5.

1: Sole Proprietorship
Sole Proprietorship
Definition
- Can be established by just one person (sole proprietor)
- Extension of yourself so the assets and liabilities of your business are also your own assets and
liabilities
- You and your business are one
- No legal distinction between the owner and the business
- Brings simplicity to establishing and operating such kind of business organization
- Tax identification number of the proprietor will be used for the business
Advantages
- Simplicity in creation
- Efficient decision making
- Less paperwork
- No double taxation
- Ease of dissolution
Disadvantages
- Business liabilities are also personal liabilities
- All personal assets would also be business assets
- Death terminates the business
- Business value will be subject to estate tax
- There is no chance for participation of others

5.2: Partnership
Partnership
Definition
- “By the 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.”
Prerequisites before forming a partnership
- There must be at least 2 or more persons; Partnership cannot be formed by one person alone
- Parties must agree in a contract (Consent, object and cause)
- Persons must have contributed money, property or industry or a combination of these into a
common fund
- Partners can each give money, or one can give money as his/her share while the other
can let the partnership use his/her building, and another can contribute his/her know-how
- Purpose of forming the partnership is for them to earn money from an activity and divide the profit
among themselves
- Apart from profit-seeking activities, the only other activity allowed would be to exercise a
profession (e.g. accounting or law practice)
- Activity that the partnership will engage in must be lawful and allowed by law
Partnerships are recorded with the Securities & Exchange Commision (SEC)
- SEC: National government regulatory agency
When is a written and notarized contract of partnership required?
- Capital contributed exceeds PHP 3000 whether in money or property
- Capital contributed involves immovables or real rights are contributed
Partnership is a separate juridical entity from the partners
- Even if partnership is not registered with the SEC, it still has a separate juridical personality
- Registration is to give notice to third persons
 - Partnership can acquire its own property, bring actions in court in its own name and incur its own
liabilities and obligations
- Before a partner in a partnership receives his/her share in the partnership earnings or before a
shareholder in a corporation receives his/her dividends, the income earned is first taxed at the
“entity-level”
- The partnership is treated by the law as a person whose income is taxed
- When the income is further distributed to the partner/shareholder, the individual is taxed
again
Delectus personae
- Unless otherwise agreed, all partners are considered agents of each other
- Whatever any individual partner may do alone will bind the entire partnership
- Except when respective duties of partners have been agreed upon, or if it has been
stipulated that a partner shall act only when the others have given consent
- Partners must all trust each other because any one of them can bind the partnership under any
contract
- Important to include in partnership agreements the process for approval for any partnership
action
- Partnership approvals must be obtained for major contracts (e.g approvals of board of
directors in corporations)
- Act of a partner which is not apparently for the carrying on of the business of the partnership does
not bind the partnership unless authorized
Different kinds of partners
- Equity/Capitalist partners: Partners who invest money into the partnership
- Industrial partners: Put in industry or contributes their services
- General partners: Have unlimited liability for the debts and obligation of the partnership
Distribution of profit/loss
- Distributed in conformity with the agreement of the partners
- If there is no agreement, the share of each partner will be done in proportion to what each partner
may have contributed
Liability in partnership
- Partnership liability is first to be satisfied out of the partnership’s assets
- If after all partnership assets have been exhausted and there is remaining balance, all partners
are liable pro rata with all their property for the payment of the remainder
- Partners cannot agree to exempt anyone from this and any stipulation against this liability is void
except amongst partners
Limited Partnerships
- Kind of partnership where one of the partners (Limited partner) is not liable for the losses or
liability of the partnership
- Prerequisites
- Must have at least one general partner
- Limited partner will not be liable for losses and liabilities beyond their contribution
- When the assets of the partnership are no longer sufficient to pay off liabilities,
the limited partner can no longer be held liable to pay from his personal assets
- General professional partnerships (e.g. law firms): Limited partnerships are
disallowed
- If the limited partner takes control of the business, he/she becomes a general partner
- If the limited partner is also an industrial partner, he/she receives a share in profit that is
just and equitable
 - If besides his/her services, the limited partner has contributed capital, he/she is
also entitled to receive a share in the profits in proportion to the capital provided
Advantages of partnership
- Ease in creation (except if falling under the written public instrument requirement)
- Not subject to regular reportorial requirements of corporations
- Ability to own property, undertake business and sue and be sued under a separate personality
- Limited ability of partners to segregate personal from business assets
- Ability to select partners
Disadvantages
- Unlimited personal liability of partners with their personal property in case partnership assets are
not sufficient to cover the partnership liabilities
- Double taxation of partnership income (Partnership then Partners)
- Difficulty in assigning partnership rights
- Existence of partnership is contingent on the partners remaining in the partnership
Note
- If a partners leaves the partnership, the partnership is dissolved
- Remaining partners will have to come up with new partnership articles and refile the
same with the SEC

