Law on Business Organizations

(Partnerships and Corporations)

CHAPTER 1: GENERAL PROVISION
Partnerships Contract: [3 Elements: Consent, Object & Cause]
- 2 or more persons binding themselves into a contract to contribute money, property or
industry into a common fund; with the intention of dividing the profits among themselves.
- Partnership has its own JURIDICAL PERSONALITY (own entity).

REQUISITE/CHARACTERISTICS:
- Consensual (consent from both parties)
- Nominate (Special designation by Law, juridical necessity)
- Onerous, contribution (Partners must give money, properties or industry & share risk)
- Bilateral (Entered into by 2 or more people; rights and obligations are reciprocal)
- Principle (Its existence is independent, It stands alone)
Preparatory (entered into with the means to an end, there's a goal to be attained)

ELEMENTS: (5)
- Must have a valid contract (COC: Consent, Object, Cause)
- Must have mutual contribution (money, property, industry)
- Must have legal capacity (pass on minors, mute, crazy people etc)
- Object must be lawful
- Community of interest (same goal)

Importance of screening for partners:

- All partners are mutual agents of each other. Any negligence or wrongdoing of one
partner shall directly affect the other partners.
- If the assets are insufficient to cover the partnership’s debts, Creditors may take the partners’
personal assets.
- Requisites of a capable partner:
- Intellectual capability
- Health
- Emotional state
- Maturity
 - Ethical values

TAKE NOTE:
- Any unlawful practices shall lead to confiscation of profits by the Law.
- A contract of partnership doesn’t need a specific form. (subject to the Statue of Fraud)
- Unless there's an immovable property or a real right; The inventory of the property
must also be attached to the public instrument.
- Importance of public instrument = validity of partnership contract
- Importance of Inventory = measurement of contribution of each person.
- Those 2 needs a public instrument, without one the partnership is void.
- Immovable Properties: Land, Buildings & Construction and it’s fruits and
accessories
- Real Right: Right of a person belonging over a determinate object
- Personal Right: Right to compel for the fulfillment of an obligation of a
determinate object
- If the capital of the partnership is above 3000, it must appear in a public instrument
and must be recorded by the SEC. (purpose is for regulation)
- Failure to comply, persons in the partnership are still liable to third parties if
they have already entered into transactions.
- Associations and Societies whose articles are kept secret, have no Juridical Personality.
- No Juridical Personality because of the lack of transparency and intention.
- Persons associated with this cannot sue each other because there's no Juridical
Personality
- Third Persons that got involved may sue the persons associated because of the
inconvenience and for their protection.
- Failure to show Inventory of an immovable property = void.

Rules to determine the existence of a partnership

- Persons who are not partners to each other, are not partners as to third persons.
- Exception: Partners by Estoppel
- Co-owners or co-possession of an object does not necessarily imply a partnership.
- Sharing of gross profits alone does not imply a partnership. (Marriage is not a Partnership)
- If the person receives a share of the profit with a receipt, it's a Prima Facie presuming that they
are in a partnership
Classification of Partnerships as to Object:
Universal Partnership (2)
1. Universal Partnership of all properties:
- The persons that bind themselves into a universal partnership must contribute all their current
property into a common fund and divide the profits themselves.
- immovable or movable properties are owned by both
- Any property that is attained after is exempted unless stipulated otherwise.
2. Universal Partnership of all profits:
- The persons that bind themselves into a universal partnership must share all the profits
- Immovable or movable property are owned individually
- Usufruct is evident:
- Gives a right to enjoy the property of another with the obligation to preserve the
property’s form and substance. (unless stated otherwise)
Everyone can enter a Universal Partnership EXCEPT:
- Persons who are prohibited from giving each other any donation or advantage can’t
enter into a universal partnership
IF: several persons want to create a universal partnership but don't specify = Universal Partnership of
Profits.

Persons who are prohibited to enter a Universal Partnership: void if enter

- Direct and Indirect donations between spouses or common law partners, except for gifts or
to exercise a professional
- Donations between persons who are found guilty of a criminal offense (Ex. adultery)
- Donation to a public officer.

Particular Partnership (general partnership)

- A partnership that is created to carry out a specific goal.
- Ex. construction, law firm etc
- The partnership cannot be taxable
- The partners/persons are individually taxed
Classification of Partnership as to Liabilities:
General Partner
- Runs and operates the business
- Have unlimited liabilities for the debts of the business
- Hence, If the business becomes insolvent, Creditors may go for the persons’ personal
properties.

Limited Partner (needs at least 1 or more General Partners)

- Doesn’t participate in running the business. (no responsibilities in regards to operation)
- Have limited liabilities from the business (only their stipulated contribution)

Classification of Partnerships as to Duration:

Partnership at will
- No fixed term
- The birth and life of the partnership depends on the mutual desire and consent of the partners.
- Any partner can simply leave (dissolve) but must be in good faith. (bad faith = pay damages)

Partnership for a particular undertaking

- With a fixed term, there's a definite period.
- Ex. construction of a house
- If the partnership continues even after the term is done, it shall be converted into a partnership
at will.

Classification of Partnership as to Legality of Existence:

De Jure Partnership
- Complies with all the legal formalities and requirements

De facto Partnership
- Has not complied with all the legal requirements

Classification of Partnership as to Third Persons:

Ordinary or Real Partnership:
- Existing partnership (typical partnerships)

Partnership by Estoppel: (No true partnership is created & no contract)

 - It's the process on how a third person who is not a partner may be treated as a partner
- Allowed by Law for the purposes of protection for the third person
- 2 Ways this happens:
- Representation: Third person self represents himself as a a partner of a partnership
even if he isn’t
- Consent: Ex. A and B are not partners but are currently transacting with C. C should
see them as 2 individuals. However, If B gives his consent to A to be partners, C should
see A and B as a single entity.

