Corporation Law: Introduction to Business Organizations (September 4, 2023)

1. Types of Business Organizations (SPJAB-JCSC)

• Sole Proprietorship
• Partnerships
• Joint 
• Accounts or Cuentas en Participacion
• Business Trusts
• Joint Venture
• Cooperative
• Syndicate, and
• Corporations.

    Code of Commerce - governed business organizations during Spanish regime;

        Different business organizations provided by Code of Commerce:

• sociedad en comandita (limited partnership)
• sociedad regular colectiva (general partnership)
• sociedad anonima - has affinity but not exactly corporation
• sociedad de cuentas en participacion (joint accounts)

2. Sole Proprietorship

• Form of business organization with only one proprietary owner
• A single individual conducts businesses under his own name or under a business name;
• Neither a creature of statute nor of a contract; 
• An unorganized business owned by a person. 
• The sole proprietor manages and exercises complete control over the conduct of his business. 
• Only him or his agent's acts may bind the business. 
• He is the only one to share in the profits. 
• The individual proprietor is the only one who is personally liable for business debts
• No legal personality separate from its proprietor or owner of the enterprise. 
• The owner has unlimited personal liability for all the debts and obligations of the business, and it is against him or her that a judgment against the enterprise is to be enforced.
• The law merely recognizes the existence of a sole proprietorship as a form of business organization conducted for profit by a single individual
• Requires its proprietor owner:
• to secure licenses and permits,
• register its business name and 
• pay taxes to the national government;
• The law does not vest separate personality on the sole proprietorship or empower it to file or defend an action in court apart from the proprietor; 
• The only available methods of obtaining funds for a single proprietorship are personal contributions of the proprietor and loans from financial institutions or private sources. 
• Totally dependent upon the life of the proprietor.
•  Upon the proprietor's death or disability, business operations may cease. 
• The registration of the trade name in the name of one person - woman - does not necessarily lead to the conclusion that the tradename as a property is hers alone, particularly when the woman is married. 
• By law, all properties acquired during the marriage, whether the acquisition appears to have been made, contracted or registered in the name of one or both spouses, is presumed to be conjugal unless the contrary is established.
• Instances when the law treats sole proprietorships as organizations that are separate from natural persons:
• RA 10142 (Financial Rehabilitation and Insolvency Act of 2010)
• Debtor refers to a:
• sole proprietorship duly registered with the Department of Trade and Industry (DTI)
• a partnership duly registered with the Securities and Exchange Commission (SEC)
• a corporation duly organized and existing under Philippine laws
• or an individual debtor who has become insolvent.'
• The definition indicates that an individual debtor is treated separately from a sole proprietorship. Thus, only an individual debtor can file a petition for suspension of payments while a sole proprietorship is not given such right. However, only a sole proprietorship can file a petition rehabilitation while an individual debtor cannot file such petition.

2.01. Business Name

• A single proprietor may do business under a business name. 
• However, doing business under another name does not create an entity distinct from the person operating the business. 
• The individual who does business as a sole proprietor under one or several names remains personally liable for his/her obligations;
• Refers to any name that is different from the true name of an individual which is used or signed in connection with her/his business on any written or printed receipts including:
• receipts for business taxes duties and fees and withdrawal or delivery receipts;
• any written or printed evidence of any agreement or business transaction; 
• and any billboard conspicuously exhibited in plain view in or at the place of her/his business or elsewhere, announcing her/his business;
• When a proprietor uses another name (other than his/her true name) as a business name, he/she is required to register his/ her business name, firm name or style with the Bureau of Trade Regulation and Consumer Protection of the Department of Trade and Industry  pursuant to Section 1 of Act No. 3883 otherwise known as the ''Business Name Law";
• A proprietor who does not register his/her business name as required under Act No. 3883 is subject to the following prohibitions: 
• He/she cannot use or sign the business name in connection with his/her business on any written or printed receipts or any evidence of agreement' or other documents; and
•  He/she cannot exhibit the business name or sign thereof in plain view. 
• Rule IV of Department Administrative Order No. 18-07, Series of 2018 dated August 13, 2018 issued by the Department of Trade and Industry (DTI) (Revised Rules and Regulations Implementing Act No. 3883) states that: 
• A Business Name (BN) should be comprised (in no particular order) of the:
• "Dominant Portion" which is a word or group of words or a combination of letters and numerals and 
• the "Descriptor" which is a word or group of words describing the nature of the business based on the Philippines Standard Industrial Classification (PSIC). 
• Section 3 of the same Rule IV provides that the following words/group of words shall not be registered as BN:
• Those that connote activities or norms that are unlawful, immoral, scandalous or contrary to propriety; 
• Those names, words, terms or expressions used to designate or distinguish, or suggestive of quality, of any class of goods, articles, merchandise, products or services; 
• Those that are registered as trade trademarks, or business names by any government authorized to register names or trademarks;
• Those that are inimical to the security of the State; 
• Those that are composed purely of generic word or words; 
• Those that by law or regulation are restricted or cannot be appropriated; 
• Those that are officially used by the government in its non-proprietary functions;
• Those names or abbreviations of any nation, inter-governmental or international organization unless authorized by competent authority of that nation, inter-government or international organization; 
• Those ordered or declared by administrative agencies/bodies or regular court not to be registered; 
• Those names of other persons;
• Those names which are deceptive, misleading or which misrepresent the nature of the business;
• Paragraph 4 of SEC Memorandum Circular No. 13, Series of 2019 dated June 21, 2019 entitled "Amended Guidelines and Procedures on the Use of Corporate and Partnership Names" provides that:
• A business trade name which is different from the corporate or partnership name shall be indicated in the articles of incorporation or partnership.
• A company may have more than one business or trade name.
• If, however a corporation has no business name, its corporate name is still protected under the law. 
• It should also be noted that a DTI Certificate of Business Name must be submitted to the Bureau of Internal Revenue (BIR) before the latter can issue a certificate of registration.
• The use of the DTI-issued Certificate of Business Name Registration by any person other than the registered owner for whatever purpose is prohibited. 
• The Certificate is valid for a period five years from the date of the issuance of thereof.
• The registration may be renewed within 90 calendar days after its expiration (called regular filing). 
• The registration shall be automatically cancelled if the registrant fails to file an application for renewal within the next 90-calendar day grace period from the time of expiration of the period for regular filing.

