MERCANTILE AND TAXATION LAWS

I. BUSINESS ORGANIZATIONS

A. Corporations

1. General Principles

A corporation is a juridical entity created by operation of law, endowed with a legal personality separate and distinct from its stockholders or members. In the Philippines, the main body of law governing corporations is the Revised Corporation Code of the Philippines (RCC), or Republic Act No. 11232, which was enacted in 2019 to update and replace the previous Corporation Code (Batas Pambansa Blg. 68). The RCC contains comprehensive provisions outlining the rights, powers, and obligations of corporations, their stockholders, directors, and officers.

The general principles of corporate law in the Philippines can be summarized as follows:

1. Separate Legal Personality

A corporation possesses a legal personality distinct from its stockholders, directors, or members. This principle allows the corporation to:

Own property in its name.
Sue and be sued as a separate entity.
Incur liabilities and obligations independently from its shareholders.

This principle was affirmed in the case of Salomon v. Salomon & Co., Ltd., which laid the foundation for the doctrine of the separate corporate personality. This also means that the liabilities of the corporation are generally limited to its assets, and creditors cannot pursue personal assets of shareholders to satisfy corporate debts (the principle of limited liability).

2. Limited Liability

One of the core principles of corporations is the limited liability of stockholders. Stockholders are only liable to the extent of their subscribed shares. This protection is one of the key reasons for the popularity of corporations as a form of business organization. However, this principle is not absolute. In certain situations, courts may disregard the separate personality of a corporation and hold the stockholders or officers personally liable for corporate obligations under the doctrine of piercing the corporate veil. Instances when this can happen include:

Fraud
Evasion of obligations
Abuse of the corporate form
Alter ego theory (when the corporation is used as a mere instrumentality or alter ego of the controlling shareholder).

Case law: In Yamashita v. Danesen, the Supreme Court clarified that the corporate veil may be pierced only in exceptional circumstances.

3. Perpetual Succession

Under the RCC, corporations now enjoy perpetual existence by default unless the articles of incorporation provide otherwise. Previously, corporations were granted a maximum term of 50 years, renewable for successive periods.

This principle allows the corporation to continue existing beyond the lives of its shareholders or members, ensuring the longevity of business ventures and legal certainty in terms of succession.

4. Transferability of Shares

The shares of a corporation represent ownership interest and are freely transferable, subject to any restrictions imposed by law or the corporation’s articles of incorporation and bylaws. Transferability of shares enhances liquidity and makes investment in corporations more attractive. In closely held or family corporations, however, restrictions on the transfer of shares are common, such as right of first refusal provisions.

5. Centralized Management

Management of the corporation is vested in a board of directors or trustees. The board acts as the governing body and is responsible for policymaking and overseeing the overall operations of the corporation. The directors or trustees are elected by the stockholders or members.

Directors (for stock corporations): Elected by stockholders, they must own at least one share of stock.
Trustees (for non-stock corporations): Elected by members.

Directors and trustees must act in good faith and in the best interest of the corporation. Breach of their fiduciary duties, such as the duty of loyalty, duty of diligence, or conflict of interest rules, can result in personal liability.

6. Corporate Powers

A corporation has the powers and authority to conduct activities in line with its primary purpose as stated in the articles of incorporation. The general corporate powers include:

The power to sue and be sued.
The power to own, purchase, and sell real and personal property.
The power to enter into contracts.
The power to borrow money.
The power to make bylaws.

The Revised Corporation Code has expanded these powers and now includes provisions for corporate social responsibility (CSR), which explicitly allows corporations to invest in activities for the benefit of society.

7. Capital Structure

The capital structure of a corporation is divided into:

Authorized capital stock: The maximum number of shares the corporation is allowed to issue as provided in its articles of incorporation.
Subscribed capital: The amount of capital that stockholders have agreed to take up and pay for.
Paid-up capital: The portion of the subscribed capital that has been paid by the stockholders.

Corporate shares may be issued with or without par value, and certain shares may have specific rights and privileges, such as preferred shares.

8. Corporate Governance

Corporate governance refers to the framework of rules and practices by which the board of directors ensures accountability, fairness, and transparency in the corporation's relationship with its shareholders, management, and other stakeholders.

The Securities and Exchange Commission (SEC) requires corporations to comply with governance standards to protect minority shareholders, enhance board diversity, and promote long-term sustainability.

The Revised Corporation Code emphasizes:

Minority protection through cumulative voting and other mechanisms.
Board diversity to include independent directors.
Enhanced provisions on corporate social responsibility.

9. Corporate Dissolution and Liquidation

Dissolution of a corporation may be voluntary or involuntary:

Voluntary dissolution occurs through a resolution passed by a majority of the board and approved by two-thirds of the stockholders.
Involuntary dissolution may be initiated by the SEC for reasons such as expiration of the corporate term (if not perpetual), failure to comply with statutory requirements, or insolvency.

Upon dissolution, the corporation enters the process of liquidation, wherein its assets are converted into cash to pay its creditors and the remaining balance distributed to the stockholders.

10. Taxation of Corporations

Corporations are subject to the following taxes under the Tax Code (National Internal Revenue Code of 1997, as amended):

Corporate Income Tax: Domestic corporations are taxed on their worldwide income, while foreign corporations are taxed only on income derived from Philippine sources. The current corporate income tax rate under the CREATE Law (Republic Act No. 11534) is 25% for large corporations and 20% for small and medium enterprises (SMEs).
Minimum Corporate Income Tax (MCIT): Imposed on corporations if their income tax due is lower than 2% of gross income, effective starting the fourth taxable year of operation.
Withholding Tax: Corporations are required to withhold taxes on certain payments to individuals and businesses.
Percentage Tax: Certain non-VAT-registered corporations are subject to percentage taxes.
Documentary Stamp Tax (DST): Corporations are liable for DST on certain transactions, such as issuance of shares.

Conclusion

Corporations in the Philippines are governed by the Revised Corporation Code, which lays down the principles of separate legal personality, limited liability, centralized management, and other essential aspects of corporate law. Corporate governance is also enhanced through stricter rules on board composition and minority shareholder protection. Corporate taxation remains a vital part of corporate responsibilities, with various taxes applicable to domestic and foreign corporations. Understanding these general principles is critical for establishing, operating, and managing corporations in the Philippines.