution provided the partnership assets are in excess of
all its liabilities. (Art. 1857.)
 
One person, both a general partner and a limited partner
 A person may be a general and a limited partner at the same time in the same
partnership provided that this fact is stated in the certificate signed, sworn to, and recorded in
the Office of the Securities and Exchange Commission. (see Art. 1845.)
 Generally, his rights and powers are those of a general partner. Hence, he is liable with
his separate property to third persons. (Art. 1816.)
 However, with respect to his contribution as a limited partner, he would have the right of
a limited partner insofar as the other partners are concerned. (Arts. 1855-1858.)
 This means that while he is not relieved from personal liability to third persons for
partnership debts, he is entitled to recover from the general partners the amount he has paid to
such third persons; and in settling accounts after dissolution, he shall have priority over general
partners in the return of their respective contributions. (Art. 1863.)
 
Loan and other business transactions with limited partnership.
 

1. Allowable transactions. — Under Art. 1854, a limited partner (who is not also a general
partner), being merely a contributor to the partnership (see Art. 1866.) without the right to
participate in its management, is not prohibited from:
a. Granting loans to the partnership;
b. Transacting other business with it; and
c. Receiving a pro rata share of the partnership assets with general creditors if he is
not also a general partner.
2. Prohibited transactions. — The limited partner, in respect of any such claim, is, however,
prohibited from:
a. Receiving or holding as collateral security any partnership property; or
b. Receiving any payment, conveyance, or release from liability if it will prejudice the
right of third persons.
3. Preferential rights of third persons. — In transacting business with the partnership as a
non-member, the limited partner is considered as a non-partner creditor. However, third persons
always enjoy preferential rights insofar as partnership assets are concerned (see Art. 1827.)
 
Compensation of limited partner.
The right of the limited partner to receive his share of the profits or compensation by way of
income stipulated for in the certificate is subject to the condition that partnership assets will still
be in excess of partnership liabilities after such payment. In other words, third-party creditors
have priority over the limited partner’s rights.
 
Requisites for return of contribution of limited partner. (Art. 1857)
 
First Paragraph:
The following conditions must exist before the contribution of a limited partner can be returned
to him:
(1) All liabilities of the partnership have been paid or if they have not yet been paid, the
assets of the partnership are sufficient to pay such liabilities. As in Article 1856, liabilities
to limited partners on account of their contributions and to general partnership are not
considered;
(2) The consent of all the members (general and limited partners) has been obtained
except when the return may be rightfully demanded; and
(3) The certificate is cancelled or so amended as to set forth the withdrawal or reduction
of the contribution.
 
Second Paragraph
 The limited partner may demand, as a matter of right, the return of his contribution provided the
conditions have been complied with —
(1) On the dissolution of the partnership; or
(2) Upon the arrival of the date specified in the certificate for the return; or
(3) After the expiration of the 6 months’ notice in writing given by him to the other
partners if no time is fixed in the certificate for the return of the contribution or for the
dissolution of the partnership.
 
Third Paragraph:
Even if a limited partner has contributed property, he has only the right to demand and receive
cash for his contribution. The exceptions are:
(1) When there is stipulation to the contrary in the certificate; or
(2) Where all the partners (general and limited) consent to the return other than in the
form of cash.
 
Fourth Paragraph:
Additional grounds for the dissolution of the partnership upon petition of a limited partner:
(1) When his demand for the return of his contribution is denied although he has a right
to such return; or
(2) When his contribution is not paid although he is entitled to its return because the
other liabilities of the partnership have not been paid or the partnership property is
insufficient for their payment. In other words, were it not for this first condition in the first
paragraph of Article 1857 which is not present, he would have been entitled to the return
of his contribution because of the presence of the second and third conditions.
  
The limited partner must first ask the other partners to have the partnership dissolved; if they
refuse, then he can seek the dissolution of the partnership by judicial decree.
 
Liabilities of a limited partner. (Art. 1858)

1. To the partnership.
a. As limited partners are not principals in the transaction of a partnership, their
liability, as a rule, is to the partnership (Art. 1858.), not to the creditors of the partnership. (see
Art. 1866.)
2. To partnership creditors and other partners.
a. A limited partner is liable for partnership obligations when he contributes services
instead of only money or property to the partnership (Art. 1845.);
b. when he allows his surname to appear in the firm name (Art. 1846.);
c. when he fails to have a false statement in the certificate corrected, knowing it to be
false (Art. 1847);
d. when he takes part in the control of the business (Art. 1848.);
e. when he receives partnership property as collateral security, payment,
conveyance, or release in fraud of partnership creditors (Art. 1854); and
f. when there is failure to substantially comply with the legal requirements governing
the formation of limited partnerships. (Art. 1844, par. 2.)
3. To separate creditors.
a. As in a general partnership, the creditor of a limited partner may, in addition to
other remedies allowed under existing laws, apply to the proper court for a “charging order”
subjecting the interest in the partnership of the debtor partner for the payment of his obligation.
(Art. 1862.)
 
