LEGAL ASPECTS IN

TOURISM & HOSPITALITY

Chapter 2
TOURISM AND HOSPITALITY AS A TRADE
 Objective
Deal with the compliance in the requirements of the law on business organization
 A. FORMS OF BUSINESS
ORGANIZATION
1. Sole Proprietorship
2. Partnership
3. Corporation
1. Sole Proprietorship
A sole proprietorship is the simplest and most common structure chosen to start a
business.

• It is an unincorporated business owned and run by one individual with no

distinction between the business and you, the owner.

• You are entitled to all profits and are responsible for all your business’s debts,
losses and liabilities.
• In this form of business, the owner is in command of his whole business and stands
to lose as much as he puts in and even more to the extent of all his personal
holdings.

• The establishment, operations and management of this form of business

organization is not governed by a special law as compared to partnership and
corporation.

• If this form of business is confronted by some legal issues and disputes, the
proprietor can use the general laws prevailing civil obligations and contracts in the
business and commercial transactions.
• Having the power to control the whole management of the business, the sole
proprietor has limitless liability since his assets and property maybe proceeded by
the creditors.

• The law does not make any difference between the personal affairs of the
proprietor and his business interest.

• Before the eyes of the law, they are one and the same, the business is being an
extension of his being.
• The aliens are generally not restricted to form a single proprietorship business in
the Philippines.

• However, in instance that they will not be permitted to form single proprietorship
business in a precise industry, they are not stripped to have business venture
through other forms of business such as corporation, partnership or joint venture.

• Registration of a sole proprietorship business in the Philippines involves a very

simple procedure wherein the Department of Trade and Industry through the
Bureau of Trade Regulations and Consumer Protection will just have to issue the
registration of the applicant.
 2. Partnership
• By contract of partnership, 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.
• Two or more persons may also form a partnership for the exercise of profession. (Article
1767, Civil Code of the Philippines).

• Partnership has a juridical personality separate and distinct from each of the partners,
even in the case of failure to comply with the requirements of Art 1772 (Article 1768).

• It is required to operate under a firm name in order to manifest this juridical personality.
(Art. 1815 CC). With their separate property, partners (except in limited partnership) are
personally liable pro rata for the debts of the partnership. (Art 1813,
Forms of Partnership
1. General Partnership – It is a basic form of partnership in which all other
partners manage the business and are personally liable for its debts.

2. Limited Partnership- in this form of partnership, certain limited partners

relinquish their ability to manage the business in exchange for limited liability
for the partnership’s debts.

3. Limited Liability Partnership – in this form of partnership, all partners have

some degree of limited liability.
Types of Partners
1. General Partners – they have an obligation of strict liability to third parties
injured by the partnership. Joint liability or joint and several liability may be
imposed depending upon circumstances.

2. Limited Partners – the liability of limited partners is limited to their investment

in the partnership.

3. Silent Partners – partners who usually provide capital to the business. They still
share in the profits and losses of the business, but they are uninvolved in the
management, and/or whose association with the business is not publicly known.
Notes:
1. Money means legal tender;
2. Property pertains to the real or personal acceptance to all the
partners;
3. Industry involves human faculties as intellectual or physical
traits
4. Common fund pertains to all contributions made by the
partners that will be pooled together as one capitalization of
the partners for the usage, common benefit and interest of the
partners;
5. There is intent to divide the profit among them
6. Partnership must be dissolve upon the death of one of its
general partners.
7. A partnership is taxed like a corporation.
8. A foreigner cannot be a partner in a partnership which owns
land.
9. The word “Limited” or “Ltd” must be added to the partnership
name in the case of limited partnership.
10. There is a need for the Philippine Embassy or Consulate to
authenticate the documents signed outside the Philippines.
Nature of Partnership

• Partnershipis fiduciary in character. It means that all

partners must have trust and confidence in one another.

• It
is not ideal to organize a partnership with people
whom you do not know or whom you cannot give your
complete trust and confidence.
Delectus Personae
• Inpartnership, a person has the right to choose
the person or persons he wants to become his
partner/s, taking into consideration such sterling
qualities as honesty, integrity, and more
importantly are trust and confidence.
Essential Elements of Partnership
1. Valid and voluntary contract to become partners.

The persons forming the partnership must be capacitated to enter into a contractual
relationship. Likewise, the contracting parties must give their free and voluntary will to
become partners.

2. Contributions of money, property or industry to the common fund, to be used

exclusively for the common interest and benefit of the partnership.

3. It must be an association for profit, with the intention of dividing the profits among
themselves.
4. The partners must be mutual agents of each other. As an agent of his co-
partners, a partner can enter into a contract and bind the partnership, provided
he is acting within the scope of his authority and for the best interest of the
partnership.

5. Lawful purpose

6. Articles of Partnership must not be kept secret.

7. Juridical personality, separate and distinct from the individual personality of

each partner. This is acquired by the partnership once it is legally established.
Art 1772
• Everycontract of partnership, having a capital of P3, 000 or
more in money or property, shall appear in public instrument,
which must be recorded in the Office of Securities Exchange
Commission.

