Chapter 2

Tourism and Hospitality as a Trade

Don Jose Ecleo Memorial Foundation College of Science

and Technology
Justiniana Edera, San Jose, Dinagat Province

Compiled by:
MARK BENN VILOAN MARZAN
College Instructor
Disclaimer: This Learning Module is compiled for the purpose of Educational Continuity and
Professional Enhancement design for MoDel- the New Normal of Don Josenian Education.

No parts of the Lesson Contents are originally authored by the Instructor. All topics and citations are
based from the books and other references stipulated in the course syllabi for further readings.
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Chapter 2

TOURISM AND
HOSPITALITY AS A TRADE
Establishing a business is not an easy thing. There are many factors to be
considered before it could materialize. A feasibility study should be done before investing
in a business. It is not wise to put up a business without any projection as to amount or
capital to be invested and the time wherein the same shall be returned.
The location and other competitors should also be considered as a basis for the
innovation or reinvention of the products to be offered to the prospective clientele. Human
resources also play as an important key for its success. Most importantly, the nature of
the business must be clearly established.

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Chapter
TOURISM AND HOSPITALITY
2 AS A TRADE
“Law is a system of rules that a society or government develops in order to
deal with crime, business agreements, and social relationships.”
– Collins, 2018

FORMS OF BUSINESS ORGANIZATIONS

Business entrepreneurs especially in the Tourism and Hospitality sectors must decide on the
form of business that they will deal with so as to be ready when threatened by some legal concerns. The
following are the different forms of business organizations:
1. Sole Proprietorship
2. Partnership
3. Corporation

Sole Proprietorship
In this form of business, the owner is in command of his whole business and stands to lose as
much as he puts and even more to the extent of all his personal holdings. In addition to that, the
establishment, operations and management of this form of business organization is not governed by a
special law as compared to partnership and corporation. If this form of business is confronted by some
legal issues and disputes, the proprietor can use the general laws prevailing civil obligations and
contracts in the business and commercial transactions.
Having the power to control the whole management of the business, the sole proprietor has
limitless liability since his assets and property may be proceeded by the creditors. The law does not
make any difference between the personal affairs of the proprietor and his business interest. Before the
eyes of the law, they are one and the same; the business is being an extension of his being.
The aliens are generally not restricted or limited to form a single proprietorship business in the
Philippines. However, in instance that they will not be permitted to form single proprietorship business
in a precise industry, they are not stripped to have business venture through other forms of business
such as corporation, partnership or joint venture.
Registration of a sole proprietorship business in the Philippines involves a very simple
procedure wherein the Department of Trade and Industry through the Bureau of Trade Regulation and
Consumer Protection will just have to issue the registration to the applicant.

Partnership
By contract of partnership, two or more persons bind themselves to contribute money, property
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or industry to a common fund, with the intention of dividing the profits among themselves.
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Two or more persons may also form a partnership for the exercise of profession (Article 1767,
Civil Code of the Philippines).
Partnership has a juridical personality separate and distinct from each of the partners, even in
the case of failure to comply with the requirements of Art 1772 (Article 1768). It is required to operate
under a firm name in order to manifest this juridical personality (Art. 1815, CC). With their separate
property, partners, (except in limited partnership) are personally liable pro rata for the debts of the
partnerships (Art 1813, CC).
Forms of Partnership
 General Partnership
It is a basic form of partnership in which all other partners manage the business and are
personally liable for its debts.

 Limited Partnership
In this form of partnership, certain limited partners relinquish their ability to manage the
business in exchange for limited liability for the partnership’s debts.

 Limited Liability Partnership

In this form of Partnership, all partners have some degree of limited liability.
Types of Partners
 General Partners
They have an obligation of strict liability to third parties injured by the partnership. Joint
liability or joint and several liability may be imposed depending upon circumstances.

 Limited Partners
The liability of limited partners is limited to their investment in the partnership.

 Silent Partners
Partners who usually provide capital to the business. They still share in the profits and losses
of the business, but they are uninvolved in the management, and/or whose association with the
business is not publicly known.

Notes:
1. Money means legal tender;
2. Property pertains to the real or personal acceptable to all the partners;
3. Industry involves human faculties as intellectual or physical traits;
4. Common fund pertains to all contributions made by the partners that will be pooled together
as one capitalization of the partners for the usage, common benefit, and interest of the
partners;
5. There is intent to divide the profit among them;
6. Partnership must be dissolved upon the death of one of its general partners;
7. A partnership is taxed like a corporation;
8. A foreigner cannot be a partner in a partnership which owns land;
9. The word “Limited” or “Ltd” must be added to the partnership name in case of Limited
partnership;
10. There is a need for the Philippine Embassy or Consulate to authenticate the documents
signed outside the Philippines.
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Nature or Partnership
Partnership is fiduciary in character. It means that all partners must have trust and confidence
in one another. It is not ideal to organize a partnership with people whom you do not know or whom
you cannot give your complete trust and confidence.