5.3: Corporation
Corporation
Definition
- An artificial being created by operation of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or incidental to its existence
Separate juridical personality from stockholders and is considered a “person” under the law
- Not liable for the debts of stockholders and vice versa (Rule: Stockholder can only lose up to the
extent of his/her investment)
- Corporations can own property separate from the stockholders
- Contracts validly entered into on behalf or in the corporation’s name create rights and liabilities
only for the corporation
- A corporation cannot bring a suit on behalf of a stockholder
- The opposite is not always the case such as in derivative suits
- The corporation is not changed by the change in identities of its stockholders
Piercing the veil of corporate fiction
- Definition: Separate juridical personality is disregarded by the courts if the corporation is used for
fraudulent or illegal purposes
- Individual stockholders can be held liable for the acts of the corporation
- 3 Basic Instances
- When the separate and distinct corporate personality defeats public convenience, as
when the corporate fiction is used as a vehicle for the evasion of an existing obligation;
- In fraud cases or when the corporate entity is used to justify a wrong, protect a fraud or
defended a crime; or
- Is used in alter ego cases (e.g. where a corporation is essentially a farce) since it is a
mere alter ego or business conduit of a person or where the corporation is so organized
and controlled and its affairs so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation
How do you form a corporation?
- Any person, partnership, association or corporation, singly or jointly with others but not more than
15 in number may organize a corporation for any lawful purpose/s
 - Natural persons who are licensed to practice a profession and partnerships or associations
organized for the purpose of practicing a profession shall not be allowed to organize a corporation
unless otherwise provided under special laws
- Incorporators who are natural persons must be of legal age
- Each incorporator must own/subscribe to at least 1 share of the capital stock
- Stock Corporation: Has capital stock divided into shares and is authorized to distribute part of the
profits to its shareholders in the form of dividends
- Non-stock Corporation: No part of its income is distributed as dividends to members, trustees or
officers
- Usually formed for charitable, religious, educational, professional, cultural, fraternal,
literary, scientific, social, civic, or similar purposes
Corporate Powers
- Sue and be sued in its corporate name
- Have perpetual existence unless the certificate of incorporation provides otherwise
- To adopt and use a corporate seal
- To amend its articles of incorporation in accordance with the provisions of this Code
- To adopt bylaws, not contrary to law, morals or public policy and to amend or repeal the same in
accordance with this Code
- In case of stock corporations: To issue or sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a
nonstock corporation
- To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise
deal with such real and personal property, including securities and bonds of other corporations,
as the transaction of the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the constitution
- To enter into a partnership, joint venture, merger, consolidation, or any other commercial
agreement with natural and juridical persons
- To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no foreign corporation shall give
donations in aid of any political party or candidate or for purpose s of partisan political activity
- To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers,
and employees
- To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation
- A corporation can only do the business for which it was organized
- Ultra vires: Violating the primary purpose of the business
Corporation can act only through its board of directors or trustees
- Unless otherwise provided, the corporate powers of all corporations shall be exercised, all
business conducted and all property of such corporations controlled and held by the board of
directors or trustees
- Board is the governing body
- Stockholders elect the board, but they cannot bind the corporation by its acts
- Once elected, directors are not directly controlled by the stockholders who only have
indirect control of the corporation through their votes
- Shareholder resolution repudiating a board act is ineffective
- Some corporate acts would need both majority board approval and approval of the stockholders
representing at least ⅔ of the outstanding capital of the corporation
- Applies to extraordinary acts, like selling all or substantially all of the corporation’s assets,
increasing/decreasing capital stock, or declaring stock dividends
One Person Corporations
- Corporation with a single stockholder
- Banks, insurance and publicly-listed companies may not incorporate as an OPC
- Natural person who is licensed to exercise a profession may not organize as an OPC for the
purpose of exercising such a profession
- OPC vs. Sole proprietorship
- OPC: Assets are considered distinct from assets of the single stockholder
- OPC: Has a separate juridical personality
- Single stockholder shall have the burden to prove that the OPC is adequately
financed a and that the property of the OPC is independent of the stockholder’s
personal property
- Otherwise, the stockholder shall be jointly and severally liable for the
debts and other liabilities of the OPC
- Features
- Single stockholder (Natural person, trust or estate)
- Personality separate and distinct from the single stockholder
- Stock corporation
- Perpetual or specific term, and can change its term from perpetual to specific and
vice-versa
- No minimal capital
- Must indicate OPC below or at the end of its corporate name
- Need not file bylaws
- Can be converted to an ordinary stock corporation and vice-versa
- Single stockholder is the sole director and president
- Single stockholder cannot be the secretary but can be the treasurer
- If also the treasurer, they must put up a surety bond with the SEC
- Single stockholder is required to designate a nominee and alternate nominee
- Will take over the oPC in case of the single stockholder’s incapacity
Advantages of a corporation
- Strong legal personality
- Separation of corporate assets and liabilities from shareholders
- Continued existence despite change in ownership
- Transferable ownership
- Clearly defined management
Disadvantages
- Potential conflict of interest among shareholders
- Difficulty and higher costs of organizing and maintaining a corporation
- Rule of majority can hamper minority rights
- Double taxation