2.02 Merchant

• The Code of Commerce provides for rules for merchants.
•  Although the concept of merchant is now rendered obsolete by provisions of other laws that provide for different qualifications and requirements for engaging in commerce, it is important to note that such term is still referred to in the Code of Commerce provisions that are still in force. 
• For instance, the Code of Commerce provisions on Joint Accounts that are still in force use the term merchant.
• Merchants are: 
• Those who, having legal capacity to engage in commerce, habitually devote themselves to it; 
• The commercial or industrial companies which may be created in accordance with [this Code] existing legislation.
• The legal presumption of habitually engaging in commerce shall exist from the moment the person who intends to engage therein announces through:
• circulars
• newspapers
• handbills
• posters exhibited to the public
• or in any other manner whatsoever
• an establishment which has for its object some commercial operation. 
• Persons who possess the following qualifications shall have legal capacity to habitually engage in commerce: 
• Having completed the age of twenty-one years. 
• Not being subject to the authority of the father or of the mother nor to marital authority. 
• Having the free disposition of their property.
• The following may not engage in commerce nor hold office or have any direct administrative or financial intervention in commercial or industrial companies: 
• Those sentenced to the penalty of civil interdiction, while they have not served their sentence or have not been amnestied or pardoned. 
• Those declared bankrupt, while they have not obtained their discharge or have not been authorized, by virtue of an agreement accepted at a general meeting of creditors and approved by judicial authority, to continue at the head of the establishment, the authority being understood in such case as limited to that expressed in the agreement. 
• Those who on account of special laws or provisions can not trade. 
• Foreigners and companies created abroad may engage in commerce in the Philippines:
• subject to the laws of their country with respect to their capacity to contract, and 
• to the provisions of this Code as regard the creation of their establishments in Philippine territory, their mercantile operations, and the jurisdiction of the courts of the nation.The provisions of the article shall be understood to be without prejudice to what, in particular cases, may be established by treaties or agreements with other powers.
• The following cannot engage in the mercantile profession, in person or through another, nor hold office or have any direct administrative or financial intervention in commercial or industrial associations, within the limits of the districts, provinces or towns in which they discharge their duties:
• Justices, judges and officials of the fiscals' office in active service. This provision shall not be applicable to the municipal mayors, judges and prosecuting attorneys, nor to those who may temporarily discharge judicial or prosecution duties. 
• Administrative, economic or military heads of districts, provinces, or posts
• Those employed in the collection and administration of funds of the State, appointed by the Government. Those who administer and collect under contract and their representative are excepted.
• Stock and commercial brokers of whatever class they may be. 
• Those who, under special laws and provisions cannot trade in specified territory.
• Macariola v. Asuncion: Article 14 of the Code of Commerce is in the nature of political law and since it was extended to this country by Spain, it was necessarily  abrogated upon the change of sovereignty from Spain to the United States. 
• Upon the transfer of sovereignty from Spain to the United States and later on from the United States to the Republic of the Philippines, Article 14 of this Code of Commerce must be deemed to have been abrogated because where there is change of sovereignty, the political laws of the former sovereign, whether compatible or not with those of the new sovereign, are automatically abrogated, unless they are expressly re-enacted by affirmative act of the new sovereign.
• Nevertheless, the Supreme Court admonished a judge in the said case who had been found to have been engaged in business to be more discreet in his private and business activities because his conduct as a member of the Judiciary must not only be characterized by propriety but must always be above suspicion.
• Berin v. Barte: Rule 5.02 of the Code of Judicial Conduct, which took effect on October 20, 1989, supplies the void left by the abrogation of Article 14 of the Spanish Code. 
• A judge may hold and manage investments but should not serve as an officer, director, manager, advisor, or employee of any business except as director of a family business of the judge.
• With respect to other government officers, the void left by the abrogation of Article 14 is filled by Republic Act No. 3019, as amended, otherwise known as the ''Anti-Graft and Corrupt Practices Act" and Republic Act No. 6713, otherwise known as "Conduct and Ethical Standards for Public Official and Employees."

