Business Law: Corporation and

Partnership and Taxes

This module is designed to introduce you to Business

Law, discuss Corporations and Partnerships and the laws
that govern them.
Additional notes and readings will be added to google
classroom during the semester. We will have discussions
via google meet (online) and face to face classes. The
schedule of these discussions/consultations will be posted
in your google classroom page.
If you have any questions, you can reach me at
mauricio_richard@ladyoflourdes.edu.ph or you can drop
a message in google classroom.
 What is a Corporation?

A corporation is an artificial being created by operation of

law, having the right of succession and the powers,
attributes, and properties expressly authorized by law or
incident to its existence.
Corporations may be public or private.

Public Corporations
Public corporations are those formed or organized for the
government of a portion of the state.
In order to carry out these services and missions, public
corporations provide services or participate in activities
similar to that of private enterprises.
To ensure success, public corporations are granted
operational flexibility while retaining the principles of
fundamental public policy and public accountability.
A public corporation's board of directors is appointed by
the sitting government while the Senate confirms said
appointment. However, the board of directors has the
authority to manage the public corporation's operations
and set policy as they see fit.
Any district, province, or city that is organized for public
purposes can be designated as a public corporation
LGUs are public corporations. Having their own
juridical personalities, LGUs can enter into contracts with
private companies for local projects.

GOCC
Government Owned and Controlled
Corporation
GOCC is a corporation created by special law or
incorporated and organized under the Corporation Code
and in which government, directly or indirect, has
ownership of the majority of the capital stock.
Article XII (National Economy and Patrimony) of the 1987
Constitution provides: “The State may, in the interest of
national welfare or defense, establish and operate vital
industries and upon payment of just compensation,
transfer to public ownership utilities and other enterprises
to be operated by the government.”
It likewise provides that “GOCCs may be created or
established by special charters in the interest of the
common good and subject to the test of economic
viability.”
Dividends remitted by GOCCS reached to the totals of
P47.99 billion, which breached the P40-billion mark in
2018, the highest amount ever collected.
Examples of GOCC:
GSIS
Philippine Ports Authority
Philippine Heart Center
Nayong Pilipino

Private Corporations

Private corporations are those formed for some private

purpose, benefit, aim, or end, as distinguished from public
corporations, which have for their purpose the general
good and welfare.
Private corporations are divided into stock
corporations and nonstock corporations.
Corporations which have a capital stock divided into
shares and are authorized to distribute to the holders of
such shares dividends or allotments of the surplus profits
on the basis of the shares held are stock corporations. All
other private corporations are nonstock corporations.
 Advantages of Corporations

Positives of Limited Liability

Limited personal liability is one of the most common
reasons businesses become corporations. A corporation is
a distinct legal entity, so incorporating protects the
business owner's personal assets, even if the corporation is
in debt or facing other liabilities.

Registration Provides a Tax Benefit

Owners of corporations are only taxed on their own salary
and bonuses, but you will also need to know how
dividends are taxed. There are also other tax benefits that
are available to some corporations, including insurance
premium deductions, deferred tax payments, and income
splitting.

Gives Business Credibility

When a business has completed the process of becoming
incorporated, it can make a favorable impression on
investors, making it easier to raise capital. Plus, in some
cases, there is perceived permanency and reputability on
the part of clients or customers when a business is a
corporation.

Allows for Stock Incentives

One of the defining elements of a stock corporation is the
stock structure, which gives board members and
employees a share in the ownership of the company. This
can be an attractive benefit for employees and can lead to
higher employee retention rates.

Your Perpetual Existence

Unlike a sole proprietorship, a corporation continues to
exist even if the owner passes away or leaves the business.
A corporation will remain in existence until the
shareholders take measures to dissolve it, or until the
corporation is merged with another business.

Transferability
Since a corporation is not tied to its owner, ownership can
be transferred to another by selling stock. This is typically
governed by the corporation, which can set limits on the
transfer of stock, and the laws of the state where the
corporation was formed.
 Disadvantages of Corporations

Downsides of the Cost

The initial cost of incorporation includes the fee required
to file your articles of incorporation, potential attorney or
accountant fees, or the cost of using an incorporation
service to assist you with the completion and filing of the
paperwork. There are also ongoing fees for maintaining a
corporation.