Rules on assignment of limited partner’s assignment of interest:
1. A limited partner may assign his interest in the partnership to another person.
However:

a. The assignee is only entitled to receive the share of the profits or other
compensation by way of income or the return of the contribution to which the assignor would
otherwise be entitled.
b. His rights are similar to those of a person to whom a partner conveyed his
whole interest in the partnership.
 
2. The substitution of a person as a limited partner in place of an existing limited partner (Art.
1859.), or the withdrawal, death, insolvency, insanity, or civil interdiction of a limited partner (Art.
1860.), or the addition of new limited partners (Art. 1849.) does not necessarily dissolve the
partnership.
 
3. No limited partner can withdraw his contribution until all liabilities to creditors are paid. (see
Art. 1857.)
 
Substituted limited partner - is a person admitted to all the rights of a limited partner who has
died or has assigned his interest in a partnership.
 Requisites:

1. All the members must consent to the assignee becoming a substituted limited partner or
the limited partner, being empowered by the certificate, must give the assignee the right to
become a limited partner;
2. The certificate must be amended in accordance with Article 1865; and
3. The certificate as amended must be registered in the Securities and Exchange
Commission.
Art. 1860. The retirement or withdrawal, death, insolvency, insanity, or civil interdiction of a
general partner dissolves the partnership (see Art. 1830.), while any of such causes affecting a
limited partner (see Art. 1861.) does not result in its dissolution unless, of course, there is only
one limited partner. (see Art. 1843.)
 
Dissolution of a limited partnership
 
A limited partnership is dissolved in much the same way as an ordinary partnership. It may be
dissolved for:

1. misconduct of a general partner,

2. fraud practiced on the limited partner by the general partner, or
3. Retirement, death, etc. of a general partner (Art. 1860.), or
4. when all the limited partners ceased to be such (Art. 1864, par. 1.), or
5. on the expiration of the term for which it was to exist (Art. 1844[1, e].), or
6. By mutual consent of the partners before the expiration of the firm’s original term.
 
Notice of Dissolution:

1. When the firm is dissolved by the expiration of the term fixed in the certificate,
notice of the dissolution need not be given since the papers fi led and recorded in the Securities
and Exchange Commission are notice to all the world of the term of the partnership.
2. Where, however, the dissolution is by the express will of the partners, the
certificate shall be cancelled, and a dissolution of the partnership is not effected until there has
been compliance with the requirement in this respect.
 
Winding Up:
The consequences of the dissolution of a general partnership apply to limited partnership.
Therefore, the partnership continues in operation while winding up.
 
Priority in the distribution of partnership assets. (Art. 1863)
The partnership liabilities shall be settled in the following order:

1. Those due to creditors, including limited partners, except those on account of their
contributions, in the order of priority as provided by law (Arts. 1854, 1856, 1857[1].);
2. Those due to limited partners in respect to their share of the profits and other
compensation by way of income on their contributions;
3. Those due to limited partners for the return of the capital contributed;
4. Those due to general partners other than for capital and profits;
5. Those due to general partners in respect to profits; and
6. Those due to general partners for the return of the capital contributed. Partnership
creditors are entitled to first distribution, followed by limited partners who take priority over
general partners.
Note that in a general partnership, the claims of the general partners in respect of capital enjoy
preference over those in respect of profits. (see Art. 1839[1, c, d].)
 
When certificate shall be cancelled or amended.
 

1. The certificate shall be cancelled, not merely amended:

a. When the partnership is dissolved other than by reason of the expiration of the
term of the partnership; or
b. When all the limited partners cease to be such. A limited partnership cannot exist
as such if there are no more limited partners. (Art. 1843.)
2. Amendment of the certificate is required for the following:
a. There is a change in the name of the partnership or in the amount or character of
the contribution of any limited partner;
b. A person is substituted as a limited partner;
c. An additional limited partner is admitted;
d. A person is admitted as a general partner;
e. A general partner retires, dies, becomes insolvent or insane, or is sentenced to
civil interdiction and the business is continued under article 1860;
f. There is change in the character of the business of the partnership;
g. There is a false or erroneous statement in the certificate;
h. There is a change in the time as stated in the certificate for the dissolution of the
partnership or for the return of a contribution;
i. A time is fixed for the dissolution of the partnership, or the return of a contribution,
no time having been specified in the certificate; or
j. The members desire to make a change in any other statement in the certificate in
order that it shall accurately represent the agreement among them.
 