2.03. Disqualifications Under the Constitution

The Constitution prohibits a number of government officers from engaging in business or profession, from entering into certain contracts or being financially interested in specified transactions. 

These persons and their disqualifications are as follows: 

• Senators and Congressmen are enjoined not to be directly or indirectly, interested financially in any contract  with, or in any franchise or special privilege granted by the  Government during his term of office. He shall not intervene  in any matter before any office of the Government for his  pecuniary benefit or where he may be called upon to act on his  office.
• The President, Vice-President, Members of the cabinet, and their deputies or assistants are prohibited, during  their tenure, from practicing any profession, participate in any  business, be financially interested in any contract or franchise  granted by the Government. They are also required to avoid  conflict of interest in the conduct of their office.
• Members of the Constitutional Commissions are not allowed to engage in the practice of any profession or  active management of any business that may be affected by  the functions of his office. They are also not allowed to be  financially interested with any contract or franchise with the  Government.
• The President, Vice-President, Members of the Cabinet, Congress, Supreme Court and the Constitutional Commissions, Ombudsman are prohibited during their tenure from obtaining any loan, guaranty, or other form of financial accommodation for any business purpose from any government-owned or controlled bank.
• The practice of profession is limited to Filipino citizens, save in cases prescribed by law. The Eleventh  Foreign Negative List (Executive Order No. 65, Series of 2018) recognizes that foreigners are now allowed by different laws to practice a number of professions.

PROBLEMS:

Q: Who are merchants for the purposes of the Code of Commerce? 

A: Merchants under the Code of Commerce are:

• natural persons, those who, having legal capacity to engage in commerce, habitually devote themselves to it and
• partnerships and corporations organized under existing laws and who are considered merchants from the time they are registered with the Securities and Exchange Commission. (1967 Bar) 

Q: A has three cars. He sells one to B; mortgages the second to C; and the third he delivers to D for sale to other persons. Is A a merchant? Reason out your answers. 

A: No, A is not a merchant. 

The Code of Commerce requires habituality for a natural person to be considered a merchant. The same element does not appear in the problem. Disposal of the three cars that A owned does not indicate a desire to habitually engage in the business. (1967 Bar) 

Q: Lita, 26 years old, wife of Jimmy, wants to put up a betamax rental outlet with a capital of P200,000.00, using the name "Genta Beta ni Lita." 

a. May Lita lawfully engage in commerce and put up a betamax outlet? Can Jimmy object? 

b. Because most of Lita's customers were her friends and relatives and did not pay rentals for the betamax tapes, the business failed and resulted in losses. If Jimmy opposed  the business ventures, what properties shall answer for Lita's obligations? 

A: a. Yes, Lita may lawfully engage in commerce and put up a betamax outlet. Article 73 of the Family Code allows either spouse to exercise any legitimate business or activity without the consent of the other. If the wife intends to engage in business, the husband may object only on valid, serious, and moral grounds.

b. The properties of the community property shall answer for obligations that accrued before the objection was made by Jimmy. However, obligations accruing thereafter shall be borne by the separate property of Lita (Art. 73, Family Code). (1988 Bar) 

3. Partnership

• There is a partnership when 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.
• The partnership exists even if the partners do not use the word "partnership" and "partners. "
• The elements of the contract are as follows:
• Two or more persons bound themselves to contribute money, property, or industry to a common fund; and 
• They intend to divide the profits among themselves.
• Registration with the Securities and Exchange Commission (SEC) is necessary where the capital of the partnership is P3,000.00 or more.
• However, the juridical personality still exists even if not registered with the SEC.
• Mere failure to register with the SEC does not invalidate a contract that has all essential requisites of a partnership. 
• The purpose of registration is to give notice to third parties. 
• Failure to register the contract does not affect the liability of the partnership and of the partners to third persons.
• The basic requirements for the registration of a partnership with the SEC are as follows:
• Name verification slip;
• Articles of Partnership; and 
• Affidavit of a partner undertaking to change the partnership name if the name already belongs to another person or entity.
• The partnership name shall bear the word "Company" or "Co." and if it is a limited partnership, the word "Limited" or "Ltd." 
• A professional partnership name may bear the word "Company," "Associates," or "Partners," or other similar descriptions.
• Additionally, partnerships may be required to secure an endorsement or clearance from other government agencies  like the Insurance Commission, if applicable.
• Foreign partners  must submit a bank certificate on the capital contribution of the partners.
• Partnership v. Corporation: CNPA-TLSC
• Creation:
• Partnership is created by mere agreement 
• Corporation commences only from the issuance of a Certificate of Incorporation by the SEC or in proper cases, passage of a special law;
• Number of Organizers:
• Two or more persons may form a partnership
• In the case of a corporation, a single person may form a corporation (called a One Person Corporation under Republic Act No. 11232 or the Revised Corporation Code of the Philippines [RCCP]). 
• Note: The requirement under Batas Pambansa Blg. 68 (the Corporation Code of the Philippines) that there be at least five incorporators to form a corporation was deleted under the RCCP;
• Powers:
• A corporation is more restricted in its powers because of its limited personality
• A partnership is subject only to such limitations as may be agreed upon by the partners;
• Authority of those who Compose:
• There is mutual agency in partnership and each general partner can represent and bind the partnership 
• Stockholders are not agents of  the corporation in the absence of express authority;
• Transfer of Interest:
• Corporate shares are freely transferable without the consent of other stockholders (unless there is a stipulation) 
• Interest in the partnership cannot be transferred without the consent of the other partners;
• Liability of those who Compose:
• The liability of stockholders and members for corporate obligations is limited to their investment
• Partners may be liable beyond their investment;
• Right of Succession:
• There is a right of succession in a corporation
• There is no right of succession in partnership as death of a general partner dissolves the partnership;
• Capacity to be a Partner/Stockholder:
• A partnership can be an incorporator/stockholder of a corporation (Section 10, RCCP)
• A corporation can now also enter into a partnership or joint venture (Section 35, RCCP)
  