Classification of Partnerships as to Purpose:

Commercial / Trading Partnerships
- For the transaction of business

Professional / Non-trading Partnerships

- For the practice of profession (spouses can enter into this type of partnership)

KINDS OF PARTNERS:
Capitalist Partners:
- Partners who contribute capital or property to a common fund.
- He can’t engage to any business due to conflict of interest
- Suffers the losses if there are. (Based from his contribution)

Industrial Partners:
- They only contribute their Industry or skills and not money or properties.
- He can’t engage to any business due to conflict of interest unless expressly stipulated
- He's not liable for the losses of the partnership but a Third person can make him liable if there
was negligence on his part.
- He gets a share of the profits due to his contribution of skill/industry
- Must be paid first than the Capitalist partners. (In regards to Profits)
General Partner
- His liability to third persons extends to even his personal assets/property

Limited Partner
- His liability to third persons is only limited to his contribution/capital
Managing Partners (2): Before & After
- Manages the business & affairs of the partnership.
- Acts of administration only, can’t sell assets of a partnership (only the partnership entity can
sell the objects)
- Hence, all partners must agree before anything can be done. (Votation)
- Suffers the losses if there are.
Before Perfection of Partnership Contract:
- For him to be removed as a Managing Partner,
- With a valid reason due to bad faith action, Partners with controlling interest must
have a votation. (Majority Votes may remove him)
- Without a valid reason, Partners with controlling interest must have a votation. (Must
have a unanimous votation to remove him)

Silent Partner
- No active part in the partnership whether or not he is known to be a partner
Liquidation Partner
- Takes charge in the winding up upon its dissolution.
Ostensible/Apparent Partner
- Partner who takes an active role in the business (known to the public)
Secret/Dormant Partner
- Partner who may takes an active role in the business (not known to the public)
Real Partner
- Contributing member of the partnership
Quasi Partner (Partnership by Estoppel)
- Not really a partner but represented himself as a partner.
- Partner by Estoppel is held liable for any wrong doing such as defraud to a third person
Continuing Partner
- Continuous partnership even after the dissolution of it.
Discontinuing Partner
- Stops participating in the partnership due to dissolution
Majority Partner - majority owner
Nominal Partner - represents the minority
Original Partner - OG member
Incoming Partner - after the establishment of the partnership
Surviving Partner - Buhay na partner
Deceased Partner - Partner who died
Expelled Partner - Partner who is expelled for a valid cause
Expelling Partner - Partner who expelled another
Sub Partner - not a member of the partnership, third person who simply contracts with one of the
partners (arrangement with one of the partners, partnership within a partnership; He isn’t liable for the
main partnership)
CHAPTER 2: OBLIGATION OF PARTNERS AMONG THEMSELVES
Continuation of the Partnership (Without an expressed agreement)
- Undertaking has expired (completed)
- Rights and obligations of the partners will remain the same (Partnership at will)
- Hence, the initial partnership is dissolved and a new partnership aka Partnership at will is
created.

Partnership Relations:
A. Partner to Partner (9)
B. Partner to Partnership entity
C. Partnership and the Third persons
D. Partners to Third persons

(A). Relation between Partners and Partner: (Obligations of each partner to each other)
Obligations to observe good faith (fiduciary duties)
1. Obligations with respect to contribution of property:
- The following must be contribution even without demand (time is of the essence)
- Contribute what has been promised
- To warrant the property incase of eviction (removal of partner)
- To deliver the fruits of the property
- If the contribution is in the form of goods, the goods must have the same value as the expressed
stipulation of each partner's contribution. (appraisal)
- Ex. If a Partner is going to contribute a specific and determinate object and it got lost before
delivery to the partnership = Partner bears the loss
- Ex. If the Partner already transferred the ownership of the determinate object to the
partnership and it got lost = Partnership bears the loss
2. Obligations with respect to contribution of money and money converted by a partner
for personal use: (DEMAND IS NOT NECESSARY)
- Should be contributed before or on the due date or else the partner will have a liability.
- If the partner taken money for personal use, the amount must be reimbursed + damages +
interest
- Partnership must follow the legal rate of interest if the partner cannot pay the amount
- Duty to indemnify the partnership for damages. (partner should pay for the opportunity cost
from his delay in payment)
- Hence, Partner who fails to pay the borrowed amount becomes a debtor, liable and is in default
 3. Obligations not to engage to other businesses for himself:
Industrial Partners: (skills/Industry)
- Cannot make another business regardless of business (Prohibited)
- If the partner puts another business up, the remedy is that the other partners (industry or
capital) can claim the benefits which the partner received in the partnership. [1789]
- This rule is to prevent conflict of interest(Industrial Partner must devote all his time and effort)
Capitalist Partners: (Money)
- Cannot make another business in the same field. (ex. IT biz, Capitalist Partner can make biz w
drinks)
Regardless of the kind of Partners, ANY VIOlATION may lead them to be OUSTED.
4. Obligations to contribute capital and if needed additional capital:
- Presumption that each Capitalist Partner contributes the same amount, unless expressly
stipulated. (Industrial Partners cannot be compelled to contribute money unless stated)
- A Partner is not bound to contribute additional capital unless there's an imminent loss to the
business. (Capitalist Partners have an obligation to add to save the business)
- If the Capitalist Partner refuses with a shitty reason, the partner is forced to sell his
share of the business to the other partners.
5. Obligations of the managing partner to collect debt:
- Scenario: A third person debtor who has a separate debt to the Managing Partner and the
Partnership.
- The Debtor must pay in proportion to both the Partner and the Partnership.
- In regards to full payment, the Partnerships shall be prioritized [1792] unless the debt to the
Partner is more onerous.
- Requisites: 2 demandable debts, 1 to MP and 1 to Partnership
6. Obligations of a partner to receive his share in the partnership credit
- If a Partner receives his share profits, He must give it back to the Partnership if the Partnership
is insolvent. (Partnership shall always be the main priority) [1793]
7. Obligations of a partner for damages caused to the partnership: duty of diligence1794
- Every partner is responsible for any damages suffered by the partnership through the fault of
the partner
- Partner cannot use the benefits and profits from the partnership to pay the damages, It may
lessen his responsibility but he needs to exert extra efforts in other fields or activities
8. Duty to render information [1806]
- Render upon demand a true and full information of all things affecting the partnership and
must be given to all partners. (Duty to give information to all partners)
 9. Obligations to account for any benefit and hold as a trustee any unauthorized personal
profits or property [1807]
- Any Partner must account to the partnership for any benefit and hold as trustee. Meaning, any
resources used by a Partner that the Partnership owns, shall be told to the rest of the Partners.
(Transparency is KEY) - fiduciary relationship
- Hence, he cannot put his own interest over the Partnership.
- Ex. A Partnership has a real property and one of the partners redeemed the property, the
Partner is not the owner, but is the TRUSTEE, he holds it in trust of his co-partners. (Any
amount from Partner to redeem property shall be reimburse by the other partners)
- If the Partner that holds the redeemed profits/property and he becomes insolvent, He
still needs to pay the shares of the other partners even after completion of partnership.

