1.1 Essential Elements of a Partnership
In the Philippines, a partnership is governed by Articles 1767 to 1867 of the Civil Code of the Philippines. A partnership is formed when two or more persons agree to contribute money, property, or industry into a common fund with the intention of dividing profits among themselves. A partnership can engage in any lawful business activity, including those in the tourism and hospitality sectors.
The essential elements of a partnership are as follows:
- Agreement: There must be an agreement between the partners to establish the partnership and share in its profits and losses. This can be in written or oral form, although written agreements are preferred to avoid disputes.
- Contribution: Each partner must contribute something of value, whether money, property, or labor, to the partnership. Contributions are not necessarily equal but must be agreed upon by all partners.
- Intent to Conduct Business: The partners must have a clear intent to engage in a common business enterprise. The business purpose should be lawful and aimed at making profits.
- Profit Sharing: The agreement must include provisions for the distribution of profits (and losses) among partners.
- Legal Capacity: Partners must have the legal capacity to enter into a contract. This typically means they must be of legal age and sound mind.
1.2 Types of Partners
In a partnership, different types of partners can assume various roles and responsibilities. The main types of partners are:
- General Partner: A general partner is actively involved in managing the business and has unlimited liability for the debts of the partnership. This means they can be held personally responsible for the partnership’s obligations.
- Example: In a small hotel operation, a general partner may take charge of daily operations, financial decisions, and staffing.
- Limited Partner: A limited partner invests in the partnership but does not participate in its day-to-day management. Limited partners have limited liability, meaning they are only liable up to the amount of their investment in the partnership.
- Example: A limited partner may invest capital in a travel agency but has no involvement in its daily activities. They will not be liable for the agency’s debts beyond their initial contribution.
- Nominal Partner: A nominal partner does not have any investment in or management role within the partnership but lends their name to the business. This type of partner may still be liable for the partnership’s obligations depending on how they present themselves to the public.
- Secret Partner: A secret partner actively participates in the management of the business but is not publicly known as a partner. Their liability can be either limited or unlimited, depending on the agreement.
- Silent Partner: A silent partner invests in the business but does not participate in its management and is not publicly involved in the business’s affairs.
Corporations: Advantages, Disadvantages, and Legal Principles
2.1 Advantages of a Corporation
A corporation is a business entity recognized by law as separate and distinct from its owners (shareholders). In the Philippines, corporations are governed by Republic Act No. 11232, or the Revised Corporation Code of the Philippines. Corporations have several advantages, making them a popular choice for larger hospitality businesses, such as hotels, resorts, and travel agencies.
Advantages of Corporations:
- Limited Liability: One of the primary advantages of a corporation is that the shareholders have limited liability. This means that shareholders are only liable for the corporation’s debts up to the amount of their investment. Personal assets are not at risk if the corporation faces financial difficulties.
- Example: A shareholder in a large hotel chain is only liable for the value of their shares and is not personally responsible for the company’s debts.
- Perpetual Existence: Corporations have perpetual existence, meaning they continue to exist even if shareholders change or pass away. This allows for business continuity.
- Ease of Transferability: Ownership in a corporation is easily transferable through the sale of shares. Shareholders can sell or transfer their shares without affecting the corporation’s operations.
- Ability to Raise Capital: Corporations can raise significant amounts of capital by issuing stocks and bonds to investors, making it easier to finance large projects or expand operations.
- Professional Management: Corporations are typically managed by a board of directors and officers who are elected by shareholders. This allows for professional management and strategic planning, especially in larger, more complex operations.
2.2 Disadvantages of a Corporation
While corporations offer many benefits, they also come with certain disadvantages:
Disadvantages of Corporations:
- Complex Formation and Maintenance: Establishing a corporation involves a more complex and costly process than forming a sole proprietorship or partnership. Corporations must be registered with the Securities and Exchange Commission (SEC) and comply with numerous regulatory requirements.
- Example: A corporation must file annual reports, maintain corporate records, and pay corporate taxes, all of which require more effort and expense compared to other business structures.
- Double Taxation: Corporations are subject to double taxation. First, the corporation pays taxes on its profits. Then, shareholders pay taxes on dividends they receive. This can result in a higher overall tax burden for the business.
- More Government Oversight: Corporations are subject to stricter government regulation and oversight, which can limit flexibility in certain business decisions.
- Limited Influence for Small Shareholders: In large corporations, small shareholders may have little influence on decision-making, as control is typically vested in a board of directors.
