Solo, Partnership or Corporation

ONE question I am often asked is what is my recommended entity/vehicle for doing business in the Philippines?

To answer that question requires a very basic look at the three most common kinds of business organizations in the country.

In the Philippines jurisdiction, one can operate a business as: (1) a sole proprietorship; (2) a partnership; or (3) a corporation. A business can also operate as a joint venture (which is considered by some as a form of partnership), but we will leave that discussion for a future column.

A sole proprietorship means that you are the sole operator and owner of your business. This requires registration with the Department of Trade and Industry. The advantage of a sole proprietorship is that it is easier to register and operate. One person is the owner and in charge of everything. It is in fact the simplest business organization available in the Philippines.

More importantly, no specific law covers it unlike for Partnerships and Corporations.

Only the general law on obligations and contracts, among others, governs a Sole Proprietorship.

However, the Sole Proprietorship has unlimited liability, and as such, the Sole Proprietor can be held liable for all the debts and liabilities of the business. This can be very painful for a businessman if his sole proprietorship fails. In effect, a creditor can not only go after the assets of the Sole Proprietorship, he can also go after the personal assets of the businessman, since the law considers the Sole Proprietorship and the businessman, one and the same. Thus, not only would the businessman lose the money he put into the business, he will also be responsible for the debts and liabilities that the business incurred.

On the other hand, a partnership under Philippine law is created when by a contract two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of diving the profits among themselves. (Art. 1767, Civil Code).

A partnership operates as a separate legal entity (Article 1768, Civil Code). It has unlimited liability, in the same way as a Sole Proprietorship. Thus the vulnerabilities of a Partnership are roughly the same as that of a Sole Proprietorship, if not more, since each of the Partners may act as a manager or agent of the partnership and can therefore bind the partnership in business, unless the partnership agrees that only one of them would act as a managing partner.

A partnership is registered in the Securities and Exchange Commission (SEC) by filing its Articles of Partnership. Partnerships are specifically governed by Articles 1767 to 1867 of the Civil Code of the Philippines. Furthermore, a Partnership dissolves when one of the partner leaves or passes on.

The third type of business organization, and the most prevalent, would be the corporation. It is essentially 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. (Sec. 1, Corporation Code). Registration of a Corporation is with the SEC.

As explained by my Professor, former Dean Cesar Villanueva, a nominee for the position of Chief Justice, the corporation has four strong features: (1) strong legal personality (i.e. it is an entity separate and distinct from its stockholders and continues to exist even when one of its stockholders leave or dies); (2) centralized management (by way of a board of directors); (3) limited liability of its investors and stockholders (only to the amount of the investment in the corporation); (4) Free transferability of units of ownership (i.e. shares of stock can be easily transferred/purchased).

The strongest advantage of a corporation, and one which most businessmen like, is its limited liability. As explained by the Supreme Court, "one of the advantages of the corporation is the limitation of an investor’s liability to the amount of investment, which flows from the legal theory that a corporate entity is separate and distinct from its stockholders." (San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631).

In other words, if the Corporation loses money, you only lose what you invested in that corporation. The corporation's creditor cannot pursue a stockholder/investor's personal assets, as a general rule. Of course, there are exceptions to the limited liability of a corporation, such as when fraud or bad faith justifies piercing the fiction of the corporate veil.

In a nutshell then, I would say that if anyone wants to go into business and secure his or her personal assets, the corporation is the best manner of doing business.

However, it is also the most expensive and cumbersome, as a corporation requires five (5) incorporators, a board of directors, and is regulated by the Corporation Code and the SEC, with required annual filings such as the General Information Sheet.

There is also the issue of taxation, as the corporation is taxed at a heavier rate. The shareholders of a corporation are also subjected to taxation on the dividends or profits they will receive from a corporation.

Nevertheless, I believe that the security of the limited liability feature of a corporation more than makes up for a corporation’s disadvantages. It is no wonder that some of the biggest businesses in the country are corporations.

Atty. Kelvin Lee is a consultant of the Siguion Reyna Montecillo & Ongsiako Law Office (www.srmo-law.com). The opinions expressed herein are his own. This column does not constitute legal advice nor does it create a lawyer-client relationship with any party. You can reach Kelvin at kelvinlesterlee@gmail.com