Delectus Personae
In partnership, a person has the right to choose the person or persons he wants to become his
partner/s, taking into consideration such sterling quality as honesty, integrity, and more importantly are
trust and confidence.

Essential Elements of Partnership

1. Valid and voluntary contract to become partners. The persons forming the partnership must
be capacitated to enter into a contractual relationship. Likewise, the contracting parties
must give them free and voluntary will to become partners.
2. Contributions of money, property or industry to the common fund, to be used exclusively
for the common interest and benefit of the partnership.
3. It must be an association for profit, with the intention of dividing the profits among
themselves.
4. The partners must be mutual agents of each other. As an agent of the co-partners, a partner
can enter into a contract and bind the partnership, provided he is acting within the scope of
his authority and for the best interest of the partnership.
5. Lawful purpose.
6. Articles of Partnership must not be kept secret.
7. Juridical personality, separate and distinct from the individual personality of each partner.
This is acquired by the partnership once it is legally established.
Art 1772
Every contract of partnership, having a capital of Php 3,000 or more in money or property, shall
appear in public instrument, which must be recorded in the Office of Securities Exchange Commission.
Failure to comply with the requirements of the preceding paragraph shall not affect the liability
of the partnership and the members thereof to third persons.

Corporation
Under Sec.2 of the Batas Pambansa 68, otherwise known as the Corporation Code of the
Philippines, corporation was defined as an artificial being created by operation of law, having the right
of succession and powers, attributes and properties expressly authorized by law or incident to its
existence.
Based on the definition provided by law, it can be deduced that a corporate form of business
has the following attributes: it is artificial being; it is created by operation of law; it has the power of
succession; it has the power, attributes and properties expressly authorized by law or incident thereto.
Be it noted that artificial being pertains to the fiction of law which creates the person of the
corporation. By operation of law, it becomes a being which the attributes of an individual with full
capacity to enter into contractual relations. It is legal or juridical person with a personality separate and
distinct from its individual members.
Creature of law on the other hand pertains to the juridical existence of a corporation which is
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dependent on the consent or grant of the sovereign. From a strict legal point of view, a corporation

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cannot come into being by mere consent of the parties; there must be a law granting it. Once granted, it
forms the primary franchise of the corporation.
It must be given emphasis also that there must be first and underlying contract among the
individuals forming the corporation upon which the state grant may be conferred.
Another important attribute of a corporate form of business is the right of succession. This
pertains to the capacity for continuous existence despite the death or replacement of its shareholders or
members, for it has a personality separate and distinct from those who compose it. The strong legal
personality of the corporation is an attribute that has made it most attractive to businessmen when
compared to other media.
Advantages of Corporate Form of Business
The following are the advantages of a corporate form of business:
 Strong Legal Personality
The corporation has legal capacity to act and contract as a distinct unit in its own name. It has
continuity of existence. As distinguished from partnership, it has a strong legal personality
having separate and distinct personality from the members composing it, unaffected by death,
resignation, or insolvency of any of its stockholders or members.

 Limited Liability to Investors

One of the advantages of a corporate form of business organization is the limitation of an
investor’s liability to the amount of the investment. This feature flows from the legal theory
that a corporate entity is separate and distinct form its stockholders.

 Free Transferability of Units of Investment

In a corporate setting, as a general rule, the shares of stocks can be transferred without the
consent of the other stockholders. This would assure investors of a ready mechanism to dispose
of their investments when their personal or financial situation may require it and therefore
places more liquidity in the corporate setting and would better encourage investors to channel
their investments through corporate vehicles.

 Centralized Management
Corporation Management is centralized in the board of directors. Shareholders are not agents
of the corporation, nor can they bind the corporations. Unlike in the partnership setting, each
partner may bind the partnership even without the knowledge of other partners. Therefore, in
its legal relationship, a corporation present more stable and efficient system of governance and
dealings with third parties, since management prerogatives are centralized in its Board of
Directors.

