INTRODUCTION 1.

Defining the area within which the parties are free to

allocate risks, control, and profit as they wish;
Basic types of business organizations:
2. Prescribing the allocations of these elements in the
1. Sole proprietorship absence of express agreement.

2. Partnerships GENERAL RULE: The Corporation Code is the primary law

that should be applied in the regulation of corporations.
3. Joint accounts or Cuentas en Participacion
EXCEPTION: The Corporation Code applies only suppletorily
4. Business trusts to banks and other financial institutions, and insurance
corporations.

5. Joint venture
Section 2. Corporation defined. – A corporation is an
artificial being created by operation of law, having the
6. Cooperative
right of succession and the powers, attributes and
properties expressly authorized by law or incident to its
7. Syndicate existence. (Attributes of a corporation)

8. Corporations Concession Theory – A corporation is an artificial being

invisible, intangible, and existing only in contemplation of law.
 A sole proprietorship has no legal personality separate
from its proprietor. Franchise – a special privilege conferred by governmental
authority, and which does not belong to citizens of the country
Business name – refers to any name that is different from the generally as a matter of common right
true name of an individual which is used or signed in
connection with hi/her business on any written or printed Types of franchise:
receipts including receipts for business taxes, duties and fees
and withdrawal or delivery receipts 1. Corporate or general franchise – the franchise to exist
as a corporation
Distinctions between partnership and corporation:
2. Special or secondary franchise – certain rights and
1. Partnership is created by mere agreement while the privileges conferred upon existing corporations, such
existence of the corporation commences only from as the right to use the streets of a municipality to lay
the issuance of a Certificate of Registration of the pipes of tracks, erect poles or string wires
SEC or in proper cases, passage of special law;
 The corporate or general franchise is vested in the
2. Even two persons may form a partnership while a individuals who comprise the corporation and not in the
corporation needs at least five incorporators; corporation itself, and cannot be conveyed in the absence
of legislative authority to do so.
3. A corporation is more restricted in its powers because
of its limited personality while a partnership is subject
only to what may be agreed upon by the partners;  The special or secondary franchises of a corporation are
vested in the corporation and may ordinarily be conveyed
4. There is mutual agency in partnership and each or mortgaged under a general power granted to a
general partner can represent and bind the corporation to dispose its property. (J.R.S. Business Corp.
partnership while stockholders are not agents of the v. Imperial Insurance)
corporation in the absence of express authority;

5. Corporate shares are freely transferable without the

consent of other stockholders (unless there is a  The right to be and to act as a corporation is not a natural
stipulation) while interest in the partnership cannot be
or civil right of any person; such right as well as the right to
transferred without the consent of other partners;
enjoy the immunities and privileges resulting from
incorporation constitute a franchise and a corporation,
6. The liability of stockholders and members of for therefore cannot be created except by or under a special
corporate obligations is limited to their investment authority from the State. (Recreation and Amusement
while partners may be liable beyond their investment; Association of the Phil. v. City of Manila)

7. There is no right of succession in partnership as  Under the contract theory, incorporation is deemed to
death of a general partner dissolves the partnership. involve contracts among the members, between the
members and the corporation, and between the members
THE CORPORATION CODE (B.P. Blg. 68) or the corporation and the State.

Perpetual succession – that continuous existence which

Section 1. Title of the Code. – This Code shall be known as enables a corporation to manage its affairs, and hold property
"The Corporation Code of the Philippines." without the necessity of perpetual conveyances, for purposes
of transmitting it
Purpose of Corporate Law:
 A corporation continues to exist even if there is a change
in those who compose it. Death of a shareholder or
 transfer of his shares will not affect the continued Under the doctrine of piercing the veil of corporate fiction,
existence of the corporation. the corporation’s separate juridical personality may be
disregarded when there is an abuse of the corporate form.
 A corporation has a personality separate and distinct from The corporation will be treated by the courts as a mere
its members. It has a personality separate and distinct aggrupation of persons and the liability will directly attach
from the persons composing it as well as from that any to them.
other entity to which it may be related. (Secosa v. Heirs of
Francisco, 433 SCRA 273) Instances when corporate personality may be disregarded:

 The properties of the corporation are not the properties of 1. When the corporate identity is used to defeat public
its shareholders, members or officers. Properties convenience, justify wrong, protect fraud, or defend
registered in the name of the corporation are owned by it crime;
as an entity separate and distinct from those who 2. Where the corporation is a mere alter ego or business
compose it. (Stockholders of Guanson & Sons, Inc. v. conduit of a person;
3. Where the corporation is so organized and controlled
Register of Deeds) In the same manner, properties of the
and its affairs are so conducted as to make it merely
shareholders, members or officers of the corporation are
an instrumentality, agency, conduit or adjunct of
not properties of the corporation.
another corporation.
 The interest of the shareholder in the corporation is
 Mere ownership by a single stockholder or by another
indirect, contingent and inchoate. (PNB v. Aznar) The
corporation of all or nearly all of the capital stock of a
interest of the shareholder on a particular property
corporation is not in itself sufficient ground for disregarding
becomes actual, direct and existing only upon liquidation
the separate corporate personality. (Wensha Spa Center
of the assets of the corporation and the same property is
v. Yung)
assigned to the share holder concerned.
 The similarity of business of two corporations does not
 The ownership of corporate properties is in the corporation
warrant the disregard of the corporate veil. The mere fact
itself and not in the holders of its share of stocks. (Mobila
that the businesses of the two entities are interrelated is
Products v. Umezawa)
not a justification for disregarding the separate
 The obligations of the corporation are not the obligations personalities, absent sufficient showing that the corporate
of its shareholders and members and officers and vice- entity was purposely used as a shield to defraud creditors
versa. and third persons of their rights. (China Bank v. Dyne-Sem
Electronics)
 The corporation cannot likewise be made to answer for the
personal obligations of the stockholders, members,  The overlapping of incorporators and stockholders of two
directors or officers. or more corporations will not necessarily justify the
piercing of the veil of corporate fiction. Much more has to
Limited Liability Rule – A stockholder is personally liable for the be proven. (China Bank v. Dyne-Sem Electronics)
financial obligations of a corporation to the extent of his unpaid
subscription. While stock holders are generally not liable, the  The mere fact that two corporations have the same
stockholders may be liable if they have not or have not fully president is not sufficient to pierce the veil of corporate
paid the subscription price. fiction of the two corporations. (Complex Electronics
Employees Association v. NLRC, 310 SCRA 403)
Reasons for the Limited Liability Rule:
Variants within the doctrine of piercing the veil of corporate
1. Investment in shares is encouraged because the task fiction:
of evaluating equity investment is greatly simplified
considering that the low-probability even of insolvency 1. The instrumentality doctrine – calls for the application
and the financial condition of other investors can of the test consisting of the three requisites, to wit:
already be ignored; a. Control, not mere majority or complete stock
2. Investment in risky ventures is encouraged; control, but complete domination, not only of
3. Banks and other financial intermediaries who are finances but of policy and business practice
considered experts are encouraged to closely monitor in respect to the transaction attacked so that
corporate debtors more closely. the corporate entity as to this transaction had
at the time no separate mind, will or
 The acts of the stockholders do not bind the corporation existence of its own;
unless they are properly authorized. b. Such control must have been used by the
defendant to commit fraud or wrong, to
 It is well settled that an individual cannot enter into a perpetuate the violation of a statutory or
contract with himself but a corporation has the same other positive legal duty, or dishonest and
freedom of contracting with its stockholders that it has of unjust act in contravention of plaintiff’s legal
contracting with any other person. (Fletcher) right; and
c. The aforesaid control and breach of duty
 A non-stock corporation may file an action in the name of must proximately cause the injury or unjust
its members only if it can prove that the members indeed loss complained of.
authorized the corporation to institute the action for and in 2. The alter ego doctrine – it must be shown that there is
behalf of such members. The mere fact that the non-stock unity of interest and ownership that the separate
corporation was organized for the purpose of advancing personalities of the corporation and the individual no
the interests and welfare of its members does not longer exist and that if the acts are treated as those
necessarily mean that the corporation has the authority to of the corporation alone, an inequitable result will
represent its members in legal proceedings, including an follow.
arbitration proceeding. (Ormoc Sugar Planters Assoc., v. 3. The identity doctrine – If the plaintiff can show that
CA) there was such a unity of interest and ownership that
the independence of the corporations had in effect
ceased or had never begun, and adherence to the
 fiction of separate identity would serve only to defeat Just like a natural person, it cannot be deprived of its life
justice and equity by permitting the economic entity to and property without due process of law.
escape liability arising out of an operation of one
corporation for the benefit of the whole enterprise.  While an individual may lawfully refuse to answer
incriminating questions unless protected by an immunity
 Only the courts (or administrative tribunals like the NLRC) statute, it does not follow that a corporation, vested with
can pierce the veil of corporate fiction. Hence, a sheriff special privileges and franchises, may refuse to show its
who has a ministerial duty to enforce a final and executor hand when charged with an abuse of such privileges.
decision cannot “pierce the veil of corporate fiction” by
enforcing the decision against stockholders who are not  No criminal action can lie against a corporation under the
parties to the action. (Cruz v. Dalisay) present rules.