• Failure
to comply with the requirements of the preceding
paragraph shall not affect the liability of the partnership and the
members thereof to third persons.
3. Corporation
• Under Sec. 2 of the Batas Pambansa 68, otherwise
known as the Corporation Code of the Philippines,
corporation was defined as an artificial being created by
operation of law, having the right of succession and
powers, attributes and properties expressly authorized
by law or incident to its existence.
Based on the definition provided by the law, it can be deducted that a corporate
form of business has the following attributes:

It is artificial being

It is created by operation of law

It has the power of succession

It has the power, attributes and properties expressly authorized by law or incident
to its existence
• Artificial being pertains to the fiction of law which creates the person of the
corporation. By operation of law, it becomes a being with the attributes of
an individual with full capacity to enter into contractual relations. It is a
legal or juridical person with a personality separate and distinct from its
individual members.

• Creature of law on the other hand pertains to the juridical existence of a

corporation which is dependent on the consent or grant of the sovereign.
From a strict legal point of view, a corporation cannot come into being by
mere consent of the parties; there must be a law granting it. Once granted,
it forms the primary franchise of the corporation.
• It
must be given emphasis also that there must be first an underlying
contract among the individuals forming the corporation upon which
the state grant may be conferred.

• Another important attribute of a corporate form of business is the

right of succession. This pertains to the capacity for continuous
existence despite the death or replacement of its shareholders or
members, for it has a personality separate and distinct from those
who compose it.

• The strong legal personality of the corporation is an attribute that has

made it most attractive to businessmen when compared to other
media.
 Advantages of Corporate Form of Business
Strong Legal Personality

The corporation has legal capacity to act and contract as a distinct unit in its own name. it has
continuity of existence. As distinguished from partnership, it has a strong legal personality having
separate and distinct personality from the members composing it, unaffected by death, resignation or
insolvency of any of its stockholders or members.

Limited Liability to Investors

One of the advantages of a corporate form of business organization is the limitation of an investor’s
liability to the amount of the investment. This feature flows from the legal theory that a corporate
entity is separate and distinct from its stockholders.
Free Transferability of Units of Investment

In a corporate setting, as a general rule, the shares of stocks can be transferred without the consent
of the other stockholders. This would assure investors of a ready mechanism to dispose of their
investments when their personal or financial situation may require it and therefore places more
liquidity in the corporate setting and would better encourage investors to channel their investment
through corporate vehicles.

Centralized Management

Corporation management is centralized in the board of directors. Shareholders are not agents of
the corporation, nor can they bind the corporations. Unlike in the partnership setting, each partner
may bind the partnership even without the knowledge of the other partners. Therefore in its legal
relationship, a corporation presents more stable and efficient system of governance and dealings
with third parties, since management prerogatives are centralized in its Board of Directors.
 Advantages over the unregistered Associations
1. It enjoys perpetual succession under its corporate name and in an
artificial form
2. It has the capacity to take and grant property, and contract
obligations.
3. It can sue and be sued in its corporate name as a juridical person.
4. It has the capacity to receive and enjoy common grants of privileges
and immunities
5. Its stockholders or members generally have no personal liability
beyond the value of their shares
Disadvantages of Corporate Form

• In
corporation, the control belongs to the Board of Directors.
There is also a limited liability on the part or shareholders.

• On the contrary, the owner in the sole proprietorship is in

command of the whole business and stands to lose as much as
he puts in and even more to the extent of all his potential
holdings.
Distinction between Corporation and Partnership as to
Legal Capacity
 Corporation has a stronger legal personality, enabling it to continue despite the death,
insolvency or withdrawal of any of its stockholders or members.

 Partnership, the withdrawal, death or insolvency of any partners would automatically bring
about the dissolution of partnership.

 Limited liability is the main feature in a corporate setting whereas partners are liable
personally for partnership debts not only to what they have invested in the partnership but
even as to their other properties.

Generally, every partner is an agent of the partnership, and by this sole act, he can bind the
partnership.
Nationality of Corporation
There are two tests to identify the nationality of a corporation.

1. Place of Incorporation Test – the principal doctrine on the test of nationality of

corporation in the Philippines. It adheres to the belief that a corporation is a
nationality test of the country under whose laws it has been organized and
registered.

2. Control Test adheres that the nationality of the corporation is determined by

the nationality of the majority of the stockholders on whom the control is
vested.
Classifications of Corporation in Relation to
the State
Corporation in relation to the state may be classified into the following:

1. Public Corporations – are those formed or organized for the government of a

portion of the State.

