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Basic types of business organizations: 1. Corporate or general franchise – the franchise to exist
as a corporation
1. Sole proprietorship 2. Special or secondary franchise – certain rights and
2. Partnerships privileges conferred upon existing corporations, such
3. Joint accounts or Cuentas en Participacion as the right to use the streets of a municipality to lay
4. Business trusts pipes of tracks, erect poles or string wires
5. Joint venture
6. Cooperative The corporate or general franchise is vested in the
7. Syndicate individuals who comprise the corporation and not in the
8. Corporations corporation itself, and cannot be conveyed in the absence
of legislative authority to do so.
A sole proprietorship has no legal personality separate
from its proprietor. The special or secondary franchises of a corporation are
vested in the corporation and may ordinarily be conveyed
or mortgaged under a general power granted to a
Business name – refers to any name that is different from the corporation to dispose its property. (J.R.S. Business Corp.
true name of an individual which is used or signed in v. Imperial Insurance)
connection with hi/her business on any written or printed
receipts including receipts for business taxes, duties and fees
and withdrawal or delivery receipts The right to be and to act as a corporation is not a natural
or civil right of any person; such right as well as the right to
enjoy the immunities and privileges resulting from
Distinctions between partnership and corporation: incorporation constitute a franchise and a corporation,
therefore cannot be created except by or under a special
1. Partnership is created by mere agreement while the authority from the State. (Recreation and Amusement
existence of the corporation commences only from Association of the Phil. v. City of Manila)
the issuance of a Certificate of Registration of the
SEC or in proper cases, passage of special law; Under the contract theory, incorporation is deemed to
2. Even two persons may form a partnership while a involve contracts among the members, between the
corporation needs at least five incorporators; members and the corporation, and between the members
3. A corporation is more restricted in its powers because or the corporation and the State.
of its limited personality while a partnership is subject
only to what may be agreed upon by the partners; Perpetual succession – that continuous existence which
4. There is mutual agency in partnership and each enables a corporation to manage its affairs, and hold property
general partner can represent and bind the without the necessity of perpetual conveyances, for purposes
partnership while stockholders are not agents of the of transmitting it
corporation in the absence of express authority;
5. Corporate shares are freely transferable without the A corporation continues to exist even if there is a change
consent of other stockholders (unless there is a in those who compose it. Death of a shareholder or
stipulation) while interest in the partnership cannot be transfer of his shares will not affect the continued
transferred without the consent of other partners; existence of the corporation.
6. The liability of stockholders and members of for
corporate obligations is limited to their investment A corporation has a personality separate and distinct from
while partners may be liable beyond their investment; its members. It has a personality separate and distinct
7. There is no right of succession in partnership as from the persons composing it as well as from that any
death of a general partner dissolves the partnership. other entity to which it may be related. (Secosa v. Heirs of
Francisco, 433 SCRA 273)
THE CORPORATION CODE (B.P. Blg. 68)
The properties of the corporation are not the properties of
its shareholders, members or officers. Properties
Section 1. Title of the Code. – This Code shall be known as registered in the name of the corporation are owned by it
"The Corporation Code of the Philippines." as an entity separate and distinct from those who
compose it. (Stockholders of Guanson & Sons, Inc. v.
Purpose of Corporate Law: Register of Deeds) In the same manner, properties of the
shareholders, members or officers of the corporation are
1. Defining the area within which the parties are free to not properties of the corporation.
allocate risks, control, and profit as they wish;
2. Prescribing the allocations of these elements in the The interest of the shareholder in the corporation is
absence of express agreement. indirect, contingent and inchoate. (PNB v. Aznar) The
interest of the shareholder on a particular property
becomes actual, direct and existing only upon liquidation
GENERAL RULE: The Corporation Code is the primary law of the assets of the corporation and the same property is
that should be applied in the regulation of corporations. assigned to the share holder concerned.
EXCEPTION: The Corporation Code applies only suppletorily The ownership of corporate properties is in the corporation
to banks and other financial institutions, and insurance itself and not in the holders of its share of stocks. (Mobila
corporations. Products v. Umezawa)
Section 2. Corporation defined. – A corporation is an The obligations of the corporation are not the obligations
artificial being created by operation of law, having the of its shareholders and members and officers and vice-
right of succession and the powers, attributes and versa.
properties expressly authorized by law or incident to its
existence. (Attributes of a corporation) The corporation cannot likewise be made to answer for the
personal obligations of the stockholders, members,
directors or officers.
Concession Theory – A corporation is an artificial being
invisible, intangible, and existing only in contemplation of law.