5.4: Cooperative
Cooperative
Definition
- Autonomous and duly registered association of people with a common bond of interest, who have
voluntarily joined together to achieve their social, economic and cultural needs and aspirations
- Done by making equitable contributions to the capital required, patronizing their products and
services and accepting a fair share of the risks and benefits of the undertaking in accordance with
universally accepted cooperative principles
 - Voluntary organizations, open to all persons able to use their services and willing to accept the
responsibilities of membership without discrimination
- Democratic organizations that are controlled by their members who actively participate in setting
their policies and making decisions
- Members contribute equitably to and democratically control the capital of their cooperatives
- Cooperatives shall provide education and training for their members, elected and appointed
representatives, managers and employees so that they can contribute effectively and efficiently to
the development of their cooperatives
Types
- Credit Cooperative: Promotes and undertakes savings and lending services among member
- Generates a common pool of funds in order to provide financial assistance and other
related financial services to its members for productive and provident purposes
- Consumer Cooperative: Primary purpose is to procure and distribute commodities to members
and non-members
- Producers Cooperative: Undertakes joint production whether agricultural or industrial
- Formed and operated by its members to undertake the production and processing of raw
materials/goods produced by members into finished or processed products for sale by
the cooperative to its members and non-members
- Any end product or its derivative arising from the raw materials produced by its members,
sold in the name of and for the account of the cooperative, shall be deemed a product of
the cooperative and its members
- Marketing Cooperative: Engages in the supply of production inputs to members and markets their
products
- Service Cooperative: Engages in medical and dental care, hospitalization, transportation,
insurance, housing, labor, electric light and power, communication, professional and other
services
- Multiple-Purpose Cooperative: Combines 2 or more of the business activities of these different
types of cooperatives
- Advocacy Cooperative: Primary cooperative which promotes and advocates cooperativism
among members and the public through socially-oriented projects, education and training,
research and communication, and other similar activities to reach out to beneficiaries
- Agrarian Reform Cooperative: Organized by marginal farmers majority of which are agrarian
reform beneficiaries for the purpose of developing an appropriate system of land tenure, land
development, land consolidation or land management in areas covered by agrarian reform
- Cooperative Bank: Organized for the primary purpose of providing a wide range of financial
services to cooperatives and their members
- Dairy Cooperative: Members are engaged in the production of fresh milk which may be
processed and/or marketed as dairy products
- Education Cooperative: Organized for the primary purpose of owning and operating licensed
educational institutions
- Electric Cooperative: Organized for the primary purpose of undertaking power generation,
utilizing renewable sources, including hybrid systems, acquisition and operation of sub
transmission or distribution to its household members
- Financial Service Cooperative: Organized for engaging in savings and credit services and other
financial services
- Fishermen Cooperative: Organized by marginalized fishermen in localities whose products are
marketed either as fresh or processed products
- Health Services Cooperative: Organized for the primary purpose of providing medical, dental and
other health services
 - Housing Cooperative: Organized to assist or provide access to housing for the benefit of its
regular members who actively participate in the savings program for housing
- Co-owned and controlled by its members
- Insurance Cooperative: Engaged in the business of insuring life and property of cooperatives and
their members
- Transport cooperative: Includes land and sea transportation, limited to small vessels as defined or
classified under the PH maritime laws
- Water Service Cooperative: Organized to own, operate and manage waters systems for the
provision and distribution of potable water for its members and their households
- Workers Cooperative: Organized by workers, including the self-employed, who are at the same
time the members and owners of the enterprise
- Principal purpose: Provide employment and business opportunities to its members and
manage it in accordance with cooperative principles
- Other types: May be determined by the Cooperative Development Authority

