Atty. Gregorio B. Austral, CPA
A shield against unlimited liability
One of the most common problems an entrepreneur faces is the lack of shield or protection of his non-business assets from the liabilities he may incur in doing business under the sole proprietorship setup.
Corporations enjoy the legal fiction of having a separate juridical personality from those individuals who compose the corporation as stockholders. Thus, the assets and liabilities of the corporation are treated as separate and distinct from the liabilities of its stockholders, and vice-versa. Under the doctrine of separate juridical personality, a stockholder is liable for corporate debts and other liabilities up to the extent of his investment in the corporation. A stockholder’s assets are beyond the reach of corporate creditors for the payment of its liabilities. Thus, a veil of corporate fiction is created by law.
The limited liability feature of a corporation makes it an attractive choice for investors. However, some features of the old corporate law make investors uncomfortable with the mandated configuration such as the requirement to have at least five incorporators and at least five members of the Board of Directors. So, when businessman A who can afford to provide the needed capital for the business but who wants to avail of the limited liability advantage in a corporation, will be forced to get four (4) other people as incorporators who are requested to be an incorporator for compliance purposes. At this point, A may still have control of his business because he can design the corporation in such a way that he holds the majority of the shares in the corporation while the rest will hold nominal shares. At least during stockholders’ meeting, matters are decided based on the number of shares. However, since the law requires that the Board of Directors must be composed of at least five (5) members, A may have a problem of corporate control since the individual members of the Board will be entitled to one vote each on matters to be decided by the Board. This is a situation where most investors become wary about putting money into a corporation which they cannot control.
Thanks to Republic Act No. 11232 which relaxes several requirements in the formation and registration of corporations. The new Corporate Code now allows the formation of a corporation by a single person or one stockholder. Decisions can now be made with dispatch since the investor can make decisions without having to resort to the formalities and legal requirements of a board meeting. While decisions can be made quickly, the lone stockholder can now enjoy a greater protection by limiting his liability to the corporate entity.
The new Corporation Code has several other new features making this type of business organization a preferred choice in doing business. It is hoped that this law will usher in more investments in the country.