CHAPTER XII

ORGANIZING A CORPORATION
The most complicated form of business organization used all over the world is
a corporation.
It is not only used for business but also in social clubs, churches,
municipalities, government instrumentalities, educational institutions, charitable
institutions, fraternities and many others
Most of the businesses in the country are in the form of corporations. The
total capital invested in corporate business in the Philippines has greatly
outweighed its importance among all other forms of business organizations. The
corporate business int he Philippines was introduced by the Americans in the turn
of the 19th century which changed the Spanish form of business organization, the
sociedad anonima, This came about by the passage of an Act. No. 1459. In April 1,
1906, the corporation Law of the Philippines as amended took effect. This was a
general law permitting the creation of corporations in the country. This law was
later change in 1980 by Batas Pambansa Bilang 68, which is now known as
Corporation Code of the Philippines.
The corporate name should not be the same with any registered entity. The
reason behind it is to avoid confusion and possible fraud or misrepresentation to
be committed.
The following are rules pertinent to corporate names:
1) The word INC should be added to the firm unless the word Corporation is
already included.
2) Banking institution should always include the words bank, banking,
commercial bank, trust and company savings bank, and building and loan
association in its firm name.
3) Only a duly licensed warehouse can include the word bonded in its firm
name.
Stockholders are the investors of a corporation. The corporations aggregate
capital is divided into smaller units of ownership which we call stocks or shares of
stocks. The corporation raises it capital through the sale of these shares of stocks
either by subscription or sale. The subscribers or purchasers of these shares of
stocks are called stockholders.
Prospective investors may acquire shares of stocks by subscription or
purchase.
Purchase of stocks may only be made from the following:
1) From the corporations treasury stocks
2) From other stockholders who would want to dispose their stocks
3) From the Stock Market
4) Thru the declaration of stock dividends
Subscription is a contract to buy certain number of shares from a corporation out
of its un-issued stocks.
Difference between subscription and sale:
1) Ownership
Ownership passes to the subscriber from the moment the subscription is
accepted by the corporation while in sale ownership passes to the purchaser
or vendee from the time stock dividend is delivered.
2) Evidence
Subscription may be established by written or oralevidence while in sale
the statue of fraud may be used as a defense.
3) Obligation

The corporation has no legal capacity to release an original subscribers

from obligation to pay for his shares while this does not apply to the sale of
stocks.
Two kinds of subscription:
1) Pre-incorporation subscription
Pre-incorporation subscription arises when the contract to subscribe the
shares of stocks is made before the corporation has acquired its legal
existence.
2) Post incorporation subscription
Post incorporation subscription arises when the contract has acquired its
legal existence.
*Stocks are paid either on cash basis or on installment basis.
Kinds of Corporation
1) Private Corporations
Private corporations are those corporations owned by privated individuals
2) Government Corporations
These are corporations formed by a legislature for governmental or
political purposes such as the municipal, provincial or city governments and
chartered cities and towns.
3) Quasi Public Corporations
These are corporations engaged in giving basic services to the public in
general, where by they are entitled or privileged to use public or government
properties.
4) Government Owned and Controlled Corporations
These are corporations that are organized and controlled by the
government. Here the government is the majority stockholder
5) Ecclesiastical Corporations
These are corporations which are rganized for religious purposes such as
the Order of Preachers(OP), Society of the Divine Word(SDW) etc.
6) Eleemosynary Corporation
These are corporations organized specifically for charitable purposes.
7) Civil Corporations
These are public or private corporations other than an Ecclesiastical or
Eleemosynary corporations.
8) Stock Corporations
These are private corporations whose capital stocks are divided into
shares which are sold to investors and entitle them to share in the dividends
of the corporation when declared.
9) Non-stock Corporations
These are corporations that do not divide their capital into shares of
stocks and therefore individuals become members of such corporations.
10) Domestic Corporations
These are corporations incorporated under the laws of the country where
they are doing business.
11) Foreign Corporations
These are corporations incorporated under the laws of a country other
than the place where they are doing business.
12) Close end Corporations
These are corporations usually whose stockholder are members of a
particular family or group of families. Shares of stocks of this company can
only be sold to family members.
13) Open End Corporations
These are corporations whose shares of stocks are made available to all
prospective investors.
Corporators are the persons comprising the corporation whether stock
or non-stock.