Advantages over the Unregistered Associations

1. It enjoys perpetual succession under its corporate name and in an artificial form.
2. It has the capacity to take and grant property, and contract obligations.
3. It can sue and be sued in its corporate name as a juridical person.
4. It has the capacity to receive and enjoy common grants of privileges and immunities.
5. Its stockholders or members generally have no personal liability beyond the value of their
shares.
Disadvantages of Corporate Form
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2. Lack of personal element

3. Abuse of corporate management
4. Limited liability hits innocent victims
5. Double taxation

Distinction between Corporation and Sole Proprietorship

In corporation, the control belongs to the Board of Directors. There is also a limited liability on
the part or shareholders. On the contrary, the owner in the sole proprietorship is in command of the
whole business and stands to lose as much as he puts in and even more to the extent of all his personal
holdings.
Distinction between Corporation and Partnership as to Legal Capacity
Corporation has a stronger legal personality, enabling it to continue despite the death,
insolvency or withdrawn of any of its stockholders or members.
Partnership, with the withdrawal, death or insolvency of any partners would automatically bring
about the dissolution of partnership.
Limited liability is the main feature in a corporate setting whereas partners are liable personally
for partnership debts not only to what they have invested in the partnership but even as to their other
properties.
Generally, every partner is an agent of the partnership, and by this sole act, he can bind the
partnership.
Nationality of Corporation
There are two tests to identify the nationality of a corporation. These are the Place of
Incorporation Test and the control Test.
The Place of Incorporation Test is the principal doctrine on the test of nationality of corporation
in the Philippines. It adheres to the belief that a corporation is a nationality test of the country under
whose laws it has been organized and registered. On the other hand, the Control test adheres that the
nationality of the corporation is determined by the nationality of the majority of the stockholders on
whom the control is vested.
Classification of Corporation in Relation to the State
Corporation in relation to the state may be classified into the following:
 Public Corporations
Formed or organized for the government of a portion of the State. Example: municipality for
government functions
 Private Corporations
Formed for some private purpose, benefit or end. Examples: ABS CBN Corporation, Jollibee
Food Corporation, San Miguel Corporation.
 Quasi Public Corporation
A cross between private corporations and public corporation. Examples: School Districts, water
districts, PLDT
Classifications of Corporation as to the Place of Incorporation
Corporation may be classified as to the place where they were incorporated, to wit:
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 Domestic Corporation
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This kind of corporation obtained personality through incorporation under the Philippine laws.

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 Foreign Corporation
Licensed by SEC to do business in the Philippines under the principle of RECIPROCITTY,
after securing a certificate of authority from the Board of Investments under EO 226 or the
Omnibus Election Code and after complying with the conditions for issuance of the license or
application forms, structural organizations and capitalization. The reasons for this are: (a) to
place them on equality with domestic corporations; (b) to subject them to inspection so that
their condition may be known: (c) to protect the residents of the state doing business with them
by subjecting them to the courts of the state.
Classifications of Corporation as to Stock
 Stock Corporation
Private corporations which have capital stock divided into shares and the stockholders are
entitled to their shares of dividends or allotment of the corporate surplus profits based on their
stockholdings or subscriptions.

 Non-stock Corporations
These are corporations which do not issue stocks and are composed of members, not
stockholders. They may be civic, charitable, religious, or professional organizations.
Other Kinds of Corporation
 De Jure Corporation
It is a corporation which complied with the requirements of the law.

 De Facto Corporation
Those who failed to comply with one or two legal requirements of the law.

 Corporation Sole
It is composed of one member or corporator and generally applies to religious denominations.
For example, the corporation sole of the Catholic Church is Cardinal Sin and his successor.

 Close Corporation
This is usually owned and managed by a family. All the outstanding stocks are owned and
managed by a family; stocks are not open for public subscription.\

 Open Corporation
All the members or corporations exercise their right to vote to elect the directors and other
officers of the corporation; the stocks are open for public subscription.

 Eleemosynary Corporation
This corporation is established for charitable purposes.

 Ecclesiastical Corporation
This corporation is established for religious purposes.

 Lay Corporation
This corporation is established for any purpose other than religion.
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 Corporation Aggregate
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This is composed of one member or corporator.

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 Corporation by Estoppel
This is a kind of corporation wherein members assume to act as corporation despite the
knowledge of the non-existence of corporate personality. In this case all the persons involved
will be liable as general partners.

 Multi National Corporation

A corporation organized in one state or country but extends its corporate business in other
territories or countries.
Powers of Corporation
The powers of corporation can either be expressed or implied. The power is expressed if the
corporation can perform functions as stipulated in the By Laws, Corporation Code and such other
statutes pertinent to the corporations. In implied power, the power is inherently necessary in the exercise
of its corporate function in the pursuit of its corporate existence.
Different Corporation Doctrines
 Doctrine of Piercing the Veil of Corporate Existence
It is a general principle under the law that a corporation has a personality which is separate and
distinct from its members. However, the said principle would not apply to some instances as
held in the case of San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals.
Corporate Law recognizes the value of creditors. In cases where the corporation uses the fiction
of corporate personality as a means of perpetuating a fraud or an illegal act, or as a vehicle for
the evasion of an existing obligation, the circumvention of statutes, the achievement or
perfection of a monopoly or generally the perpetration of knavery or crime, then the “veil which
the law covers and isolates the corporation from the members of stockholders who compose it
will be lifted to allow for its consideration merely as an aggregation of individuals.
In several cases, the doctrine of piercing the veil the corporate fiction has been applied
by the Supreme Court: when the corporate entity is used to commit fraud or to justify wrong,
or to defend crime; when the corporate entity is used to defeat public convenience, or a mere
farce, since the corporation is merely the alter ego, business conduit or instrumentality of a
person or another entity; and when the piercing of the corporate fiction is necessary to achieve
justice or equity.

