MGT 101 - Forms of Business Organization

Forms of Business Organization

in the Philippines,

• sole proprietorship

• partnership

• corporation

• joint venture

• cooperative

Importance of Knowing the Different Forms of Business

• business formation and execution is aligned with business model

• tax incidence and implications

• business risks

• regulatory compliance

• governance

Sole Proprietorship

• the simplest form of business

  • ease of information (registration with the DTI)

  • owner has full control, authority and responsibility over all the assets and liabilities of the business

  • owner has full control and authority to make decisions for the business

• all profits go to the owner

• owner is solely liable for all business risks and losses

• business and owner are merged in one person and are taxed as one person; individual tax rates apply

• foreigners may form single proprietorship business in the Philippines in industries where the Constitution and the laws do not impose any restriction or limitation on ownership equity

Art. 1767, Civil Code

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

[Partnership] contract

two or more persons bound by a _____ of partnership

• partnership is also a

[Partnership] common fund

partners contribute money, property, or industry to a _____ with the intention of dividing profit among themselves

[Partnership] juridical person

partnership is also a _____—separate and distinct from the partners

[Partnership] assets

may acquire _____ and incur obligations

[Partnership] Articles of Partnership

• "partnership contract”

• must be registered with SEC

• partners are liable pro rata to the creditors of partnership for its contractual debts unless otherwise stipulated in the _____

[Partnership] small businesses

common to _____ in early formation stage

[Partnership] professional services

legally prescribed form of organization for businesses that provide _____

[Formation/Creation of Partnership] Art. 1784, Civil Code

begins from the moment of execution of the contract

[Formation/Creation of Partnership] Art. 1772, Civil Code

Every contract of partnership having a capital of ₱3000.00 or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of Securities and failure to comply with the requirements of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons.

[Formation/Creation of Partnership] Art. 1775, Civil Code

Associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality and shall be governed by the provisions relating to co-ownership.

[Kinds of Partnership] As to its Object | Art. 1776, Civil Code

• Universal

• Particular

[Kinds of Partnership] As Regards the Liabilities of the Partners | Art 1776, Civil Code

• General

• Limited

[Kinds of Partnership] Universal Partnership | Art. 1777

may refer to all the present property or to all the profits

[Kinds of Partnership] Universal Partnership | Art. 1779, Civil Code

in a universal partnership of all present property, the property which belonged to each of the partners at the same time of the constitution of the partnership, becomes the common property of all the partners, as well as the profits which they may acquire therewith

[Kinds of Partnership] Universal Partnership | Art. 1780, Civil Code

• a universal partnership of profits comprises all that the partners may acquire by their industry or work during the existence of the partnership

• movable or immovable property which each of the partners may possess at the time of the celebration of the contract shall continue to pertain exclusively to each, only the usufruct passing to the partnership

[Kinds of Partnership] partnership of profits

articles of universal partnership, entered into without specification, only constitute universal _____

[Kinds of Partnership] Particular Partnership | Art. 1783, Civil Code

has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation

[Classification of Partners] As to Contribution

1. Capitalist Partner

2. Industrial Partner

[Classification of Partners] Capitalist Partner

one who contributes money or property to the common fund

[Classification of Partners] Industrial Partner

one who contributes only his industry or personal service

[Classification of Partners] As to Liability

1. General Partner

2. Limited Partner

[Classification of Partners] General Partner

one whose liability to third persons extends to his separate property, he may either be a capitalist or industrial partner

[Classification of Partners] Limited Partner

one whose liability to third person is limited to his capital contribution

[Classification of Partners] As to Management

1. Managing Partner

2. Silent Partner

3. Liquidating Partner

[Classification of Partners] Managing Partner

• one who manages the business or affairs of the partnership

• he may be appointed in the articles of partnership or after constitution of the partnership

[Classification of Partners] Silent Partner

one who doesn’t take any active part in the business although he may be known to be a partner

[Classification of Partners] Liquidating Partner

one who takes charge of the winding up of the partnership affairs upon dissolution

[Classification of Partners] Capitalist Partner vs. Industrial Partner

• contributes money or property

• cannot generally engage in the same or similar enterprise as the of his firm

• shares in the profits according to the agreement; if no agreement, according to pro rata contribution

• share in the losses according to agreement; if no agreement, according to the agreement as to profits; if non, pro rata contribution