Requirements for amendment and cancellation of certificate

1. The following are the requirements to amend a certificate:

a. The amendment must be in writing;
b. It must be signed and sworn to by all the members including the new members,
and the assigning limited partner in case of substitution or addition of a limited or general
partner; and
c. The certificate, as amended, must be fi led for record in the Securities and
Exchange Commission.
2. For cancellation:
a. Cancellation of a certificate must be in writing
b. Signed by all the members and
c. Filed with the Office of the Securities and Exchange Commission.
d. If the cancellation is ordered by the court, certified copy of such order shall be filed
with the Commission.
 
NOTE: The approval by the Commission of the amendment or cancellation is not required.
 Week 5: Private Corporations, its Incorporation and Organization (Sec 1
to 21, RA 11232)
Private Corporations are those that are organized under the Corporation laws of the country. As
provided by Sec. 2 of RA 11232, corporations are:
 Artificial beings
 Created by operation of law
 Has right of succession
 Has powers, attributes, and properties expressly authorized by law or incident to its
existence.
 
PARTNERSHIPS VS. CORPORATIONS
 
Corporation Partnership
Manner of Creation By operation of law Mere agreement of partners
Number of organizers Not more than 15 2 or more
Right of Succession True False
Only those expressly No limit provided not contrary
Limitation on Powers authorized by law/ incident to to law, morals, good customs,
its existence public order or public policy.
Management Board of Directors General Partners
Not liable for debts of the Liable with their separate
Liability for debts
corporation assets for partnership debts
Date of issuance of certificate Execution of partnership
Commencement for existence
of incorporation contract
True, even without consent of True, if only with consent by
Transfer of interest
other stockholders other partners
Term Perpetual Indefinite life
False, must have consent by True, by stipulation by
Dissolution
the State partners
 
Classification of Corporations
 

1. Stock Corporation. Corporations which have capital stock divided into shares and are
authorized to distribute to the holders of shares dividends or allotments of the surplus profits on
the basis of the shares.
2. Non-Stock Corporation. Corporations where no part of its income is distributable as
dividends to its members, trustees or officers.
3. Domestic Corporation. One incorporated under Philippine laws.
4. Foreign Corporation. One formed, organized and existing under any laws other than
those of the Philippines and whose laws allow Filipino citizens and corporations to do business
 in the Philippines. Note: Consideration: At least 60% of Filipinos should comprise the capital
structure of the company.
5. Corporation Aggregate. One composed of more than one corporator.
6. One-person Corporation. One composed of only one person.
7. Public Corporation. One that is organized for the government of a portion of the State
8. Private Corporation. One that is formed for a private purpose.
9. Ecclesiastical Corporation. One formed for a religious purpose
10. Lay Corporation. One formed for a purpose other than religious.
11. Eleemosynary Corporation. One formed for charity.
12. Civil Corporation. One formed for business or profit.
13. De Jure Corporation. One that has been created in strict compliance with all the legal
requirements of the law.
14. De Facto Corporation. One that is defectively created but there is an exercise of
corporate rights and franchise resulting from an attempt in good faith to incorporate on the part
of its partners.
15. Parent Corporation. One who owns shares of another corporation and having power
(control) over the latter including the election of officers thereof.
16. Subsidiary Corporation. One whose shares are owned by another corporation.
17. Close Corporation. One whose shares is limited to a few people and not listed in any
stock exchange.
18. Open Corporation. One whose shares are offered to public and is listed to any stock
exchange.
19. Corporation by Estoppel. One which is in reality not a corporation but is considered as
one with respect to those who are precluded by their admission from denying its existence.
 
Corporations Created by Special Laws / Charters
Corporations may be also formed by virtue of special laws or charters, and shall be governed
primarily by the provisions applicable to them.
 
Examples: Social Security System (SSS), a government-owned and controlled
corporation is formed by virtue by Republic Act 1161 (Social Security Law),
and as amended by Republic Act 8282 (Social Security Act of 1997), and is
not covered by the Corporation Code of the Philippines
 
Components of a Corporation

1. Those who comprise the corporation, including stockholders, members, incorporators, et

cetera.
2. Those stockholders or members mentioned in the articles of incorporation as originally
forming and composing the corporation and who are signatories thereof.
3. Corporators of a stock corporation.
4. Corporators of a non-stock corporation.
5. A person (juridical or natural) who usually discovers a prospective business and brings
persons interested to invest in it through formation of a corporation.
 