 Doctrine of Business Opportunity

This doctrine refers to the case when a director or officer of the corporation is presented with a
business venture which can be profitably handled by the corporation. He must give that business
opportunity to the corporation, he shall be held liable to refund to the corporation whatever
profits and benefits he may have derived from such business opportunity.

 Trust Fund Doctrine

When the directors of the solvent or insolvent corporation distribute all corporate assets to the
stockholders without reserving any assets for payment of corporate debts and liabilities. The
directors or officers, together with the stockholders who received the assets, are considered
trustees and the corporation and creditors can recover from stockholders. Such corporate assets
they receive shall be sold at public auction for the settlement of corporate liabilities.
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Distinction between Corporators and Incorporators

 Corporators
These are the total number or persons who compose the corporation after its formation which
include the incorporators, the stockholders and/or members.

 Incorporators, stock or non-stock

They must be natural persons. A juridical person cannot be an incorporator. The law provides
that the incorporators must be at least (5) five but not more than (15) fifteen.

REGISTRATION REQUIREMENTS IN ESTABLISHING

BUSINESS PERTINENT TO THE HOSPITALITY INDUSTRY
Promotion of the different tourist destinations in the country may be well settled through the
opening of various businesses well supported by the respective local government units and in
coordination with the Department of Tourism. In making the said mandate possible, the regulatory
power of the State, through licensing of businesses may be used. In this regard, the public in general
(local and foreign tourists) may be assured of quality service from the hospitality industry, and in effect,
an additive of tourist attractions.
Licensing is very important in the operation of any business in the country. License is mandated
to be displayed in a conspicuous place within the vicinity of any business establishment, guaranteeing
the public that the business wherein they are the clientele is not nuisance, and is legitimately operated.
Meanwhile, if you would decide to establish partnerships and corporations as a form of business
in the near future, it is necessary that you register with the SEC or the Securities and Exchange
Commission. However, if you would like to establish a single proprietorship or you want to have the
control of everything in your business, the registration is through the DTI or the Department of Trade
and Industry.
If you would like to avail of the incentives provided under Executive Order 226 or the Omnibus
Investment Code, registration with the Board of Investments (BOI) is a must.
Registration is also needed if you would like to avail of the incentives of the following
Investment Promotion Agencies:
 PEZA – Philippine Economic Zone Authority
 SBMA – Subic Bay Metropolitan Authority
 CDC- Clark Development Corporation
 Cagayan Economic Zone Authority
 Phividec Industrial Authority
 Zamboanga Economic Zone Authority.
The registration of foreign investments for purposes of capital repatriation and profit
remittances is under the Bangko Sentral ng Pilipinas (BSP).
Before a business can be fully operated, it is a must that they secure the following: TIN (Tax
Identification Number) under the Bureau of Internal Revenue; Locational Clearance / Business permit
for firms in Metro Manila under the MMDA or Metro Manila Development Authority, employer’s SSS
number under the Social Security System membership in the government health care benefits system
through the Philippine Health Insurance Corporation; electric services connection through MERALCO
or Manila Electric Co; water services through the Maynilad Water Company and/or manila Water
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Company for firms locating in Metro Manila, LWUA or Local Water Utilities Administration for firms
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outside Metro Manila; telephone services connection.

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Assessment of Learning refers to the strategies designed to confirm what students know and
demonstrate whether or not they met the intended learning outcomes of the course/subject. These
are aimed to assess the level of your understanding on the important contents on this learning
module. Your score on these worksheets will be recorded as your quizzes.

Definition of Terms (15 points)

Instruction: Define the following terms – based on your understanding. Write your
answer on a sheet of paper.

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Self-Reasoning (20 points) _________________________
Instruction: Study and analyze the given case. Feel free to express your own opinion –
this case will help assess your level of understanding. Use a separate sheet
for your answer.

Reuben gave a business proposal to Mae in which he will be establishing a fast food restaurant in his
personal property. The only participation that Mae will have to give in his proposal is to finance all the
necessary expenses of the business. The income will be equally divided between Reuben and Mae.
If you are Mae, would you consider the proposal a good proposal? Discuss

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