Problems of Double Taxation

Some types of corporations have the potential to result in
"double taxation." Double taxation occurs when a
company is taxed once on profits and again on the
dividends paid to shareholders.

Your Loss of Personal "Ownership"

If a corporation is a stock corporation, one person doesn't
retain complete control of the entity. The corporation is
governed by a board of directors who are elected by
shareholders.

Business Registration Requires Structure

When you form a corporation, you are required to follow
all of the rules outlined by the state in which you filed. This
includes the management of the corporation, operational
requirements, and the corporation's accounting practices.

The Headache of Ongoing Paperwork

Most corporations are required to file annual reports on
the financial status of the company. Ongoing paperwork
also includes tax returns, accounting records, meeting
minutes, and any required licenses and permits for
conducting business.

Difficulty Dissolving After Business Registration

While perpetual existence is a benefit of incorporating, it
can also be a disadvantage because it can require
significant time and money to complete the necessary
procedures for dissolution.
 Non Stock Non Profit Corporations /
Foundations

A nonstock corporation is one where no part of its income

is distributable as dividends to its members, trustees, or
officers. It may be exempted from paying income tax, if it
falls to any of the following:

A.Labor, agricultural or horticultural organization not

organized principally for profit.
B.Mutual savings bank not having a capital stock
represented by shares, and cooperative bank without
capital stock organized and operated for mutual
purposes and without profit;
C.A beneficiary society, order or association, operating
for the exclusive benefit of the members such as a
fraternal organization operating under the lodge
system, or mutual aid association or a non-stock
corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits
exclusively to the members of such society, order, or
association, or non-stock corporation or their
dependents;
D. Cemetery company owned and operated
exclusively for the benefit of its members;
E.Non-stock corporation or association organized and
operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or
asset belongs to or inures to the benefit of any
member, organizer, officer or any specific person;
F. Business league, chamber of commerce, or board of
trade, not organized for profit and no part of the net
income of which inures to the benefit of any private
stock-holder, or individual;
G.Civic league or organization not organized for profit
but operated exclusively for the promotion of social
welfare;
H. A non-stock and nonprofit educational institution
I. Government educational institution;
J. Farmers’ or other mutual typhoon or fire insurance
company, mutual ditch or irrigation company, mutual
or cooperative telephone company, or like
organization of a purely local character, the income of
which consists solely of assessments, dues, and fees
collected from members for the sole purpose of
meeting its expenses;
K.Farmers’, fruit growers’, or like association organized
and operated as a sales agent for the purpose of
marketing the products of its members and turning
back to them the proceeds of sales, less the necessary
selling expenses on the basis of the quantity of
produce finished by them
In order for an entity to qualify as a non-profit corporation
exempt from income tax, it must demonstrate that its
earnings or assets do not inure to the benefit of any of its
trustees, organizers, officers, members or any specific
person. It must not be organized or operated for the
benefit of private interests such as specific individuals,
incorporators or his family, shareholders of the
organization, or persons controlled directly or indirectly by
such private interests. The organization must serve a
public rather than a private purpose.

Cooperatives

A cooperative is defined as an organization composed

primarily of small producers and consumers who
voluntarily join together to form business enterprises
which they themselves own, control and patronize.

How is a cooperative different from a corporation?

1. A cooperative is organized for service while a
corporation’s purpose is profit.
 2. Membership in a cooperative is open and voluntary
while in a corporation, membership is restricted.
3. In a cooperative, one man has one vote, with no proxy
voting. In the case of a corporation, it is one share,
one vote with more shares meaning, more votes.
4. A cooperative’s profits are refunded to the members of
a cooperative on the basis of their individual
patronage, while corporate profits are distributed to
stockholders on the basis of the number of shares.