(B) Relation between the Partner and the Partnership:

Responsibilities of the Partnership to the Individual Partners:
1. Partnership should refund amounts which are disbursed by the partner in behalf of the
partnership (including interest)
2. The Partnership answers the obligations which the partner may have contracted in good faith
in the interest of the Partnership (Partnership must answer for the risks in consequence of
management, if the partner is not at fault)
Rights of a Partner: (8)
1. 1810 Property Rights of a Partner (Good Will & Capital Included)
a. The Right in specific partnership property
- Tangible Property (Belongs to the Partnership)
- [1811] A Partner is considered as co-owner of a specific partnership property. (5
incidents of co-ownership)
- Each partner has an equal right to possess specific partnership property for
Partnership Purposes.
- A Partner cannot assign his interest in any specific property (Interest of each
partner cannot be determined, only after LIQUIDATION)
- Specific Partnership Property is not subject to attachment or execution against
an individual partner.
- Specific Partnership Property is not subject to Legal Support to an individual
partner.
- The Partner’s interest in not debt due from the partnership
b. Interest in the property (Equity Rights) - Distribution of Profits and Losses
- Talks about the Partner’ share in the profits and surplus (usually yearly)
- A Partner’s Interest in the Partnership Property (Equity Rights) is a personal right,
hence it may be assigned to someone else. (Dissolution is not needed)
- Meaning, after the business pays off its liabilities and there are profits or surpluses, the
partners may assign their share to an assignee. (attachment of interest is valid unlike
attachment of a specific partnership property)
- In regards to sharing losses, all partners are supposed to share losses, If one is excluded
= stipulation is void BUT the Partnership isn’t void. (Industrial Partners must be paid
before the Capitalist Partners) [Surplus - only known after dissolution]
c. The Right to participate in management
- Every Partner is an agent of the partnership business (binds everyone)
- If manner of management hasn’t been established = all partners are agents of the
partnership (any indiv act affects da other partners)
- If the manner of management is established these are the rules:
- Scenario 1
- If only 1 is appointed as managing partner, all his acts cannot be opposed.
Only may be opposed if it's done in bad faith.
- To remove a managing partner who has acted upon bad faith, votation is
needed (partners with the controlling interest must have majority votes)
- To remove a managing partner who didn’t do anything, votation is needed and
it must be unanimous.
- Scenario 2
- Partner was granted management rights after the creation of the partnership,
the management rights can be revoked at any time by the partners with
controlling interest.
- Scenario 3
- There are 2 managing partners, but no expressed stipulations were made in
which acts they manage. No Expressed Stipulation = Both Managing Partners
may act by themselves. If one managing partner opposes, votation is key.
- Ex. A B C D are in a partnership. A and B contributed money while C D are
industrial partners. C D got V as an accountant. A wants to get rid of V but C
refuses. Hence both managing partners should vote, If its a tie, partners with
controlling interest aka A and B should also vote. If A contributed 30k while B
only 10k, A governs the vote/choice whether V is out or not.
- Votation is KEY: Managing Partners → Partners with controlling interest
2. The Right to reimbursement for amounts advanced by the Partnership +
indemnification for risks in consequence of management (reimbursement of abuno
except Capital)
- Every Partner is an agent of the Partnership for the purpose of its business
- Partnership should reimburse the Partner who made an abuno for the business except if its in
capital, + the Partnership shall pay for the risk in consequence of the management of the
partner.
3. The Right to associate with another person in his share (contract of sub-partnership)
- [1804] Sub-Partnership Contract: A B and C are in a partnership, A has an agreement with D,
D is not part of the partnership with B and C. D simply has an agreement with A which makes
him a su-partner of A. Hence, D does not acquire the rights of a partner & not liable for the
partnership.
- For a sub-partner of one of the partners to be part of the partnership, all partners must agree
upon it. But in regards to only being a sub-partner, the other partner has no say and only the
individual partner has.
4. The Right of access and inspection of partnership books
- The Firm’s account books should be open to inspection at all times within reasonable hours
on business days.
5. A Right to a true and full information of all things affecting the Partnership
- Each partner has a duty to give out true and full information affecting the partnership
- Each partner has the right to demand and receive information for the purpose of the
partnership
6. The Right to a formal account of Partnership affairs
- [1809] Generally a Partner is not entitled to a formal account of Partnership affairs during the
existence of the Partnership. (waste of time because It may be asked about from Rights 4-5)
- If a Partner is going to dissolution in good faith, he may ask for a formal account
- Formal Account may be demanded in certain situations:
- If a partner is wrongfully excluded from the business or possession of his
property by his co-partners.
- If the right exist under the terms of any agreement (expressly stipulated)
- If a partner has derived profits from any transaction connected with the
formation, conduct or liquidation of the partnership.
- Whenever other circumstances render it just and reasonable. (Ex. Partner was
tasked to go abroad from the Partnership, Partner can demand for a formal
account)
7. The Right to have the Partnership dissolved under certain conditions
 8. The Right to use a Firm or Partnership name
- Persons who are not part of the Partnership who include their name to the Firm name, do not
have/acquired rights of a partner.
- Partners can choose anything for their Firm Name, as long as it's not misleading
- Having a deceased partner’s name on the Firm name is allowed but must have a sign that the
partner is dead

(C) Obligation of a Partnership:

- Contract of mutual agency [1818] for the purpose of its business and the act must be in the
name of the Partnership.
- All acts that a partner does with the purpose of the business will bind all partners
- Exceptions: Won’t Bind the Partnership
- Partner acts upon a situation that he does not have authority over.
- The Third Person knows that this Partner does not have authority but still continues.
Articles of the Partnership/Special Agreements:
- Partners with no authority on a certain act may have but is subject to the following:
- If the Third Person had no notice and that the act is for the purpose of the partnership
(Third Person must not have knowledge of it)
- If the Third Person is aware of the limited authority of the Partner = All the Partners
will be bound plus the Third Person. (Estoppel)
[1816]: Liability of the Partnership for Contractual Obligations (If Third Person is Creditor)
- All partners including Industrial Partners are liable PRO-RATA (equally)
- Partners’ Liability: Contractual Obligations = Ex. unpaid salary employment contract
- Debts and Obligations of the Partnership and each Individual Partner’s
- PRO RATA = number of partners, not contribution
- If the Partnership goes into liquidation/dissolution and has debt still outstanding,
that's the time where each partner will be pay through their own personal property
- Priority to pay off is the Creditor which is a Third Person before any creditor inside the
partnership.
Real Property own by the Partnership:
- Scenario 1: Title of the Real Property is in the name of the Partnership and the
Conveyance/transferring process is in the name of the Partnership. = Any Partner can transfer
it.
- Scenario 2: Property name is of the Partnership but the COnveyance is with 1 Partner, If the
Partner sells it, only his part is sold to the Third Person.(Third Person must not knowledge of
the lack of authority of the Partner)
 - Scenario 3: Name is on 1 or more, Conveyance with the 1 or more, Records did not disclose
the right of the Partnership. = Third Person will receive it all. The Partnership may take it back
if proven that the Partner who sold it to the Third Person did not do the transaction for the
purpose of the partnership.
- Scenario 4: Name of the property is on 1 or more Partners or to a third person who they
entrusted it to. Conveyance is in the Partnership or Partner’s name. = only the share of the
Partner is transferred to the Third Person who bought it. (Third Person must not knowledge
of the lack of authority of the Partner)
- Scenario 5: Ideal Scenario - Name and Conveyance is named with all the Partners.
General Partner: Partner, Managing Partner etc.
Limited Partner: Silent, Capitalist Partner

If the Partner took benefits or did it for his own personal benefit = ratification

[1820]: A partner’s admissions binds the Partnership (the statement must be made within his
authority)
[1821]: Creditor who gives notice to 1 partner is equivalent to a demand for a debt the partnership and
partners have. (bind) 1 Partner’s knowledge = Partnership knowledge
(D) Obligation to Third Person:
- Liability arising from a DELICT or QUASI DELICT (CRIME & PRIMA FACIE)
- Partnership is liable for the damages, interest and compensation to any Third Person affected.
(1824): Ex. Shipping cargo hits a third person, all partners and the partnership is liable
- Basically: Any wrongful act of a Partner that he did within his authority makes the Partnership
liable + the partners. If outside of his authority, self liable.
- 1822 Rule: Requisites
- Partner guilty
- Acting within his authority
- Third Person is not a Partner
- Third Person affected negatively
1823: The Partnership is liable for any losses suffered by Third Person if one of the Partners misused it
but is within his scope of authority. + The Partners will be SOLIDARILY LIABLE for the losses.
(Solidarily = Any one can pay full)

1825: Partnership by Estoppel

- Third Person who became a partner for a transaction is liable for any damages that happened to
the person who bought it.
 CHAPTER 3: LIMITED PARTNERSHIP/DISSOlUTION
1828-1829:
1. Dissolution: (Partners are still in a Partnership) - To Stop Partnership Relation
- Change in the relation of the partners caused by any partner stopping to be associated with
carrying on the business. (When the partner doesn’t want to continue making business with
the other partners)
- If the Partnership has dissolved, the Partners may make a new partnership under the same
terms.
- Causes of Dissolution:
- Extrajudicial (Immediate Dissolution):
- Without violation between partners and their agreements
- Completion of the Partnership term
- Partnership at will (Partners continued even after term)
- Expressed will of ALL Partners (unanimous agreement)
- Expulsion of any Partner
- With violation between partners and their agreements
- Any unlawful event
- Any unfulfilled promise of a Partner (object perishes before delivery)
- Death of any Partner
- Insolvency of any Partner or the Partnership (PRO RATA)
- Civil Interdiction of a Partner (no capacity to manage self property)
- Judicial (After HEARING and APPLICATION, not Immediate)
- Grounds:
- If a partner is declared insane.
- Incapability to perform his part in the Partnership Contract (no chance
of recovering his part)
- Guilty of bad conduct which may affect the business
- Breach in Partnership Contract Agreements
- Business of the Partnership is carried on at a loss (everytime)
- Judicial Decree (Court says to dissolve the Partnership)
- Effects of Dissolution:
- All Partners lose their AUTHORITY to act for the Partnership, but the Partnership is
still ongoing. (In a way, HALTED)
- Except 2 Instances: Acts to finish Winding Up affairs & Completion of
unfinished business transactions. [1832]
 - [1833]
- If dissolution wasn’t caused by ACT, DEATH or INSOLVENCY, the general
rule is followed. Partners lose their authority.
- If dissolution was caused by Act, Death or Insolvency:
- Partner DO NOT have KNOWLEDGE of the dissolution:
- Each partner is liable for his co-partners for his share =
Authority is not terminated and that partner can bind the
partnership to Third Person.
- Partner HAS KNOWLEDGE of the dissolution:
- Authority to act for the Partnership is deemed terminated.
- [1834] Rule to Third Persons
- Third Person has every right to presume that the Partnership Business is still
active and not dissolved.
- Hence, the Partnership is bound to finish affairs and complete unfinished
business if the Third Person DOES NOT have knowledge of the dissolution.
- Partnership is NOT BOUND IF,
- There was unlawful acts
- Partner’s Insolvency
- Third Person has knowledge of the dissolution and wants to finish
transaction
- Any new transactions with Third Person
- [1835] Effects of Partner’s Existing Liability
- Dissolution doesn’t discharge liability of continuing partner
- Partners who wants to leave are discharged but the other partners and partner
creditors must have gotten a notice.
- Notice of Dissolution must be given to the ff:
- Persons who extended credit to the Partnership before dissolution
- Persons who has knowledge of the existence of the Firm (everyone must be notified)
- Ex. If the Firm posts news of their dissolution online = no person can make them liable

Rights of Partners upon dissolution:

Rightful Dissolution: (no violation)
- Each partner has the right to receive a Partner’s Lien.
- Partnership Property applied to discharge Partnership Liabilities
- He shall receive in cash his share of the surplus
Wrongful Dissolution:
- Rights of Innocent Partner
- Partnership Property applied to Partnership Liabilities
- Receive his share of the surplus in cash
- Compensation for the damages caused by Wrongful Partner
- Authority to continue the business with the same name
- Acquire partnership property if they choose to continue the business
- Rights of Wrongful Partner
- If the other partners discontinue the partnership, the wrongful partner may receive
Partner’s Lien. (cash of surplus & partnership property share, but kulang for his
liability for damages)
- If the partners continue the partnership, the wronged partner will only have his current
interest and surplus lessen his liability/compensation for damages.

