Businesses are undeniably an integral part of society. They fuel our livelihood, generate our sources of income, and ultimately provide the necessities required in our daily lives. Whether big or small, businesses are what keep the economy and the society alive and running.
In the Philippines, businesses can take various forms. One form is sole proprietorship, which is a form of business organization conducted for profit by a single individual. It simply requires its proprietor or owner to secure licenses and permits, register its business name, and pay taxes to the national government.[1]
Another form is partnership, where two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.[2] The law also recognizes the formation of a partnership for the exercise of a profession, as seen in the business of law firms. In essence, a partnership involves the sharing of the partners in the profits and losses of the venture.[3]
While sole proprietorships and partnerships have their own distinct features, most businesses in the Philippines take the form of corporations. According to the Securities and Exchange Commission (SEC), as of 31 December 2020, there are 688,456 active companies in the Philippines, 576,434 of which are corporations.[4]
This article will delve into the nature of corporations in the Philippines, as well as their attributes that make them a feasible means of doing business.
Corporations: Attributes and Advantages
A corporation is an artificial being created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from its incorporators and shareholders, as well as from any other legal entity to which it may be related.[5]
The most essential, and probably the most advantageous attribute of a corporation, is its separate juridical personality. While also possessed by partnerships, the attribute of separate juridical personality is more defined in corporations because the law specifically recognizes it as an “artificial being.”[6] Thus, case law consistently imparts that “as a juridical entity, a corporation may act only through its directors, officers and employees.” Obligations resulting from the acts of the directors and officers as the corporate agents are not their personal liability, but the direct responsibility of the corporation they represent.[7]
Stemming from this attribute of separate juridical personality is the principle of limited liability, i.e., corporate debt or credit is not the debt or credit of the stockholder. This protection from liability for shareholders is a consequence of the corporation’s status as a distinct legal entity, and a result of a conscious policy decision to promote capital formation.[8]
Another attribute of a corporation is the principle of “centralized management”[9] which vests upon the board of directors or trustees the exercise of all corporate powers and empowers them to conduct all business and control all properties of the corporation.[10]
Other salient advantages of corporations include tax incentives under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law. Passed in 2021, the CREATE Law reduced corporate income tax imposed upon domestic corporations with a taxable income above Php5,000,000, from 30% to 25%. For domestic micro, small, and medium enterprise (MSME) corporations with a taxable income of Php5,000,000 and below, and with total assets of not more than Php100,000,000, the rate of corporate income tax was likewise significantly reduced, from 30% to 20%.[11]
Moreover, an amendment in the Revised Corporation Code provides for a corporation’s perpetual existence by default, though incorporators may nevertheless fix a corporate term of existence in the Articles of Incorporation.[12]
Taking the form of corporations
A more important component of a corporation is its recognition from the government, particularly the SEC. As a result, businesses wishing to be incorporated must register with the SEC to validate their legal personality and obtain permission to commence business activities.[13]
Under Section 18 of the Revised Corporation Code, a person or group of persons desiring to incorporate shall submit the intended corporate name for verification. Similarly, the incorporators shall submit their proposed articles of incorporation and bylaws to the SEC. Upon approval, the corporation commences its corporate existence and juridical personality under its official seal. The incorporators, stockholders/members, and their successors shall also constitute a body corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law.[14]
After registration with the SEC, the corporation must then obtain a Mayor’s Permit before the local government unit (LGU). It shall also register with the Bureau of Internal Revenue (BIR) to ensure compliance with tax requirements.
In all, the unique nature of corporations enables them to become feasible vehicles for business. With its distinct attributes, businesses are equipped to stand on their own, build capital, and in turn, contribute to the growth of our economy.
We write this article to provide an overview about corporations as a means of doing business in the Philippines. This article should not be taken as a form of legal advice. Should you need legal assistance on incorporation in the Philippines and other corporate concerns, please send an email to ryan@romanolaw.ph.
[1] Stanley Fine Furniture vs. Gallano, G.R. No.190486, 26 November 2014
[2] Art 1767, Civil Code
[3] Moran vs CA, G.R. No. L-59956, 31 October 1984
[4] Number of Registered Corporations as of 31 December 2020, Securities and Exchange Commission (2020)
[5] PNB vs Andrada, G.R. No. 142936, 17 April 2002
[6]Section 2, Revised Corporation Code (2019)
[7] Zaragoza vs Tan, G.R. No. 225544, 04 December 2017
[8] Philippine National Bank vs Hydro Resources Contractors Corporation, G.R. No. 167530, 13 March 2013
[9] Philippine Corporate Law, Cesar Villanueva and Teresa Villanueva-Tiansay (2021)
[10] Section 22, Revised Corporation Code
[11] Package 2: Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, Department of Finance, accessed at https://taxreform.dof.gov.ph/tax-reform-packages/p2-corporate-recovery-and-tax-incentives-for-enterprises-act/ last 1 Sept 2022.
[12] Section 11, Revised Corporation Code
[13] Philippine Corporate Law, Villanueva (2021)
[14] Id.