• Similar features of Partnership and Corporation:
• Both have juridical personality distinct from their components (stockholders or. partners); 
• Both are groups of persons (exception: One Person Corporation); 
• Capitals of both are derived from their components;
• There is distribution of profits in stock corporations and in partnerships; 
• They both act only through their agents;
• They can be organized only where there is a law authorizing their organization.

4. Joint Accounts (Sociedad de Cuentas en Participacion) 

• A Joint Account is present when there is an:
• arrangement whereby merchants may interest themselves in the transaction of other merchants, 
• contributing thereto the amount of capital they may agree upon, and 
• participating in the favorable and unfavorable results thereof in the proportion they may determine. 
• Also commonly called as "accidental partnership"
• Bourns v. D.M. Carman: A joint account as a partnership constituted in such a manner that "the existence of which is only known to those who had an interest in the same, there being no mutual agreements between the partners, and without a corporate name indicating to the public in some way that there were other people besides the one who ostensibly managed and conducted the business." 
• Such is exactly the accidental partnership of cuentas en participacion defined in Article 239 of the Code of Commerce.
• Joint Accounts v. Partnership:
• Juridical Personality: 
• A joint account has no juridical personality
• A partnership has a personality separate and distinct from the partners;
• Business Name:
• No commercial name common to all participants can be adopted in joint accounts
• A partnership can adopt a partnership name;
• Management:
• The general partners are all managers in partnership
• In a joint account only the ostensible partner manages and transacts business in his own name and under his individual liability;
• Parties in Cases:
• In a joint account, only the ostensible partner - the person carrying on the joint business - can be sued by and is liable to persons transacting with the former. 
• In partnership, all general partners may be liable even up to the extent of their personal properties and may therefore be sued by third persons.
• The duty to liquidate is imposed on the manager under Article 243 of the Code of Commerce. 
• The express statutory obligation imposed upon the manager makes it an imperative obligation for the manager to proceed without delay to the liquidation of the joint account and to account the proceeds of the liquidation to the partners. 
• If the manager failed to comply with his statutory duty to account the proceeds to the partners, the partners are entitled to file an action to compel an accounting, and the payment of their respective shares of the capital invested, together with damages. 
• In case of the liquidation of a joint account partnership, the sale of the firm assets is necessarily uncertain and eventual because the selling price that may be obtained from the property and effects that comprise such assets is uncertain. Hence, the price received should be allotted in the same proportion as that fixed in the contract for the division of the profits and losses, for otherwise one of the partners would be benefited to the detriment and loss of his co-partners. 
• For instance, if it is duly and fully proved that the managing firm acquired realty in the name and at the expense of the joint account partnership with the firm, it is just that, in liquidating the property of common ownership, such realty should be divided between the partners in the same manner as were the profits and losses during the existence of the business, from the beginning of the partnership to the date of its dissolution. This doctrine is perfectly with justice, as no person should enrich himself expense of another.

5. Business Trust

• It is a legal relation whereby one person, called the "trustor," conveys a property to another for the benefit of a person called the "beneficiary." 
• The person in whom confidence is reposed as regard the property is called the "trustee."
• Trusts are either express or implied. 
• Express trusts are created by the intention of the trustor or of the parties. 
• Implied trust comes into being by operation of law.
• There are only few provisions on express trust under the New Civil Code. 
• However, the New Civil Code adopts the principles of general law of trusts, insofar as they are not in conflict with the said Code, the Code of Commerce, the Rules of Court, and special laws. 
• Generally, the rights and obligations of the parties are expressly provided for in their agreement called a Trust Agreement.
• A trust agreement can actually be entered into with a trust department of a commercial or universal bank. 
• Pertinent regulations issued by the Bangko Sentral ng Pilipinas (BSP) define the term "trust business" as any activity resulting from a trustor-trustee relationship (trusteeship) involving the appointment of a trustee by a trustor for the administration, holding, management of funds and/or properties of the trustor by the trustee for the use, benefit or advantage of the trustor or of others called beneficiaries.
• In the United States, a business trust is called the ''Massachusetts Trust" because they were developed in Masachusetts. 
• It is defined as an unincorporated business association established by a declaration or deed of trust, and governed to a great extent by the general law of trust.
• Legal title is with the trustee who holds and manages the property for the benefit of members, who are beneficiaries of the trust with equitable interests, usually represented by transferable certificates.
• A "Real Estate Investment Trust" within the contemplation of Republic Act No. 9856, otherwise known as "The Real Estate Investment Trust (REIT) ACT OF 2009" has certain features of a business trust. 
• However, a REIT is not a real business trust. 
• A REIT "is a stock corporation established in accordance with the Corporation Code of the Philippines and the rules and regulations promulgated by the Commission [SEC] principally for the purpose of owning income-generating real estate assets.
• The law clarifies that "a REIT, although designated as a 'trust', does not have the same technical meaning as 'trust' under existing laws and regulations but is used ... for the sole purpose of adopting the internationally accepted description of the company in accordance with global best practices."