TAKE NOTE: Failure to contribute is not grounds for void of Partnership

- A partner may have the contract of Partnership Rescinded only if the Partner was
misrepresented or induced by Fraud to become a Partner. (Voidable)
- As a result of the Partner who successfully proves this:
- is entitled to RESTITUTION. (receive his initial contribution)
- Still liable for Third Persons because voidable contracts are still active until terminated.

2. Winding Up:
- Process of settling the business or the Partnership affairs after dissolution.
- Liquidation properties & Distribution of proceeds
- Partners have the authority to Liquidate Partnership Properties
- May be delegated to 1 or more partners called, Liquidating Partners.
- In an absence of agreement, the Partner who is innocent and is still solvent may be the
Liquidating Partner.
- [1842] Partner has the right to demand for his accounting interest against the Liquidating
Partner.
- Powers of a Liquidating Partner:
- Make new contracts for the purpose of liquidation only.
- Raise money to pay debts
- Incur obligations to preserve partnership assets
- Incur expenses necessary in the conduct of litigation (case in court)
 - Assets of a Partnership:
- Partnership Property
- Contributions of each partner
- Order of Payment in the WINDING UP STAGE:
- Third Person Creditors
- Debt to Partners that aren’t capital and profit
- Debt to Partners that is capital
- Debt to Partners that is profit

1839: Doctrine of Marshalling of Assets

- Rights of Partnership Creditors (Third Person Creditors)
- Priority in receiving payment through partnership property
- Rights of Individual Creditors
- Paid through individual debtors partners from their surplus which remains after the
firm debts are paid.
- If IC has claims over the individual debtor, he has preference over da partner’s personal
property
If a Partner becomes insolvent & claims over his separate property:
- Prio is Partnership Creditors, then the partners by the may of contribution

1840: Dissolution of Partnership by CHANGE in membership

- Dissolves the partnership and creates a new one.
- No liquidation should have happened, the Firm continues to operate.
- The Partnership Creditors of the old partnership are still the Creditors of the newly made one.
- Specific Instances:
- New Partner admitted in the Partnership
- Any Partner retires and assigns a new Partner
- Any Partner retires od dies and biz continues with the consent of the Partner,
but without assignment of his right in partnership property
- All the partners assign their rights in partnership to 1 or more third persons
who PROMISES to pay the debts of the partnership.
- Any Partner who wrongfully causes a dissolution, while the other partners
continue the partnership
- Partner gets expelled.
1841:
- If the partner is retired or deceased and the business continues without any settlement of
accounts between the retired/deceased partner and the partnership:
- The Partner’s legal representative may know the value of the partner’s interest at the ate
of dissolution
- The legal representative shall receive the partner’s interest as an ordinary creditor

3. Termination:
- Marks the end of the Partnership. (Completion of the Winding Up & Dissolution)

Limited Partnership:
-
Week 5: The Corporation as a Juridical Person
Corporation:
- Is an artificial entity created by law. It has the right of succession and the powers, attributes and
properties expressly authorized by law. (Different entity from owners)
- Unlike a Partnership, a Corporation must undergo a process through the SEC.

Limited Liability Principle:

- shareholders/members of a corporation are generally not liable for any obligation and liabilities
that the corporation has due it having its own artificial identity and personality.

Incorporator:
- Persons who made the corporation from the beginning (very first set of stockholders)

Stockholder:
- Could be any new persons joining the corporation by buying shares (Incorporators are
stockholders)

Directors:
- People voted to be placed under management (Incorporators could be directors)

Officers:
- Highest ranking employees
- President is both a director and officer (leader of all officers, is a stockholder too)

Treasurer:
- Usually one treasurer (could have assistants)
- His purpose is to certify the finances of the shares (IPO)
Secretary:
-

Attributes of a Corporation:
1. Artificial entity with a separate existing personality
a. A corporation’ stockholders or members are generally not liable for the obligations and
liabilities of a corporation and vice versa.
 b. It has the right to file cases at its own name. It's also allowed to acquire, possess and
transfer property. (property is owned by the corporation not the stockholders)
c. Corporation is unaffected by changes in it’s individual membership.
d. Corporations are entitled to certain constitutional rights. (Due process, Protection)
e. May be held liable for a quasi-delict made by its officer/member.
f. Generally, Corporations are not entitled to moral damages.

Corporate Veil:
- Protection of shareholders/members of a corporation from the liabilities and obligations of a
corporation. (Corporation to its shareholders, Parent Corporation to Subsidiary Corporation)
Instances It may be pierced through:
a. The purpose of piercing through the corporate veil is to prevent fraud. (Courts only have this
right, and it is a last resort)
b. If pierced through, It is only applicable for that certain case, the rest remains.
Classification of Piercing the Veil Cases: 3 Cases
- Fraud Cases
- Fraud or evil motif must be evident
- The corporation should have been used by the individual to commit fraud and create
confusion inside the corporation.
- If proven with convincing evidence, the liabilities shall be transferred to the individual
- Alterego Cases
- Individuals are pretending that there is a corporation but in fact, there is none and it is
only being used for the individual’s personal motifs. (same logic with parent
corporations to subsidiary corporations)
- Alter Ego Rule:
- If one corporation has complete control over the subsidiary corporation
(ginagamit as an instrument) = disregard corporate fiction (liabilities of
instrument is liabilities of parent corporation)
- Requisites:
- Complete Dominion Control
- With complete control, the individual must have used it to commit
fraud.
- The result must have injured other parties.
- Equity or Public Convenience Cases
- Corporate Vehicle is being used to evade an obligation
What Happens If the Corporate Veil is Pierced? = Real Actor shoulder’s the consequences
- The Corporation will be treated merely as an association of persons and the
stockholders/members will be treated as the corporation. (Obligations and Liabilities are
transferred to the individuals).
- In regards to Parent and Subsidiary Corporations, they’ll be treated as one corporation.