Shares of Stock. One of the units into which the capital stock of the corporation is divided.
Stock Certificate. Written acknowledgement by the corporation of the stockholder’s interest in
the corporation.
Par Value Stock. Nominal value of which appears to the stock certificate.
 No Par Value Stock. One without any nominal or par value appearing of stock certificates
 
Classes of Shares of Stock

1. Common / ordinary stock – entitles the holder to a pro rata division of the dividends,
without any preference over other stockholders.
2. Preferred stock – entitles the holder of certain preferences other other shareholders.
a. Cumulative preferred stock – entitled the holder for payment not only to current
dividends but also those in arrears, before holders of common shares are paid
b. Non-cumulative preferred stock – entitled the holder for payment to current
dividends but not those in arrears, before holders of common shares are paid
c. Participating preferred stock – entitle the holder to participate with the holder of
the common shares in the surplus profits after the amount stipulated has been paid to holders of
preferred shares
d. Non-participating preferred stock – entitle the holder only to the amount stipulated
paid to holders of preferred shares
 
Redeemable Shares. Those which grant the issuing corporation the power to redeem or
purchase them after a certain period.
Founder’s Shares. Those which grant to the founders certain rights and privileges not enjoyed
by other shares.
Treasury Shares. Those which have been issued and fully paid for but subsequently reacquired
by the issuing corporation by purchase, redemption, donation, or through some other lawful
means.
Watered Shares. Those issued without compensation or with no adequate consideration.
Voting Shares. Those entitled to vote in the meetings of the corporation.
Non-voting Shares. Those without voting rights, except in certain cases.
 
Incorporation and Organization of Private Corporations
 
Steps:

1. Verification with SEC of the name to be used. No corporate name shall be allowed if the
proposed name is:
a. Identical or deceptively similar to any existing corporation or any other name
protected by law
b. Patently deceptive, confusing or contrary to existing laws.
2. Drafting and execution of articles of incorporation signed by the incorporators.
3. Filing of articles of incorporation with SEC.
4. Payment for the filing, publication and other fees.
5. Issuance of certificate of incorporation by SEC. [Start of the juridical personality of the
corporation]
 
Contents of the Articles of Incorporation

1. Name of corporation.
2. Purpose of the corporation.
3. Place of principal office which must be in the Philippines
4. Term of existence (maximum of 50 years, may be extended)
5. Names, nationalities and residences of incorporators (majority are residents of
Philippines, and must be at least a subscribed of one share of stock)
6. Names, nationalities and residences of board of directors or trustees
7. Amount of authorized capital stock, number of shares divided, and par value of each
8. Names of subscribers, nationalities, shares subscribed, amount subscribed and amount
paid in. (must not be lower than PHP 5,000)
9. Other matters
10. Name of temporary treasurer elected, notarial acknowledgement, and affidavit
 
A sample format, can be seen as provided by Sec. 14, RA 11232.
 
Amendment of Articles of Incorporation
 
Votes required for amendment

1. Majority vote of directors

2. Vote or written assent of 2/3 of the outstanding capital stock or members
Effectivity: Upon approval by SEC or from the date of filing with Commission if not acted within 6
months
 
Continuous non-operation
For five years – shall be grounds for revocation of its corporate franchise or certificate of
incorporation, unless the same is due to causes beyond the control of the corporation as may
be determined by SEC.
 
Delinquent corporation - a corporation that has commenced its business but subsequently
becomes inoperative for a period of at least five (5) consecutive years. A delinquent corporation
shall have a period of two (2) years to resume operations and comply with all requirements that
the Commission shall prescribed. Otherwise, its certificate shall be revoked.
 
Capital Stock Terms
 

1. Capital stock. Amount specified in the articles of incorporation paid in for carrying on of
the business of the corporation.
a. Authorized capital stock. Total amount of shares which a corporation is allowed to
issue if shares have a par value.
b. Subscribed capital stock. Part of capital stock which is subscribed, whether paid or
unpaid
c. Outstanding capital stock. Total shares of stock issued to
subscribers/stockholders, whether or not fully or partially paid, except treasury shares.
d. Paid up capital stock. Part of subscribed stock paid to the corporation.
e. Unissued capital stock. Part of capital stock which is not issued nor subscribed
2. Legal capital. Total par value of all issued par value shares or total cash/consideration
received for all issued no par value shares.