6. Joint Venture

• Joint venture is an association of persons or companies jointly undertaking some commercial enterprise; 
• Generally all contribute assets and share risks. 
• It requires a:
• community interest in the performance of the subject, 
• a right to direct and govern the policy connected therewith, and 
• duty, which may be altered by agreement to share both in profit and losses.
• Rationale for Joint Ventures. Joint venture are used as a business organization for the following reasons:
• Joint ventures reduce the investment required of any one company and distribute the risk of undertaking  an expensive and risky venture because some projects are of such magnitude that they strain the financial reserves of corporations;
• Joint ventures pool "know-how," thereby permitting the members to achieve diversification that it would have difficulty achieving alone;
• A member of the joint venture may gain possible legal, political or public relations advantages by organizing and incorporating where activities are to be conducted; and
• A member may avoid government scrutiny of corporate expansion.
• Aurbach v. Sanitary Wares Manufacturing Corporation: The Supreme Court adopted the view that a joint venture is an organization formed for some temporary purpose. 
• It is hardly distinguishable from the partnership, since their elements are similar:
• community of interest in the business, 
• sharing profits and losses, and 
• mutual right of control.
• It was further explained that it would seem that under Philippine law, a joint venture is a form of a partnership and should thus be governed by the law of partnerships.
• It is the substance, rather than the form of the agreement that determines if the parties entered into a joint venture agreement. 
• The intention of the parties that is reflected in the agreement governs. 
• Hence, even if the parties called the agreement a Power of Attorney, the agreement may also be considered a joint venture agreement if the terms and conditions thereof indicate that it is a joint venture agreement.
• Corporations can enter into joint venture agreements. 
• Two or more corporations may enter into a joint venture through a contract or agreement if the nature of the venture is in line with the business authorized by their charters. 
• The contract or agreement need not be registered with the Securities and Exchange Commission provided that the joint venture will not result in the formation of a partnership or corporation. It follows that Joint Ventures may result in the formation of a joint venture corporation. In such case, it must comply with applicable nationalization laws. 
• In addition, the joint venture may give certain shareholders or groups of shareholders power to select or nominate a specified number of directors, give to the shareholders control over the selection and retention of employees, or set up procedure for settlement of disputes.
• However, the joint venture corporation itself is subject to corporate law not to partnership law. 
• The Supreme Court explained: "By choosing to adopt a corporate entity as the medium to pursue the joint venture enterprise, the parties to the joint venture are bound by corporate law principles under which the entity must operate. Among these principles is the limited liability doctrine. The use of a joint venture corporation allows the co-venturers to take full advantage of the limited liability feature of the corporate vehicle which is not present in a formal partnership arrangement." 
• The parties to the joint venture agreement cannot cite the provisions of the law on partnership with respect to the corporation itself and its relationship with its shareholders.
• It follows that violation of the provisions of the Joint Venture Agreement will not necessarily prejudice subsequent shareholders who are not parties thereto. 
• For example, the provisions of the Joint Venture Agreement granting preference to holders of certain shares, which are not reproduced in the Articles of Incorporation and the certificates, will not be binding on creditors and other shareholders who are not part of the agreement. 

7. Cooperatives

• A cooperative is 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.
• The governing law is Republic Act No. 9520 otherwise known as "The Philippine Cooperative Code of 2008. 
• "Article 2 of the said law states that it is "the declared policy of the State to foster the creation and growth of cooperatives as a practical vehicle for prompting self-reliance and harnessing people power towards the attainment of economic development and social justice. The State encourages the private sector to undertake the actual formation and organization to cooperatives and endeavors to create an atmosphere that is conducive to the growth and development of these cooperatives.
• It is also declared as a policy that the Government and it branches, subdivisions, instrumentalities and agencies shall ensure the provision of technical guidance, financial assistance and other services to enable said cooperatives to develop into viable and responsive economic enterprises and thereby bring about a strong cooperative movement that is free from any conditions that might infringe upon the autonomy or organizational integrity of cooperatives.
• Further, the State recognizes the principle of subsidiarity under which the cooperative sector will:
• initiate and regulate within it own ranks the promotion and organization, 
• training and research, 
• audit and 
• support services relating to cooperatives with government assistance where necessary.
• Although cooperatives are not primarily governed by the Corporation Code, they are also treated as a corporate entity with their own acts and liabilities.
• A cooperative is vested with powers and capacities under Article 9 of the Philippine Cooperative Code of 2008, including the:
• power to the exclusive use of its registered name, 
• the power to sue and be sued and 
• the right of succession. 
• The law also expressly provides that a duly registered cooperative shall have limited liability.
• It is the General Assembly that is the highest policy-making body of the cooperative. 
• On the other hand, the Board of Directors of a cooperative shall be responsible for the cooperative's strategic planning, direction-setting and policy formulation activities.