6: Tax
Income Tax
Taxable Entities
- Resident Citizens: Citizens whose residence is within the Philippines
- Non-Resident Citizens: Citizens whose residence is not within the Philippines
- Overseas Contract Workers: Individuals registered with the POEA as a valid holder of an
Overseas Employment Certificate that holds a job outside the Philippines which requires their
physical presence in that foreign country where their salaries originate
- Resident Alien: Individuals whose residence is within the Philippines and are not citizens thereof
- Non-Resident Alien: Individuals whose residence is not within the country but are temporarily in
the country and are not citizens thereof
- Domestic Corporations: Corporations which are incorporated in the Philippines
- Foreign Corporations
- Resident Foreign Corporations: Corporations incorporated abroad but have a license to
do business in the Philippines
- Non-Resident Foreign Corporations: Corporations which are incorporated abroad and
does not have a license to do business in the Philippines
Taxable Entities that are taxable on income derived from all sources
- Resident Citizens
- Domestic Corporations
Taxable Entities that are taxable on income derived from the Philippines only
- Non-Resident Citizens
- Overseas Contract Workers
- Resident Alien
- Non-Resident Alien
- Foreign Corporations
Gross Income: All income derived from whatever source
- Sources:
- Compensation for Services
- Business Income
- Gains derived from dealings with property
- Interests
- Rents
- Royalties
 - Dividends
- Annuities
- Prizes and Winnings
- Pensions
- Partner's Distributive Share from the net income of the General
- Professional Partnership
- Standard Formula (Graduated Income Tax)
-
Gross Income