2. Created by operation of Law (Corporations regardless of business must follow all the
rules of the Law)
- A corporation comes into existence only in the issuance of the certificate of incorporation from
the SEC, after complete compliance with the requirements. (Cannot be created by mere
agreement)
- Legislature and the state must grant approval for a private corporation to function through the
General Law. Private corporations can’t be created by a Special Law.
- Public Corporations are created through a Special Law or charter.
- Differentiate Private and Public Corporations by majority stock ownership and board of
directors.
- Tests to distinguish the Nationality of a Corporation
- Place of incorporation Test
- Corporation is a national of the state where it operates, regardless of the
nationality of the stockholders.
- Control Test or Wartine Test
- Nationality of the controlling stockholders determines the nationality of the
corporation.
- Grandfather rule is applied only as a supplement to the Control Test if the
results are in doubt. (Grandfather test, ownership/management of the
corporation’s influence.
- Ex. Corp A owns 60% of Corp X, 40% is owned by an American. If Corp A is
owned by Foreigners and Local Pinoys, it does not follow the Control Test. If
Corp A is owned by Pinoys fully, it complies with the tests.
- In the Philippines we follow the “Place of incorporation Test”.
- But for Investment/Equities, the Philippines follows the Control Test. (60 40 req)

3. Enjoys the right of succession

- Corporations may be immortal. (Perpetual Existence)
- May manage its own affairs and properties
- The corporation’s identity and personality remains the same regardless of the changes in
directors/members. (shouldn’t affect the changes)
 4. It has the powers, attributes and properties expressly authorized by law.
- All corporation acts should comply with the Law. If outside the compliance with law, it is void.

Classes of Corporations:
- For a corporation to exist it must have a special grant from the state that comes from a general
law or a special law.
- Private Corporations = General Law RA 11232, revised corporation code.
- Public Corporation = Special Law or charter.

1. Public corporation:
- Organized by the state to perform functions and govern portions of the state.
- Example of a GOCC: Government Service insurance system

2. Quasi Public corporation:

- Private corporations which have accepted from the state the grant of a franchise or contract
involving the performance of public duties but organized for profit.

3. Quasi Corporation:
- Is a body or a municipal society which is not vested with the general powers of a corporation, it
is recognized as an aggregate corporation with precise duties which may be enforced under the
law.

4. Private Corporation:
- Corporations organized by private persons

Stock Corporation:
- Business corporations that issue capital stock divided into shares, which authorizes holders for
such shares, dividends and allotment of surplus profits based on share ownership.
- Has authority to issue capital stock.
- Purpose to profit.
- Max of 15 incorporators

Non-stock Corporation:
- Business corporations that do not issue stocks to its members and are not created for profit,
but for the public good and welfare. (Ex. social, educational and religious organizations)
- No authority to issue capital stock.
 - No purpose to business, no expectation to give dividends
- At Least 2 corporators

1. Par Value Corporation:

- Par value of the shares are stated in the articles of incorporation, and that value is
unchangeable.
2. No Par value Corporation:
- Par value changes from time to time, depending on the corporation.
3. Dehure Corporation:
- Follows the law for incorporation
- Their right to exist as a corporation cannot be attacked by any party.
4. Defacto Corporation:
- Defectively formed, but exercises corporate powers. (Usually delay in giving the documents or
bylaws to the SEC).
- Any party cannot attack the existence of the corporation collaterally.
- You can only attack the existence of a Defacto Corporation through a process called co
warranto proceeding.
5. Unexisting Corporation:
- Fails to deliver the document of articles of incorporation.
If there's a 3rd person:
- Courts will side with 3rd person if its an unexisting corporation, “Corporation by Estoppel”.
- 3rd Person may choose who he wants to hold liable, the individuals or the fake entity.
- Section 20: All persons who act as a corporation knowingly that it is not allowed under law,
will become General Partners of each other in regards to all liabilities and debts.

6. Corporations by Prescription:
- Corporation powers for an indefinite period without interference with the sovereign power.
- Ex. Roman Catholic Church

7. Open Corporations:
- Corporations who IPO-ed and is buyable by any person
8. Closed Corporation:
- Corporations that aren’t for the public to own.
- Requisites:
- All types of shares except treasury shares should be held by at most 20 people only.
- Have share restrictions, only selected people may the share be transferred to
 - Shouldn’t list in any stock exchange
- Companies relating to public services cannot be a close corporation
9. Subsidiary Corporations:
- Very related to another corporation
- Majority of its directors can be elected directly or indirectly by such other corporations.
- Ex. Corp A owns 50% of Corp B, mother company/subsidiary corporation.
10. Affiliate Corporation
- Related to another corporation by owning a common management or by a long term lease.
(control device)
11. Parent corporation:
- Controlling corporations of another.
12. Corporation Sole:
- Only 1 trustee to manage the whole corporation, example bishop
13. One Person Corporation
- Different from sole proprietorship because of Limited Liability if Corporation.
- Can only be formed by a natural person and by a trust
- Only one shareholder in this corporation
14. Condominium Corporation
- Allows selling of the part of the land
- Co-owners of the land
15. Civil Corporation
- Corporations with the purpose to profit.

Under the Principle of Estoppel, regardless if it's a real corporation or a fake corporation, real or fake
shareholders/members of the corporation may be sued as a legal person in order to hold him and his
members liable.
Module 7: Managing the Corporation: Directors/Trustees and Officers
Directors (Stock Corporations) and Trustees (Non-stock Corporations)
- Board of Directors have a 1 year term each, until re-election
- Board of Trustees have a maximum of a 3 year term each, until re-election
- Corporation must have at least a 20% public interest/float

Executive Director:
- Operates day to day operations
- Have material relationships with corporation
Independent Director:
- Does not have power to operate day to day operations
- No material relationship with corporation

DUTIES:
Obedience:
- Has the liberty to manage the corporation but all actions must be done lawfully
and should not commit any “blind eye” actions.
Diligence
- Directors and Trustees must always do background checks and thoroughly think
it through before any execution because, any negligence committed by directors
and trustees are likewise liable jointly or solidarily for all damages that may be
suffered by the corporation, stockholders or members or any other person
affected by it.
Loyalty
- Directors and Trustees must not have any interest or acquire anything that may
negatively affect the corporation.
- Directors can’t use the corporation’s business opportunities for its own benefit
regardless of if the director risked his own capital or resource. Hence, the profits
from the business opportunities must be completely surrendered to the
corporation.
- Directors, Trustees and Officers cannot use insider information for their own
personal gain. (ex. trade secrets, market positions & price strategies)
- Example: Directors can’t invest in a direct competitor of the corporation.