8. Syndicate

• A syndicate is a group of people who come together to work for a common aim. 
• This unincorporated business association is often encountered among insurance companies who may be underwriting a large risk or banks that are lending a huge amount. 
• Syndication is therefore the practice of dividing investment risk between several persons in order to minimize individual risk.
• It has been observed that "as banks have gotten bigger, so have their lending limits, but there may be times when a credit facility exceeds the lending limit of one bank. 
• Banks also wish to diversify their loan portfolios and may not wish to extend credit to one borrower up to the maximum legal amount. In such cases, the lead lender may sell participating interests in the loan to other lenders or may arrange a syndicated credit facility. 
• It was explained further that in syndicated loan, each lender is a member of the syndicate and a party to the loan documents. The borrower has a direct contractual relationship with each member of the lending syndicate. 
• Syndicated credit facilities often involve a revolving credit arrangement used by the borrower for working capital and a term loan that is used to refinance the borrower's existing debt."
• In syndicated loans, the lead bank may initially be the only lender. However, it may not have sufficient available cash to lend the whole amount needed by the borrower. Thus, after extending the loan to the borrower to partially cover the latter's needs, the lead bank may propose loan syndication to other banks with the undertaking to share the collateral that was already given by the borrower. 
• The agreement to share the collateral is perfected the moment there is a meeting of minds thereon among the participating banks and the same agreement is consummated with the execution of the documents contemplated like a "mortgage trust indenture" or a "joint real estate mortgage."

9. Homeowners' Associations

• Homeowners' associations may acquire juridical personality and corporate powers.
• Section 3(b), Republic Act No. 9904:"Association" refers to the 
• homeowners' association which is a non-stock, non-profit corporation registered with:
• the Housing and Land Use Regulatory Board (HLURB), 
• or one previously registered with the Home Insurance Guarantee Corporation (now Home Guaranty Corporation) or 
• the Securities and Exchange Commission (SEC), 
• organized by:
• owners or purchasers of a lot in a subdivision/village or other residential real property located within the jurisdiction of the association; 
• or awardees, usufructuaries, legal occupants and/or lessees of a housing unit and/or lot in a government socialized or economic housing or relocation project and other urban estates; 
• or underprivileged and homeless citizens as defined under existing laws in the process of being accredited as usufructuaries or awardees of ownership rights under the:
• Community Mortgage Program (CMP), 
• Land Tenure Assistance Program (LTAP) and 
• other similar programs in relation to a socialized housing project actually being implemented by the national government or the LGU.
• Registration of a homeowner's association is with the Housing and Land Use Regulatory Board (HLURB). 
• This authority extends to all associations, federations, confederations or umbrella organizations of the associations.
• The governing law is Republic Act No. 9904 otherwise known as "The Magna Carta for Homeowners and Homeowners Association." The underlying State policy is stated in Section 2 of Republic Act No. 9904:
• Declaration of Policy. - In fulfillment of the constitutional principles directing the State to encourage, promote and respect nongovernmental, community-based and people's organizations in serving their legitimate collective interests in our participatory democracy, it is hereby declared the policy of the State to uphold the rights of the people to form unions, associations, or societies, and to recognize and promote the rights and the roles of homeowners as individuals and as members of the society and of homeowners' associations. To this end, the State shall endeavor to make available resources and assistance that will help them fulfill their roles in serving the needs and interests of their communities, in complementing the efforts of local government units (LGUs) in providing vital and basic services to our citizens, and in helping implement local and national government policies, programs, rules and ordinances for the development of the nation. 
• Originally, homeowners' associations were within the regulatory powers of the SEC. 
• Pursuant to Section 2 of Executive  Order No. 535, these powers were later transferred to the Home Insurance and Guaranty Corporation (HIGC). In 2000, the powers and responsibilities over homeowners' associations were transferred by Section 26 of the "Home Guaranty Corporation Act of 2000" or Republic Act No. 8763 to the Housing and Land Use Regulatory Board (HLURB).
• The HLURB is also vested with the quasi-judicial functions regarding homeowners' associations in subdivisions and condominiums. 
• For instance, it has exclusive jurisdiction over controversies between the homeowners and its members.
• The term ''homeowners" as contemplated under the special law includes: 
• An owner or purchaser of a lot in a subdivision/village; 
• An awardee, usufructuary, or legal occupant of a unit, house and/or lot in a government socialized or economic housing or relocation project and other urban estates; or 
• An informal settler in the process of being accredited as beneficiary or awardee of ownership rights under the CMP,  LTAP, and other similar programs.