Limited Liability Rule – A stockholder is personally liable for the
financial obligations of a corporation to the extent of his unpaid
Franchise – a special privilege conferred by governmental subscription. While stock holders are generally not liable, the
authority, and which does not belong to citizens of the country
generally as a matter of common right
stockholders may be liable if they have not or have not fully a. Control, not mere majority or complete stock
paid the subscription price. control, but complete domination, not only of
finances but of policy and business practice
Reasons for the Limited Liability Rule: in respect to the transaction attacked so that
the corporate entity as to this transaction had
1. Investment in shares is encouraged because the task at the time no separate mind, will or
of evaluating equity investment is greatly simplified existence of its own;
considering that the low-probability even of insolvency b. Such control must have been used by the
and the financial condition of other investors can defendant to commit fraud or wrong, to
already be ignored; perpetuate the violation of a statutory or
2. Investment in risky ventures is encouraged; other positive legal duty, or dishonest and
3. Banks and other financial intermediaries who are unjust act in contravention of plaintiff’s legal
considered experts are encouraged to closely monitor right; and
corporate debtors more closely. c. The aforesaid control and breach of duty
must proximately cause the injury or unjust
The acts of the stockholders do not bind the corporation loss complained of.
unless they are properly authorized. 2. The alter ego doctrine – it must be shown that there is
unity of interest and ownership that the separate
It is well settled that an individual cannot enter into a personalities of the corporation and the individual no
contract with himself but a corporation has the same longer exist and that if the acts are treated as those
freedom of contracting with its stockholders that it has of of the corporation alone, an inequitable result will
contracting with any other person. (Fletcher) follow.
3. The identity doctrine – If the plaintiff can show that
A non-stock corporation may file an action in the name of there was such a unity of interest and ownership that
its members only if it can prove that the members indeed the independence of the corporations had in effect
authorized the corporation to institute the action for and in ceased or had never begun, and adherence to the
behalf of such members. The mere fact that the non-stock fiction of separate identity would serve only to defeat
corporation was organized for the purpose of advancing justice and equity by permitting the economic entity to
the interests and welfare of its members does not escape liability arising out of an operation of one
necessarily mean that the corporation has the authority to corporation for the benefit of the whole enterprise.
represent its members in legal proceedings, including an
arbitration proceeding. (Ormoc Sugar Planters Assoc., v. Only the courts (or administrative tribunals like the NLRC)
CA) can pierce the veil of corporate fiction. Hence, a sheriff
who has a ministerial duty to enforce a final and executor
Under the doctrine of piercing the veil of corporate fiction, decision cannot “pierce the veil of corporate fiction” by
the corporation’s separate juridical personality may be enforcing the decision against stockholders who are not
disregarded when there is an abuse of the corporate form. parties to the action. (Cruz v. Dalisay)
The corporation will be treated by the courts as a mere
aggrupation of persons and the liability will directly attach When the veil of corporate fiction is pierced in proper
to them. cases, the corporate character is not necessarily
abrogated. It continues for legitimate objectives. (Reynoso
Instances when corporate personality may be disregarded: IV v. CA)
1. When the corporate identity is used to defeat public Group of Companies – refers to corporations that are
convenience, justify wrong, protect fraud, or defend financially related to one another as parent corporations,
crime; subsidiaries and affiliates
2. Where the corporation is a mere alter ego or business
conduit of a person; A group of companies has no personality separate and
3. Where the corporation is so organized and controlled distinct from each of the components corporations.
and its affairs are so conducted as to make it merely
an instrumentality, agency, conduit or adjunct of Consistent with the Primary Rules of Attribution, notice to
another corporation. the Board of Directors should also be deemed notice to
the corporation.
Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a Knowledge of facts acquired or possessed by an officer or
corporation is not in itself sufficient ground for disregarding agent of the corporation in the course of his employment,
the separate corporate personality. (Wensha Spa Center and in relation to matters within the scope of his authority,
v. Yung) is notice to the corporation, whether he communicates
such knowledge or not since a corporation cannot see, or
The similarity of business of two corporations does not know, anything except through its officers. (Francisco v.
warrant the disregard of the corporate veil. The mere fact GSIS)
that the businesses of the two entities are interrelated is
not a justification for disregarding the separate Two test for determining whether a corporation is foreign or
personalities, absent sufficient showing that the corporate domestic:
entity was purposely used as a shield to defraud creditors
and third persons of their rights. (China Bank v. Dyne-Sem 1. Aggregate test (Control test) – requires looking into
Electronics) the nationality, domicile, or residence of the
individuals who control the corporation; what about
The overlapping of incorporators and stockholders of two the Grandfather Rule? The Grandfather Rule applies
or more corporations will not necessarily justify the if the share of Filipinos in a shareholder corporation is
piercing of the veil of corporate fiction. Much more has to less than 60%.
be proven. (China Bank v. Dyne-Sem Electronics) 2. Entity test (place of incorporation test) – looks to the
nation where the corporation was incorporated.
The mere fact that two corporations have the same
president is not sufficient to pierce the veil of corporate One exceptional situation where the Supreme Court ruled
fiction of the two corporations. (Complex Electronics that a corporation has no nationality is the case of
Employees Association v. NLRC, 310 SCRA 403) Corporation Sole.
Variants within the doctrine of piercing the veil of corporate For practical purposes, a corporation is in a metaphysical
fiction: sense a resident of the place where its principal office is
located as stated in the Articles of Incorporation.
1. The instrumentality doctrine – calls for the application
of the test consisting of the three requisites, to wit:
Doctrine of Corporate Responsibility – Under this doctrine, a Corporators in a stock corporation are called stockholders
corporation is directly and primarily liable, not merely vicarious, or shareholders. Corporators in a non-stock corporation
to the injury incurred to a party with whom the corporation has are called members. (4a)
a special relationship.