PARTNERSHIPS

A partnership is a business organization that is an association of at

least two or more persons who agree to place money, property or
industry in a common fund with the aim of sharing the profits
among themselves.
The Civil Code of the Philippines also defines partnership as a
juridical entity with a lawful object or purpose for the common
benefit or interest of the partners.
Types:

 General Partnership – a business arrangement where two or

more people, usually referred to as general partners, agree to
share among themselves all assets, profits, and financial and
legal liabilities of the business; the general partners can take
part in the daily management of the partnership and each has
unlimited liability for the actions of the partnership, including
the actions of other partners
 Limited Partnership – a type of partnership where the
partners, usually referred to as limited partners, are only held
 liable to the extent of their investment in the partnership;
unlike general partnerships, the limited partners have no
management authority or input towards the operations of the
company

Advantages:
 Partnerships are easy to form. The requirements are largely
the same as for a sole proprietorship, the only difference is the
creation of the Articles of Partnership. Compared to a
corporation, there are fewer requirements to form and maintain
a partnership business.
 There is the flexibility of operation. As there are only a few
owners in a partnership business, certain concerns that need to
be addressed can easily be solved by the partners. Agreements
and resolutions as to business matters are immediately decided
by the partners.
 Operations are efficient. Simply put, “Two heads are better
than one.” There can be better management because of the
pooling of resources. With the presence of the partners, more
ideas will also be applied in the operation of the business.
 Partners are expected to have great interest in the
operation of the partnership. Partners have their own areas
of interest and responsibility, which helps in the smooth
operation of the business. The unlimited liability of the
partners also encourages their interest in participating in the
venture.
 The possibility of bigger resources. Financial institutions
may extend bigger loans to partnerships considering the
 combined resources of the partners. Thus, more capital can be
used in production.

Disadvantages:
 Partners have unlimited liability for partnership
debts. Partners face unlimited liability for partnership debts.
Partners may not only put their combined money and property
at risk but also their individual assets as well.
 It has a limited life or it lacks stability. Partnership is
unstable. Being a contract between the partners, it is dissolved
based on their agreement, or upon the withdrawal, incapacity,
or death of a partner, or for other causes which terminate a
contract.
 Limited ability to raise capital. The capital is based on how
much can be contributed by each partner upon registration at
the Securities and Exchange Commission.

Foreign Corporations doing business in the Philippines

1. Branch office
A branch office is a foreign corporation organized and existing
under foreign laws. It carries out business activities of the
headquarters and derives income from the host country. For a
branch office it is mandatory to register with the Securities and
Exchange Commission (SEC). This commission is the national
government regulatory agency charged with supervision over the
corporate sector, the capital market participants, the securities and
investment instruments market, and the investing public. It is
required to put up a minimum paid in capital of US$200,000.00.
There are two exceptions, when the remittance amount can be
reduced with 50% to US$100,000.00. These exceptions are either
when activity involves advanced technology or if a company
employs at least 50 direct employees.
2. Representative office
This is the easiest subsidiary structure to set-up in the Philippines.
Similar to a branch office, a representative office is a foreign
corporation organized and existing under foreign laws. For a
representative office it is also mandatory to register with the
Securities and Exchange Commission (SEC). Unlike a branch
office, it does not derive income from the host country and is fully
subsidized by its head office. It deals directly with clients of the
parent company as it often acts as a communication centre. A
representative office undertakes activities including dissemination
of information, promoting company products, as well as quality
control of products for export. It is required to have a minimum
inward remittance of US$30,000.00 to cover the operating expenses.
3. Regional headquarters / regional operating headquarters
Under Republic Act 8756, any multinational company may establish
a regional headquarters (RHQ) or regional operating headquarters
(ROHQ), as long as they are existing under laws other than the
Philippines, with branches, affiliates and subsidiaries in the Asia
Pacific Region and other foreign markets.

Regional Headquarters (RHQ)

An RHQ undertakes activities that are limited to acting as

supervisory, communication and coordinating centre for its
subsidiaries, affiliates and branches in the Asia Pacific region. It
acts as an administrative branch of a multinational company
engaged in international trade. It does not derive income from
sources within the Philippines and does not participate in any
manner in the management of any subsidiary or branch office it
might have in the Philippines. It is required inward to have a
minimum remittance of US$50,000.00 annually to cover operating
expenses.

Regional Operating Headquarters (ROHQ)

Unlike to regional headquarters (RHQ) a regional operating

headquarters derives income in the Philippines. For this type of
business structure, the required capital is US$200,000.00 one-time
remittance. An ROHQ performs the following qualifying services to
its affiliates, subsidiaries, and branches in the Philippines:

 General administration and planning

 Business planning and coordination
 Sourcing/procurement of raw materials components
 Corporate finance advisory services
 Marketing Control and sales promotion
 Training and personnel management
 Logistic services
 Research and development services and product development
 Technical support and communications
 Business development