2. Private Corporations – are those formed for some private purpose, benefit or
end.

3. Quasi-public Corporation – is a cross between private corporations and public

corporation.
Classifications of Corporation as to the Place of
Incorporation

Corporation may be classified as to the place where they were incorporated

Domestic Corporation – this kind of corporation obtained personality through

incorporation under the Philippine laws

Foreign Corporation – is licensed by SEC to do business in the Philippines under

the principle of RECIPROCITY, after securing a certificate of authority from the
Board of Investments under EO 226 or the Omnibus Election Code and after
complying with the conditions for issuance of the license or application forms,
structural organizations and capitalization.
The reasons for this are:

a. To place them on equality with domestic corporations

b. To subject them to inspection so that their condition may be
known
c. To protect the residents of the state doing business with them
by subjecting them to the courts of the state.
Classifications of Corporation as to Stock

Stock Corporation – private corporations which have capital

stock divided into shares and stockholders are entitled to their
shares of dividends or allotment of the corporate surplus profits
based on their stockholdings or subscriptions.

Non-stock Corporation – these are corporations which do not

issue stocks and are composed of members, not stockholders.
They maybe civic, charitable, religious or professional
organizations.
Other Kinds of Corporation
1. De Jure Corporation – corporation which complied with the requirements of
the law
2. De Facto Corporation – those who failed to comply with one or two legal
requirements of the law
3. Corporation Sole – composed of one member or corporator and generally
applies to religious denominations
4. Close Corporation – usually owned and managed by a family. All the
outstanding stocks are owned and managed by a family; stocks are not open for
public subscription
5. Open Corporation – all members or corporations exercise their right to vote to elect
the directors and other officers of the corporation; the stocks are open for public
subscription.
6. Eleemosynary Corporation- established for charitable purposes
7. Ecclesiastical Corporation – established for religious purposes
8. Lay Corporation – established for any purpose other than religion
9. Corporation Aggregate – composed of one member or corporator
10. Corporation by Estoppel – a kind of corporation wherein members assume to act as
corporation despite the knowledge of the non-existence of corporate personality. In
this case all the persons involved will be liable as general partners.
11. Multi National Corporation – a corporation organized in one state or country but
extends its corporate business in other territories or countries.
Powers of Corporation

• The powers of corporation can either be:

Expressed – if the corporation can perform functions stipulated in the Bylaws,

Corporation Code and such statutes pertinent to the corporations.

Implied – the power is inherently necessary in the exercise of its corporate

function in the pursuit of its corporate existence.
 Different Corporation Doctrines
1. Doctrines of Piercing the Veil of Corporate existence – it is a general principle under the law
that a corporation has a personality which is separate and distinct from its members.

2. Doctrines of Business Opportunity – this doctrine refers to the case when a director or
officer of the corporation is presented with a business venture which can be profitably
handled by the corporation. He must give that business opportunity to the corporation, he
shall be held liable to refund to the corporation whatever profits and benefits he may have
derived from such business opportunity.

3. Trust Fund Doctrine – when the directors of the solvent or insolvent corporation distribute
all corporate assets to the stockholders without reserving any assets for payment of
corporate debts and liabilities. The directors or officers, together with stockholders who
received the assets, are considered trustees and the corporation and creditors can recover
from the stockholders. Such corporate assets they received shall be sold at public auction for
the settlement of corporate liabilities.
Distinction between Corporators and Incorporators
Corporators

• These are the total number or persons who compose the corporation after its
formation which include the incorporators, the stockholders and/or members.

Incorporators, stock or non-stock

• They must be natural persons. A juridical person cannot be an incorporator. The

law provides that the incorporators must be at least five (5) but not more that
fifteen (15)
Registration Requirements in Business
Pertinent to the Hospitality Industry
• Promotion of the different tourist destinations in the country may be well settled
through the opening of various businesses well supported by the respective local
government units and in coordination with the Department of Tourism.

• In making the said mandate possible, the regulatory power of the State, through
licensing of the businesses may be used.

• In this regard, the public in general (local and foreign tourists) may be assured of
quality service from the hospitality industry, and in effect, and additive of tourist
attractions.
• Licensing is very important in the operation of any business in the country.

• License is mandated to be displayed in a conspicuous place within the vicinity of

any business establishment, guaranteeing the public that the business wherein
they are the clientele is not nuisance, and is legitimately operated.

 SEC (Securities and Exchange Commission) – partnerships and corporations

 DTI (Department of Trade and Industry) – single proprietorship

 Board of Investments – if you would like to avail of the incentives provided under
Executive Order 226 or the Omnibus Investment Code
• Registration is also needed if you would like to avail of the incentives of the
following Investment Promotion Agencies:

 PEZA – Philippine Economic Zone Authority

 CDC – Clark Development Corporation

 Cagayan Economic Zone Authority

 Phividec Industrial Authority

 Zamboanga Economic Zone Authority

• BSP (Bangko Sentral ng Pilipinas)- The registration of foreign investments for the
purpose of capital repatriation and profit remittances.

• Before a business can be fully operated, it is a must that they secure the following:

 TIN ( Tax Identification Number) – under the BIR

 Local clearance/ business permit – for firms in Metro Manila, under MMDA/
Baranggay/City or Municipal Offices
 SSS number – under SSS

 Government health care – Philhealth

 Electric connection – Meralco/Ormeco

 Water services – Maynilad/Calapan Waterworks

 Telephone services – Telecom Companies