10. Unincorporated Associations

• Unincorporated associations or organizations of persons, that do not claim to be part of a corporation, may also act as a group in pursuing certain activities. 
• Even if unregistered, the members of an association or organization, by agreement, may perform acts not contrary to law, morals, good customs, public order or public policy.
• The applicable law or rule would depend on the circumstances. Thus, in some cases, the New Civil Code provisions on partnership or agency may apply depending on the express or implied agreement of the parties. In other cases, the members of these unincorporated associations or organizations may all sign an agreement as parties but may expressly provide for joint creditors and/or debtors or solidary creditors and/or debtors. 
• The Rules of Court recognized the existence of associations or "entity without juridical personality" by providing in Section 8 of Title 14 thereof the rule on service of summons thereto. 

11. Corporations

• In 1776, Adam Smith wrote in his canonical Wealth of Nations that "companies, though they may, perhaps, have been useful for the first introduction of some branches of commerce, by making, at their own expense, an experiment which the state might not think it prudent to make, have in the long-run proved, universally, either burdensome or useless, and have either mismanaged or confined the trade." 
• His aversion for companies was further magnified when he observed in the same work that the same companies were involved in collusion to limit competition, restraint of trade, market price enhancement, and obstruction of circulation of employment.
• The corporate form has evolved into something that is far different from the companies of Adam Smith's time. However,  it is not unusual to hear the same complaints against corporations now as it was then. Constant friction between some segments of society and "big business" is apparently inevitable and, whether unfounded or not, accusations that corporations are involved in collusion, obstruction, suppression and other irregularities are the inescapable results. Nevertheless, corporations continue their role as important components of the economy. Instead of doing away with corporations, the State subjects them to regulations and tries it make them develop a "social conscience."
• Corporations have their origin in Roman law. The republic — Populus Romanus, Senatus Popolusque Romanus, Res public — is said to be the "original" corporation. It was during the early republic that corporate forms and other organizations gradually developed including the religious sodalitas, the universitas, the collegium, the governmental municipium and the societas. 

11.01. Core Features

• Its separate personality (under the Doctrine of Separate Personality) and the limited liability of its components (Limited Liability Rule) make a corporation the most desirable business organization for many businessmen. 
• Corporations as investment vehicles involve the pooling of money capital from shareholders and human capital from management.
• Business corporations have five core characteristics, namely: LLTDI
• Legal personality;
• Limited liability of shareholders;
• Transferability of shares;
• Delegated management under a board structure, and
• Investor ownership.
• The core characteristics respond to the exigencies of the large modern business enterprise and are therefore uniquely attractive for organizing productive activities.
• As will be discussed further elsewhere in this book, the core characteristics appear even in a One Person Corporation although in a limited sense with respect to centralized management. There is no separate Board because the single shareholder is the sole director although there may also be officers who manage the corporation.

11.02. Advantages of Corporations

• The advantages of a corporation as business organization are as follows: CLCT-CPSE
• The capacity to act as a legal unit;
• Limitation of or exemption from, individual liability of shareholders; 
• Continuity of existence;
• Transferability of shares;
• Centralized management of board of directors;
• Professional management;
• Standardized method of organization, and finance; and 
• Easy capital generation

11.03. Disadvantages of Corporations

• The disadvantages of a corporate form are as follows: DGIL-HHM
• It is prone to "double taxation";
• They are subject to greater governmental regulation and control; 
• A corporation may be burdened with an inefficient management if stockholders cannot organize to oppose management; 
• Limited liability of stockholders may at times translate into limited ability to raise creditor capital; 
• It is harder to organize compared to other business organizations; 
• It is harder or more complicated to maintain; and
• The "owners" or stockholders do not participate in the day-to-day management. 

11.04. Tax Treatment

• The law treats corporations and other business organizations exactly the same for certain specific purposes. 
• For example, for income tax purposes, the term corporation includes other business organizations. 
• Section 22(B) of National Internal Revenue Code provides that the term corporation "shall include:
• partnerships, no matter how created or organized, 
• joint-stock companies,
• joint accounts (cuentas en participacion), 
• association, or 
• insurance companies, 
• but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy, operations pursuant to an operating consortium agreement under a service contract with the Government.

11.05. Opinions Regarding the Corporate Form

• It should be noted that early on, there were those who were reluctant to accept corporations as business vehicles. It is well to bear this in mind not only for historical purposes but also for the purpose of avoiding, if possible, the perceived pitfalls that accompany a corporation without putting an end to the corporate form.
• Notwithstanding such objection, corporations continue proliferate. In this jurisdiction, the contribution of corporations to national development cannot be ignored. The importance of  corporations was in fact emphasized in the Sponsorship Speech that was made when the bill introducing the Corporation Code was considered on Second Reading by the Batasang Pambansa.