Corporation Elections:
- Directors from previous term must be present if they want to be voted back to the
board. If not present, they can have a proxy if allowed by the bylaws.
- All stockholders or members have the right to vote.
- Elections must be done by ballot
 - Stockholders can have as many votes as their stock holdings (votes can
be distributed to candidates or to 1 specific)
- For non-stock corporations, members can have the same amount of votes
as the board of trustees but cannot focus all their votes to one candidate.
- If the majority stockholders or the majority of the members (non-stock) are
absent and have no proxy or direct communication with the election meeting, the
election meeting must be postponed.
After Elections:
- Directors must elect a President (needs to be a director), a Treasurer (must be a
resident), a Secretary (must be a resident and citizen of PH) and officers.
Disqualifications of Directors, Trustees and Officers:
- Any fraudulent acts committed with final judgement by foreign or local courts
- Unlawful actions committed for self benefits
Removal and Fill of Directors or Trustees:
- Through votation of stockholders. Must have at least 2/3s to be voted out of the
board.
- After removal, the vacant slot in the board of directors can be occupied by a
candidate through votation of the current board of directors.
 Module 8: Corporate Powers
Corporate Power and Capacity:
a. Right to sue and to be sued
b. Right to have perpetual existence (everlasting)
c. To adopt and use a corporate seal (documents of authentication)
d. Amend/revise/follow the Revised Corporation Code
e. Follow bylaws
f. For stock corporations, right to issue and sell stocks to subscribers
g. Right to buy, sell, trade, hold, lease, mortgage etc with real and personal
properties.
h. To enter into partnership, joint venture, merger, consolidation or other
agreements with natural and juridical persons
i. To establish pension, retirement and other plans to benefit its directors, trustees,
officers and employees.
j. Right to act such other powers that may be necessary to carry out its purpose as
stated in the articles of incorporation.

Examples:
- Dividends
- Issuance of more shares or Buyback of shares
- Corporation to invest in a different business is allowed if Board says so
- Sale of Disposition of own assets
- Extend or shorten corporate term

Stockholder Rights:
- They can sell the stock to the corporation for its fair market value
- If a stockholder votes against the corporation, he can sell his holdings for fair
value but needs to make a written demand within 30 days of the vote or else, the
value to be received will be the market value of the stock 1 day before the
votation happened.

Expressed Powers:
- Granted by the law, articles of corporation and bylaws. (35-43)
- Ex. Restaurant Business can’t operate Money Lending services

Implied Powers:
- Included from expressed powers,
- Ex. The right to sue or be sued

Inherent Powers:
 - Incidental from the corporation
- Ex. If bylaws were to be removed, it still must be followed by the
corporation/organization

Ultra Vires Acts:

- Any action the corporation committed outside its expressed, implied and inherent
powers are considered as this.
- Ex. Criminal Acts like Tax Evasion

Any actions executed within the corporation shall be done only if the majority of
the stockholders agreed, this must be done through a votation with at least 2/3s
voting for it
 Module 9: Corporate By-Laws, Meetings, Books and Records
Bylaws
- Internal rules of a corporation
2 Ways to Adopt Bylaws:
- Approved and signed by all incorporators and filed with the SEC simultaneously
with the AoL. (Bylaws adopted in the completion of the incorporation)
- Approved by the majority of the stockholders/members anytime after
incorporation. (Bylaws adopted after incorporation of the corporation)
Amendment of Bylaws (Revision)
- Majority vote of the board of directors/trustees and majority vote of the
stockholders/members
- By delegation to the board of directors/trustees by ⅔ of the
stockholders/members
Content of the Bylaws:
1. Time, Place and manner of the regular meetings of the directors/trustees (Usually
Monthly)
a. If one cannot physically attend, one must communicate through alternative
modes of communication. (video call)
b. Proxies cannot vote for Director/Trustee in board meetings
2. Time, place and manner of regular stockholder/member meetings
a. Held annual on the date in the bylaws or anytime after April 15th.
3. Quorum and Voting
a. The required number of members (Quorum)
b. Mode and manner of voting
c. Quorum: Majority of the board is considered a Quorum
i. Ex. 10 members in the board of directors, 6/10 attended and made
a decision = Quorum + the decision made is considered as the
whole board of directors.
d. Right to vote of a stockholder/member can be done physically or through a
proxy unlike Directions in a board meeting.
4. Qualifications, Duties, Responsibilities and Compensations
5. Elections of Directors and Appointment of officers
6. Penalties for violations
7. The manner of issuing stock certificates
8. Other matters (if necessary for corporate affairs, promotion of good governance,
anti-graft and anti-corruption measures)

Module 10: Independent Study Week = N/A

 Module 11: Stocks and Mergers
Subscription:
- Acquisition of an issue shared of a corporation

Issuance:
- Distribution of shares by the corporation to people

Pre-Incorporation of Subscription:
- Articles of Incorporation has a specific sector in which the initial people who
subscribed for the shares are placed.
- People who subscribed cannot unsubscribe if they were part of the articles of
incorporation. (Subscription is irrevocable)
- Subscribers usually pay in cash, however it's possible to pay through a different
way. (In case of service, it should have been done already); Future service from
the person is not allowed.

Watered Stocks: (Illegal)

- More expensive than regular stocks
- Less than the PAR value of the stock. (Ex. A buys 1M stocks worth 1M with a
property worth 500k, the stocks are considered “watered stocks”)
- Corporation who sold stocks at a premium to the customer. (Illegal, can be
considered as fraud)
- Who is LIABLE? The Individual or /s that paid less than he needed and the
personnel/officer who allowed it to happen. (Both are SOLIDARILY LIABLE)

Trust Fund Doctrine:

- Corporation’s assets are considered to be a trust fund for the benefit of the
Creditors.