2.3 Legal Principles Governing Corporations
Corporations are governed by several important legal principles:
- Separate Legal Personality: A corporation has a distinct legal identity separate from its shareholders. This allows the corporation to enter into contracts, sue or be sued, and own property in its own name.
- Limited Liability: Shareholders enjoy limited liability, protecting them from personal responsibility for the corporation’s debts and obligations.
- Corporate Veil: The legal separation between the corporation and its shareholders is referred to as the corporate veil. However, in cases of fraud, abuse, or illegal activities, courts may pierce the corporate veil and hold shareholders personally liable.
- Board of Directors: The corporation is managed by a board of directors, who are elected by shareholders. The board has fiduciary duties to act in the best interest of the corporation and its shareholders.
Distinctions Between Business Forms
The choice of business form can significantly affect a company’s operations, legal liability, and taxation. Below are key distinctions between the most common business forms:
| Feature | Sole Proprietorship | Partnership | Corporation | Cooperative |
| Ownership | Owned by one individual | Owned by two or more | Owned by shareholders | Owned by members |
| Liability | Unlimited liability | Unlimited for general partners; limited for limited partners | Limited liability for shareholders | Limited liability for members |
| Management | Sole proprietor manages | Partners manage (or designate managers) | Board of directors elected by shareholders | Managed democratically by members |
| Taxation | Income taxed as personal income | Income passed through to partners | Corporation is taxed as a separate entity; double taxation applies | Exempt from certain taxes if they comply with cooperative laws |
| Continuity | Ends with owner’s death or withdrawal | Ends with death/withdrawal of partners (unless agreement provides otherwise) | Perpetual existence | Perpetual existence if properly maintained |
| Regulation | Minimal regulation | Requires registration; governed by partnership agreement | Governed by the Revised Corporation Code; requires SEC registration | Regulated by the Cooperative Development Authority (CDA) |
Nationality of a Corporation
The nationality of a corporation in the Philippines is determined by the “Grandfather Rule” and the Control Test:
- Control Test: A corporation is considered Filipino if at least 60% of its capital is owned by Filipino citizens. This rule is primarily used to determine whether a corporation can participate in activities reserved for Filipinos, such as owning land or engaging in specific industries (e.g., mining, telecommunications, and certain areas of tourism).
- Grandfather Rule: When ownership is layered through other corporations, the Grandfather Rule may apply, requiring a deeper investigation into the actual ownership structure. It considers the nationality of shareholders in corporations that hold shares in the subject corporation.
- Example in Tourism: If a foreign company wants to invest in the hospitality industry in the Philippines, it can only own up to 40% of a hotel corporation, while 60% must be owned by Filipino nationals.
Registration Requirements for Hospitality Businesses
For hospitality businesses to operate legally in the Philippines, they must comply with several registration and licensing requirements:
5.1 Department of Trade and Industry (DTI)
- Sole proprietorships must be registered with the DTI to obtain a business name registration.
5.2 Securities and Exchange Commission (SEC)
- Partnerships and corporations must be registered with the SEC. This involves filing incorporation documents (such as Articles of Incorporation) and other requirements based on the type of business.
5.3 Local Government Unit (LGU)
- All businesses must secure a Mayor’s Permit or Business Permit from the local government where the business will operate. The requirements vary by location but usually include a business plan, zoning clearance, health clearance, and fire safety inspection.
5.4 Bureau of Internal Revenue (BIR)
- After registering with the DTI or SEC, businesses must also register with the BIR to obtain a Tax Identification Number (TIN) and Official Receipts. This is essential for compliance with tax obligations.
5.5 Department of Tourism (DOT)
- Hospitality businesses such as hotels, resorts, and travel agencies must be accredited by the Department of Tourism (DOT). Accreditation is a requirement for businesses seeking to operate as official tourism enterprises and enjoy the benefits of government support, such as promotions and access to tourism-related incentives.
Conclusion
Understanding the different forms of business organizations and their respective legal principles is essential for entrepreneurs and investors in the tourism and hospitality sectors. Partnerships offer shared management and liability structures, while corporations provide limited liability and the potential for raising significant capital, but with more complex formation and taxation rules. In the Philippine context, foreign ownership in corporations is subject to strict limits, especially in sectors like tourism.
Compliance with legal registration requirements is crucial for ensuring that hospitality businesses operate legally and benefit from government support. By choosing the appropriate business structure and meeting all regulatory requirements, businesses in the tourism and hospitality sectors can navigate the complexities of the Philippine legal environment and contribute to the growth of this vital industry.