11.06. Purposes of Corporate Law

• Laws on corporations — like the laws governing other business organizations— are principally concerned with the following:
• defining the area within which the parties are free to allocate risk, control, and profit as they wish and 
• prescribing the allocation of these elements in the absence of express agreement.
• The Revised Corporation Code of the Philippines, the Corporation Code and the old Corporation Law provide for the:
• formation and organization of corporations,
• define their powers, 
• fix the duties of directors and other officers thereof, 
• declare the rights and liabilities of shareholders and members and
• prescribe the conditions under which corporations may transact business
• The main groups of persons that are affected by corporate law include:
• stockholders, 
• directors and officers, and 
• creditors. 
• Corporate law seeks to regulate both the relations between the group and within the groups. 
• It regulates "the mechanisms by which people join, or leave, one of these groups as well as their rights and duties once they have joined a group."
• Nevertheless, since a separate juridical entity is present, corporate law may not necessarily establish direct legal relations between the groups but may instead mediate these relationships through the other juridical entity, the corporation.
• Corporate law also allocates risks between the owners (shareholders) and management (directors and officers) to minimize conflict between the components. 
• A structure for business activities is created and devices to control or prevent conflicts between the components are provided for. 
• Corporate law seeks to reduce ongoing costs of organizing business through the corporate form. 
• Corporate law does this by facilitating coordination between participants in corporate enterprise, and by reducing the scope of value-reducing forms of opportunism among different constituencies.
• The legislator who authored the Corporation Code explained that the law was designed "to lay down rules and regulations of the organization of corporations with a view to the protection of the public interest, but at the same time, promote the economic and social development of the country through the development of the corporate vehicle as a means of doing business in the Philippines." 
• The Corporation Code makes it possible for business to prosper and this would spread the benefits of prosperity among all the people, especially the employees of the corporations and associations which may be organized under the aegis of the Corporation Code."
• The Revised Corporation Code of the Philippines likewise serves the purposes sought to be accomplished under the Corporation Code. It was explained that: "...the Corporation Code of the Philippines was enacted in 1980, or 36 years ago. If we are to keep up with the rest of the financial world, we need to codify best international corporate practices and address the archaic bottlenecks in the areas of starting a business, and protecting minority investors. We must likewise provide an environment conducive not just to big businesses, but make the corporate vehicle an appealing prospect for startups and entrepreneurs."

11.07. Purpose of the RCCP

• The RCCP was passed by Congress mainly to introduce four (4) main reform clusters, namely: 
• Policies that would enhance the ease of doing business in the Philippines;
• Simplifying name verification. Shifting from the "confusingly similar" to "distinguishability" test for name registration.
• Introducing the concept of a "one-person corporation." Addressing the requirement for at least five stockholders, often necessitating nominee shareholders.
• Introducing the concept of a "perpetual corporate term" to prevent dissolution due to term expiry.
• Allowing remote communication and absentee voting for stockholders.
• Encouraging the use of technology for meetings and communication, reducing the need for physical presence.
• Implementing an electronic filing system to improve compliance with reportorial requirements.
• Rules that prioritize corporate and stockholder protection;
• the creation of emergency boards; 
• the revised rules on the right to inspect corporate books;
• modified quorum requirements; and 
• expanded grounds for disqualification of directors.
• Provisions that instill corporate and civic responsibility;
• Aim to create effective corporate entities for capital accumulation, goods production, and service delivery.
• Imposed stricter good governance standards in the public sector through the GOCC Governance Act.
• Addressing the issue of criminals hiding behind corporate entities. Seeking to impose corporate criminal liability and penalties, including fines and registration revocation, for graft and corruption.
• Requiring corporations with public interest to have independent directors on their boards. Mandatory appointment of a compliance officer by the board of directors for such corporations.
• Examples of corporations vested with public interest include educational institutions, banks, insurance, transportation, telecommunication companies, and publicly listed companies. SEC may expand the list of corporations vested with public interest in the interest of the public.
• Amendments that will strengthen the country's policy and regulatory corporate framework.
• arbitration of commercial disputes;
• amendments on dissolution; and 
• the alignment of SEC's powers under the Corporation Code with the Securities Regulation Code

•  In the House of Representatives, one of the sponsors of Bill that eventually became the RCCP explained that: 'The Bill at hand seeks to remedy this situation by updating the law and making it more attuned to the current world order and bringing the country' legal framework for corporations into the 21st century. Among others, the Bill: 
• enables corporations registered in the Philippines to compete globally by codifying international corporate best practices; 
• encourages entrepreneurship and the formation of small businesses by authorizing the establishment of one person corporations; 
• contributes to the ease of doing business by 
• mandating the Securities and Exchange Commission (SEC) to develop and implement electronic filing and monitoring systems, and
• permitting corporations to exist perpetually, unless their Certificates of Incorporation specify otherwise;
• enhances the country's competitiveness by favorably impacting two ease-of-doing-business indicators, particularly in starting a business and protecting minority stockholders; 
• promotes stockholders' rights by 
• expanding the right of a stockholder to inspect the books of the corporation to include a stockholder's representative who may be more knowledgeable in corporate issues;
• affording stockholders and members of the Boards to remotely participate in meetings and to vote in the same; 
• deters corporate abuse by 
• requiring the election of independent directors in entities vested with public interest;
• providing for corporate criminal liability, holding not only the individuals responsible for their violations but the corporation itself, subjecting the latter to hefty fines; 
• streamlining cooperation between various regulatory agencies and the SEC; and
• endowing the SEC with additional powers, including the powerto hold persons in contempt for failing to comply with any of the SEC's orders or subpoenas.

11.08. Good Governance under RCCP

• In addition, a good number of amendments the Corporation Code under the RCCP are intended to strengthen good corporate governance, which will also protect the rights of stockholders, and deter corporate abuses and fraud as well as graft and corrupt practices.
• The intent is to apply good governance principles not only on listed companies but on all corporations as well.