[Classification of Partners] Capitalist Partner vs. Industrial Partner

• contributes his industry

• cannot engage in any business for himself

• receives a just and equitable share

• exempted as to losses (as between partners); but is liable to third persons without prejudice to reimbursement from the capitalist partners

[Partnership] Profit and Loss Sharing

• governed by the Articles of Partnership

• if only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion

• in the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what he may have contributed, but the industrial partner shall not be liable for the losses

[Partnership] Transfer of Ownership

interest in a partnership may be sold to existing partners or to another party only with the conformity and approval of existing partners

[Partnership] Taxation

• same tax as a corporation for general and limited partnership

• individual tax payments by each partner in a general professional partnership

Dissolution of Partnership

• the change in the relation of the partners by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business

• the partnership is not terminated, but continues until the winding up of partnership affairs is completed

[Dissolution of Partnership] Causes of Dissolution

1. without violation of agreement

2. violation of the agreement

3. by any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership

4. loss of a specific thing which a partner had promised to contribute to the partnership

5. death of any partner

6. insolvency of any partner or the partnership

7. civil interdiction of any partner

8. decree of court

[Cause of Dissolution] without violation of agreement

• termination of the definite term or particular undertaking specified in the agreement

• express will of any partner who must act in good faith

• express will of all the partners

• expulsion of any partner

[Partnership] Instances when a Partner can Apply to the Courts for Dissolution of Partnership

1. a partner has been declared insane in any judicial proceeding or is shown to be of unsound mind;

2. a partner becomes in any other way incapable of performing his part of the partnership contract

3. a partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business;

4. a partner willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business on partnership with him

5. the business of the partnership can only be carried on at a loss

6. other circumstances render a dissolution equitable

Joint Venture

• the Philippine Supreme Court has described this as an association of persons or companies jointly undertaking some commercial enterprise

• generally, all contribute assets and share risks which requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and a duty which may be altered by agreement to share both in profit and losses

Partnership vs. Joint Venture (cited by most opinions in common law jurisdiction, but is not entirely accurate in this jurisdiction)

contemplates a general business with some degree of continuity

Partnership vs. Joint Venture (cited by most opinions in common law jurisdiction, but is not entirely accurate in this jurisdiction)

formed for the execution of a single transaction, and is thus of a temporary nature

Corporation

an artificial being created by operation of law, having the right 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 with a separate and distinct personality

• is is created by operation of law

• it enjoys the right of succession

• it has the powers, attributes and properties expressly authorized by law or incident to its existence

[Corporation] Doctrine of Separate Personality

a corporation has a juridical personality separate and distinct from that of its stockholders or members

[Corporation | Doctrine of Separate Personality] Consequences (of having a separate personality)

• obligations incurred by the corporation, acting through it directors, officers, and employees, are its sole liabilities

• a corporation may bring legal actions in its own name in the same manner as natural persons

• properties of corporation are not properties of stockholders

  • the stockholders’ interest over the property of the corporation, in any, is indirect, contingent and inchoate

• acquisition of court of jurisdiction—service of summons may be made on the president, general manager, corporate secretary, treasurer or in-house counsel

• members may change but the juridical person of the corporation remains the same without alteration

• entitlement to due process and equal protection of law under the constitution

[Corporation] Salient Features of the Revised Corporation Code (R.A. No. 11232)

• a corporation can now exist perpetually unless dissolved sooner

• the inclusion of Compliance Officer is now mandatory

• electronic means is now allowed in filling requirements

• attendance in meeting via remote communication or in absentia, among others—practices that were not part of the old provisions

[Corporation | Salient Features of the Revised Corporation Code (R.A. No. 11232)] Chief Executive Officer

made the alternative title to President

[Corporation | Salient Features of the Revised Corporation Code (R.A. No. 11232)] Chief Financial Officer

made alternative title to Treasurer

Classification of Corporations

1. stock

2. non-stock

3. other classifications

[Classification of Corporations] Stock Corporation

• one which has a capital stock divided into shares and is authorized to distribute to the holders of such shares dividends or allotments of the surplus profits (i.e. retained earnings on the basis of the shares held)

• organized for profit

[Classification of Corporations] Board of Directors

the usual governing body of Stock Corporations

[Classification of Corporations] Non-stock Corporation

• one where no part of the income is distributable as dividends to its members, trustees, or officers

• not organized for profit

[Classification of Corporations] Board of Trustees

the usual governing body for Non-stock Corporations

[Formation of Corporations] 15

maybe formed by at least one person (one person corporation) but not more than _____ natural or artificial persons