Less: Deductions

Taxable Income

Multiplied by applicable Tax Rate

Tax Due
- Deductions in general
- Amounts allowed by the law to reduce the Gross Income to taxable income
- Deductions are allowed to all individuals except those who earn compensation income
arising from personal services rendered under an employer-employee relationship
- 2 ways of claiming deductions
- Optional Standard Deduction
- Itemized Deduction
- Ordinary and necessary expenses paid or incurred during the taxable
year in connection with the trade, business or profession, including raw
materials, supplies and direct labor
- Wages and other forms of compensation for personal services actually
rendered, including the grossed-up monetary value of fringe benefits and
travel expenses incurred in the pursuit of the trade or profession
- Business rentals
- Interest paid or incurred within a taxable year in connection with the
conduct of a taxpayer’s profession, trade or business, less an amount
equal to a certain percentage of the interest income subject to final tax
- Entertainment, amusement, and recreation expenses, not to
- exceed the following ceilings:
- 0.50% of net sales for taxpayers engaged in sale of goods or
properties
- 1% of net revenue for taxpayers engaged in sale of services,
including professionals and lessors of properties
- Taxes
- Losses
- Bad debts
- Depreciation
- Charitable and other contributions, subject to certain
- limitations
- Research and development (R&D) expenditures
- Optional Standard Deduction
 - In lieu of Itemized Deduction, a taxpayer may elect a standard deduction
in an amount not exceeding 40$ of his gross sales or gross receipts
- Non-resident aliens cannot avail of optional standard deduction
Business Income
- Gross income derived from the conduct of trade or business of the exercise of a profession
- Total Sales, Less: Cost of Good Sold, Add: all Income from incidental and outside
sources, Gross Income
Withholding Tax
Considered as an effective tool in the collection of taxes for the ff:
- It encourages voluntary compliance
- It reduces cost of collection effort
- It prevents delinquencies and revenue
- loss
- It prevents dry spell in the fiscal conditions of the government by providing revenues throughout
the taxable year
Persons required to withhold taxes
- Individuals engaged in business or practiced of profession
- Non-individuals (corporations, associations, partnership, cooperatives) whether engaged in
business or not
- Government agencies and its instrumentalities (National Government Agencies (NGAs),
Government-owned or Controlled Corporations (GOCCs), Local Government Units including
Barangays (LGUs)
Withholding Agent
- Any person or entity who is in control of the payment subject to withholding tax and therefore is
required to deduct and remit taxes withheld to the government
Classification
- Creditable withholding tax
- Compensation: Tax withheld from income payments to individuals arising from an
employer-employee relationship
- Expanded: Kind of withholding tax which is prescribed on certain income payments and is
creditable against the income tax due of the payee for the taxable quarter/year in which
the particular income was earned
- Withholding Tax on GMP - Value Added Taxes: Tax withheld by National Government
Agencies and instrumentalities before making any payments to VAT registered
taxpayers/suppliers/payees on account of their purchases of goods/services
- Withholding Tax on Government Money Payments - Percentage Taxes: Tax withheld by
National Government Agencies and instrumentalities before making any payments to
non-VAT registered taxpayers/suppliers/payees
- Final Withholding Tax: Prescribed on certain income payments and is not creditable
against income tax due of the payee on other income subject to regular rates of tax for
the taxable year
- Income tax withheld constitutes the full and final payment of the Income Tax due
from the payee on the particular income subjected to final withholding tax
Value-Added Tax
Definition
- Tax on consumption
- Indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee
of the goods, properties or services
- Tax is based on the “value” added at each stage of the supply chain
 - Any person who imports goods whether or not made in the course of his trade or business
Imposed on any person who in the course of his trade/business:
- Sells, barters, exchanges, leases goods or properties, renders services
Basic VAT Computation
- Gross Selling Price + 12% of GSP = Invoice Price
- GSP includes costs and expenses for producing the product/service including VAT paid to
suppliers
- Input VAT: Reflected in receipts and which you paid for as the seller
- Output VAT: Paid by your customer that you collected
- If at the end of any taxable quarter
- the output tax exceeds the input tax, the excess shall be paid by the VAT-registered
person.
- [If OT > IT, there is a VAT payment due]
- If the input tax exceeds the output tax, the excess shall be carried over to the succeeding
quarter or quarters
- [If IT > OT, there is no VAT payment due]
Payment and Filing
- Under the TRAIN law, all filing and payment will all be done quarterly (within 25 days after end of
the quarter)
Effect of VAT Zero-Rating
- A zero-rated sale by a VAT-registered person is a taxable transaction for VAT purposes, but shall
not result in any output tax
- Input tax on the purchases of goods, properties or services related to such zero-rated
sale shall be available as tax credit or refund
- As a result, the taxpayer recognizes only input taxes; there are no output taxes from the
transaction
What are these Zero-rated Sales/services
- Export sales
- Sales to persons or entities whose exemption under special laws/international agreements to
which the Philippines is a signatory effectively subjects such sales to zero rate
- Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines, which goods are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the
BSP
- Services other than processing, manufacturing or repacking rendered to a person engaged in
business conducted outside the Philippines or to a nonresident person not engaged in business
who is outside the Philippines when the services are performed, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the BSP
- Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services
to zero percent (0%) rate
- Services rendered to persons engaged in international shipping or air transport operations,
including leases of property for use thereof
- Services performed by subcontractors and/or contractors in processing, converting, or
manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of the
total annual production
- Transport of passengers and cargo by domestic air or sea vessels from the Philippines to a
foreign country
 - Sale of power or fuel generated through renewable sources of energy
VAT Exemption
- Sale of goods or properties and/or services and the use of lease of properties that is not subject
to VAT and the seller is not allowed any tax credit of VAT on purchases
- Person making the exempt sale of goods, properties or services shall not bill any output tax to his
customers because the said transaction is not subject to VAT
- Common exempt transactions
- Read the PPT
- VAT Exemption under the CREATE Law
- Sale or distribution, importation, printing, or publication of any educational material
covered by the UNESCO agreement including digital and electronic format
- All drugs, vaccines, and medical devices prescribed and used for the treatment of
COVID-19
- Capital equipment, its spare parts, and raw materials for the production of personal
protective equipment for COVID-19 prevention
- Drugs for the treatment of COVID-19 approved by the FDA for use in clinical trials,
including raw materials directly necessary for the production of such drugs
- Sale of prescription drugs and medicines for cancer, mental illness, tuberculosis,
diabetes, high cholesterol, hypertension, and kidney disease (beginning January 1, 2021
instead of January 1, 2023)