Stock:
- Full payment is necessary in order to receive a certificate of stock
- In regards to when the person needs to pay fully for the stocks, it depends on
the articles incorporation or what is stated in the contract. (Ex. Could be a 1 time
payment or Payment in 3 consecutive months).
- If no issuance of TIME FRAME, the Board of Directors can make a “Call”.

Call:
- Is a resolution meant for all stockholders who still has a remaining balance from
their subscription
 - If a stockholder still does not pay even after the CALL, the stockholder shall be
delinquent and subject to sale. (Force to sell) (Delinquent, no voting right + not
part of the outstanding shares)
- Sale of Delinquent Stock
- Board of Directors informs stockholders and publishes in a general
platform for at least 1-2 weeks
- Stockholder can stop the sale by paying for the remaining balance
- If no payment, the stocks can be auctioned.
Loss of Stock Certificate:
- There's a specific process to be done in order to receive it
- Affidavit of Loss (To send over to the corporate)
- Verification & Double checking documents
- Publish a public notice for 1-3 weeks
- Waiting time of 1 year
- No one speaks up in that 1 year
- Reissuance of new certificate to stockholder
Merger:
- The process of combining 2 companies into 1
- Process:
- There should be a Plan of Merger
- Stockholder and Members' approval
- Creation of Articles of Merger
- Send to the Commision (To process)
- Effects/Implementation of Merger
- Single corporation
- Possesses all rights, liabilities, duties of the 2 past corporations
 Module 12: Non-Stock, Close and Special Corporations
Non-Stock Corporations:
- These corporations are made not with the purpose to profit, It may have been
created for the ff:
- Religious
- Charitable
- Professionals
- Fraternity
- Social
- Civil service
- Scientific
- Educational
- Its income from operations cannot be distributed as dividends
- Membership in a Non-Stock Corporation is personal and non transferable.
- Usually 1 Member = 1 Vote unless otherwise stated by the AoL (Articles of
Incorporation) or BL (Bylaws)
- Votation Methods: Physically present, by proxy or through communication
platform
- Board of Trustees/Officers:
- Generally, Board of Trustee must have a maximum of 15 trustees only
- Term is every 3 years (They must elect a successor afterwards)
- Meetings may be held at any place even outside the city/municipality of
the principal place. (should have proper notice)
- Dissolution Process:
1. Pay off all obligations
2. Assets must be returned, transferred or conveyed
3. Assets that were lended to the non-stock corporation with a purpose of the ff
must be transferred to another non-stock corporation with the same purpose.
(Donated Asset should be used by another corporation with similar activities)
4. Some Assets if stated in the AoL or BL can be transferred to the members
5. Assets can be distributed by votation as well. (Must be approved by the majority
of the BoT or Board of Trustees and 2/3s of the members with voting rights)
- Plan of Distribution Process (5th part of Dissolution)
- Must have the majority vote of the Board of Trustees
- Board must give a written notice to all members regarding the votation
- Must have at least 2/3s of the votes of all members
Close Corporation: [Can make their own rules & Less restrictions and Formality]
1. Prerequisites of a Close Corporation:
a. Maximum of 20 stockholders (Should be stated in the Articles of
Incorporation, if not stated, corporation is not a close corporation)
b. Its stocks have a restriction in regards to transfer (max of 1-2 times); Right
of First Refusal (If the stockholder wants to get rid of a few stocks, He
must first ask people from the corporation before asking other people)
c. Its stocks shouldn’t be listed in any Stock Exchange.
HENCE: These 3 rules must be clearly STATED in the Articles of Incorporation to be
considered as a Close Corporation.
2. Corporations with Public Interest cannot be a Close Corporation
- Ex. Schools, Insurance Companies and Mining and Oil Corps.
3. Close Corporations may have classification of Stocks and Directors:
a. Different types of Stocks:
i. Ex. Stock A for family through blood while Stock B is for family
through Marriage
b. Different types of Directors:
i. Ex. 4/7 directors own stock A 3/7 directors own stock B
4. The AoL can also state that the majority is 70% in votation from the default of
50+1.
5. Close Corporations do not need meetings because usually the stockholders are
in control because it's usually family and relatives handling the corporation.
6. Possibility of a DEADLOCK:
a. All Directors are divided equally into 2 sides, hence no action may be
done
b. The remedy is through the help of the SEC
i. SEC can over 1 stockholder to buyout another stockholder
ii. SEC can order an appointment of a Provisional Director
1. Person who is not a stockholder
2. Person who is not a Creditor of the corporation
7. Dissolution of a Member in a Close Corporation
a. If a member wants to dissolve out of good faith, the member can compel
the corporation to buy his shares for fair value or par value.
Special Corporation:
Education Corporations:
- Educational corporations are both governed by special laws and general
provisions
- Board of Trustees: Must have a minimum of 5 and maximum of 15. (Shall be in
multiples of 5)
- ⅕ of the Board shall expire yearly, hence it is to be filled afterwards with new
directors
Religious Corporations:
- Religious corporations may be incorporated by 1 or more persons.
- Is classified as a Corporation Sole (Corporation led by 1 natural person)
1. Articles of Incorporation of a Corporation Sole: Must be Part of the Articles
a. The natural person must have the intent to be a corporation sole
b. The rules, regulations and discipline of religious denomination must be
consistent
c. The person must be in charge of the management of the specified territory
(affairs, estate, property, religious denomination)
d. If there's a vacancy, it must be filled abiding the rules and regulations of
the articles incorporated
e. The principal place of the corporation sole must be in the Philippines
2. Submission of Articles of Incorporation
a. Verified by affidavit or affirmation by chief executive(ex. Archbishop,
bishop, rabbi, minister etc)
b. Filling with the Commision
3. Acquisition and alienation of Property
a. Sole Corporation may acquire property and may sell it
b. When selling, it must be verified by an upperhead
4. Filling Vacancies
a. The people that will manage the corporation sole’s assets will be the
person or persons authorized by the rules in its articles of incorporation
until a replacement has been appointed.
5. Dissolution of Corporation Sole
a. May be done voluntarily
b. Must present the following:
i. Name of Corporation
ii. Reason for Dissolution
iii. Authorization for dissolution from the religious denomination, sect
or church
iv. Name and addresses of the persons that will supervise the winding
up process