[Formation of Corporations] Certification of Incorporation by SEC

corporate or juridical existence begins from the date of issuance of _____

Components of a Corporation

• incorporators

• corporate term

• corporators

[Components of a Corporation] Incorporators

are those stockholders or members mentioned in the articles as originally forming and composing the corporation and who are signatories thereof

[Components of a Corporation] Incorporator Requirements

• any person, partnership, association or corporation not more than 15 (except those in the practice of profession)

• of legal age

• must own or subscribe to at least one share of stock of the corporation

[Components of a Corporation] One Person Corporation

a corporation with a single stockholder

[Components of a Corporation] Corporate Term

• perpetual existence unless the AOI provides otherwise

• corporations existing prior to the effectivity of the Revised Corporation Code shall have perpetual existence unless the corporation, upon a vote of its stockholders representing majority of its capital stock, notifies the commission that it elects to retain its specific corporate term

• any change in this is subject to appraisal right

• a corporation whose term has expired may apply for a revival of its corporate existence

[Components of a Corporation] Corporators vs. Incorporators

are those who compose a corporation, whether as stockholders or as members

[Components of a Corporation] Corporators vs. Incorporators

are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof

[Components of a Corporation] Stockholders or Shareholders

corporators in a stock corporation

[Components of a Corporation] Members

corporators in a non-stock corporation

General Powers and Capacity of a Corporation

1. to sue and be sued

2. succession

3. adopt and use corporate seal

4. amend its AOI

5. adopt its by-laws

6. for Stock Corporations: issue and sell stocks to subscribers; for Non-Stock Corporations: to admit members

7. purchase, receive, take or grant, hold, convey, lease, pledge, mortgage, and deal with real and personal properties, securities and bonds

8. enter into merger or consolidation

9. make reasonable donations for public welfare, hospital, charitable, cultural, scientific, civic or similar purposes, provded that no donation is given to any (1) political, (2) candidate, and (3) partisan party political activity

10. establish pension, retirement or other plans for the benefit of its directors, trustees, officers, and employees

11. exercise other powers essential or necessary to carry out its purposes

[Corporation] Degree of Formality

• existence of formal records—articles of incorporation, minutes of the meeting, by-laws, other books

• election of officers; election of BOD

• regular/special meetings of the BOD or shareholders to elect management or ratify management’s actions as required by law or company policies

[Corporation] Transfer of Ownership

• owners of shares of corporations (personal property) can exercise all powers of full ownership (e.g. right to use, right to the fruits, right to dispose)

• limitations of this power are restricted only those authorized by the SEC such as transfer restrictions for close corporations

• to effect transfer, parties must execute a public instrument such as a Deed of Transfer/Assignment of Shares, pay the corresponding BIR taxes, and record the transfer in the Stock and Transfer Book of the corporation

[Corporation | Taxation] Corporate Recovery and Tax Incentives for Enterprises (CREATE)

based on this law, corporate income tax rate is 25% and 20% for domestic corporations with net taxable income not exceeding ₱5M and with total assets not exceeding ₱100M excluding lan where the particular business office, plant, and equipment are located during the taxable year

[Corporation] Dissolution

• corporation shall have perpetual existence unless the corporation (incorporated before the effectivity of the revised corporation code) expresses intent to abide by the corporate terms as stated in its AOI.

• by majority vote of the Board and by a resolution adopted by stockholders representing 2/3 of the outstanding capital stock, all corporate assets including goodwill may be sold, disposed or leased

Cooperative

an autonomous and duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve their social, economic, and cultural needs and aspirations by making equitable contributions to the capital required, patronizing their products and services and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles

Characteristics of a Cooperative

1. voluntary association

2. separate juridical entity

3. equal voting rights

4. democratic management

5. fixed legal life

6. capital divided into shares

7. observe formality conducting business affairs

8. registered with the Cooperative Development Authority

Types and Categories of Cooperatives

• credit cooperative

• consumers cooperative

• producers cooperative

• marketing cooperative

• service cooperative

• multipurpose cooperative

• advocacy cooperative

• agrarian reform cooperative

• cooperative bank

• dair cooperative

• education cooperative

• electric cooperative

• financia service cooperative

• fishermen cooperative

• health services cooperative

• housing cooperative

• insurance cooperative

• transport cooperative

• water service cooperative

• workers cooperative