 When the veil of corporate fiction is pierced in proper Theory of Special or Limited Capacities – The powers of the
cases, the corporate character is not necessarily corporation are given by law and it cannot exercise powers that
abrogated. It continues for legitimate objectives. (Reynoso are not so given. In fine, the powers of the corporation are only
IV v. CA) those that are expressly provided for, implied powers, and
incidental powers.
Group of Companies – refers to corporations that are
financially related to one another as parent corporations, Section 3. Classes of corporations. – Corporations formed
subsidiaries and affiliates or organized under this Code may be stock or non-stock
corporations. Corporations which have capital stock
 A group of companies has no personality separate and
divided into shares and are authorized to distribute to the
distinct from each of the components corporations. holders of such shares dividends or allotments of the
surplus profits on the basis of the shares held are stock
 Consistent with the Primary Rules of Attribution, notice to
corporations. All other corporations are non-stock
the Board of Directors should also be deemed notice to
corporations.
the corporation.

 Knowledge of facts acquired or possessed by an officer or Section 4. Corporations created by special laws or
agent of the corporation in the course of his employment, charters. – Corporations created by special laws or
and in relation to matters within the scope of his authority, charters shall be governed primarily by the provisions of
is notice to the corporation, whether he communicates the special law or charter creating them or applicable to
such knowledge or not since a corporation cannot see, or them, supplemented by the provisions of this Code,
know, anything except through its officers. (Francisco v. insofar as they are applicable.
GSIS)
Corporations going public – a corporation which decides to list
Two test for determining whether a corporation is foreign or its shares in the stock exchange
domestic:

1. Aggregate test (Control test) – requires looking into Corporations going private – a corporation which would restrict
the nationality, domicile, or residence of the the shareholders to a certain group
individuals who control the corporation; what about
the Grandfather Rule? The Grandfather Rule applies  The issuance of share certificates is not, by itself, proof
if the share of Filipinos in a shareholder corporation is that the corporation is a stock corporation. The so-called
less than 60%. share certificates may nothing more than proof of
2. Entity test (place of incorporation test) – looks to the membership in a non-stock corporation.
nation where the corporation was incorporated.

 One exceptional situation where the Supreme Court ruled

 A public corporation is limited to corporation for the
that a corporation has no nationality is the case of
government of the State or municipal corporations under
Corporation Sole.
Section 3 of the old Corporation Law.
 For practical purposes, a corporation is in a metaphysical
sense a resident of the place where its principal office is GOCC – any agency organized as a stock or non-stock
located as stated in the Articles of Incorporation. corporation vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by
the Government directly or through its instrumentalities either
wholly or where applicable as in the case of stock corporations
to the extent of at least 51% of its capital stock
Doctrine of Corporate Responsibility – Under this doctrine, a
corporation is directly and primarily liable, not merely vicarious,
Section 5. Corporators and incorporators, stockholders
to the injury incurred to a party with whom the corporation has
and members. – Corporators are those who compose a
a special relationship.
corporation, whether as stockholders or as members.
 As a rule, a corporation is not entitled to moral damages Incorporators are those stockholders or members
because, not being a natural persons, it cannot experience mentioned in the articles of incorporation as originally
physical suffering or sentiments like wounded feelings, forming and composing the corporation and who are
serious anxiety, mental anguish and moral shock. The only signatories thereof.
exception to this rule is when the corporation has a
reputation that is debased, resulting in its humiliation in the Corporators in a stock corporation are called stockholders
business realms. (MERALCO v. T.E.A.M. Corp) or shareholders. Corporators in a non-stock corporation
are called members. (4a)
 A corporation is a person, in proper cases, within the due
process and equal protection clause of the Constitution.