Incorporators are first set of stockholders stated in the articles of

incorporation.
Stockholders are part owners of a corporation, who hold shares of
stocks to evidence their ownership. This entitles them to dividends when
declared by the board of directors. The stockholders may either be natural or
juridical persons.
Members are corporators in non-stock corpoartions

Steps in the Formation of a Corporation

1. Promotion
It is the process of bringing together the incorporators or the persons
interested in the business, of procuring subscriptions or capital for the corporation
and of setting in motion the machinery that leads to the incorporation of the
corporation itself.
2.Incorporation
a) Verification from the records of the Securities and Exchange Commission
(SEC) that the proposed corporate name is not the same or similar to an
existing corporation.
b)
Drafting and execution of the articles of incorporation by the incorporators.
The person elected as temporary treasurer should execute an affidavit
regarding the share capital subscribed and paid up. The treasurer should also
submit a sworn statement of assets and liabilities of the corporation.
c) Deposit by the treasurer of the cash paid for the shares subscribed in the
bank in the name of the treasurer in trust for and to the credit of the
corporation. The bank is required to issue a certificate of deposit.
d) Filing of the articles of incorporation with the SEC together with treasurers
affidavit, statement of financial position, certificate of bank deposit, and
certificate as to the name of the corporation;
e) Payment of the filing and publication fees; and
f) Issuance by the SEC of the certificate of incorporation.
3.Formal
organization
and
commencement
of business operations.
Formal organization requires the adoption of by-laws and the election of the
board of directors and of the administrative officers. It also includes the taking
of such other steps as are necessary to enable the corporation to transact the
legitimate business or accomplish the purpose for which it was created.
Section
22
of the Corporation Code states that if a corporation does not formally organize
and commence the transaction of its business within two (2) years from the
date of its incorporation, its corporate powers shall cease and the corporation
shall
be
deemed
dissolved.
If a corporation has commenced business but subsequently becomes
continuously inoperative for a period of at least five (5) years, the same shall
be a ground for the suspension or revocation of its certificate of incorporation.
Articles of Incorporation
Section
14
provides that all corporations organized under this Code shall file with the
Securities and Exchange Commission articles of incorporation in any of the
official languages duly signed and acknowledged by all of the incorporators,
containing substantially the following matters except as otherwise prescribed

by
this
Code
or
special
law:
1.
The
name
of
the
corporation;
2. The specific purpose or purposes for which the corporation is formed;
3. The principal place of business which must be within the Philippines;
4.
The
term
of
existence;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five (5)
nor
more
than
fifteen
(15);
7. The names, nationalities and residences of the persons who shall act as
directors of trustees until the first regular directors or trustees are elected and
qualified.
8.
If
it
be
a
stock
corporation:
a.
Amount
of
authorized
share
capital
in
pesos,
b.
Number
of
shares
into
which
it
is
divided,
c.
In
case
the
shares
are
par
value
shares:

The
par
value
of
each
share,
Names, nationalities and residences of the original subscribers,
The amount subscribed and paid by each subscriber on his subscription.
d. In case of no par value, the articles need only state such fact, and the
number
of
shares
into
which
said
share
capita
is
divided.
9. If it be a non-stock corporation, the amount of its capital, the names,
nationalities and residences of the contributors and the amount contributed.
By-laws
By-laws are sets of rules and regulations that govern the internal
organization and operation of the corporation Managing a Corporation
Stockholders - owners of the corporation; they delegate the management to
a duly elected board of directors
Securities and Exchange Commission (SEC)- the entity that supervises the
enforcement of the government enacted laws that are designed to make
available to the stockholders
Board of Directors- has all the rights of management, except those few that
the law provides which can be exercised but only with the consent of majority
of the stockholders
The election of the BOD by the stockholders is usually held annually.
Span of stockholders' control in the corporation: Amendment of the articles
of incorporation Acts which involve the control of the corporation Acts that
affect the propriety rights of the stockholders Voting
All common stocks listed in the books of the corporation are entitled to vote
except when specifically prohibited to do so in its charter
Preferred stocks often have restricted voting rights in exchange for other
privilege
Two (2) Methods of Voting:
1. Voting under the common law -Stockholders cast one (1) cote regardless of the
number of shares he owns
2. Cumulative Voting - Every stockholder can cast as many votes as the number
of shares he owns multiplied by the number of board of directors to be
elected Liability of Stockholders Cases when a stockholder may still be liable
for corporate obligations beyond his capital contribution:
a) His unpaid subscription
b) The watered stocks he holds
c) Unpaid salaries of the employees of the firm
Note:
BOD is the policy formulating body

 Set of officers is the policy implementing body of the corporation

Stockholder has the ultimate control of the corporation
Incorporators shall not be less than 5 nor more than 15
Incorporating directors shall not be less than 5 nor more than 11 in stock
corporations
BOD shall not be less than 5 nor more than 15 in a non stock corporation

Qualifications of the board of Directors

1. He must own at least one (1) share of stock of the same corporation. If he
losses his share during his incumbency, he must vacate his position.
2. He must have good moral character such as: personality integrity and
honesty and is impartial.
3. He should have the capacity to contract, that is, he must be of legal age
and not otherwise incapacitated.
4. He must have the necessary business acumen to manage the business
efficiently.
5. Two thirds of the board of directors should be Filipino citizens. Some
corporations require 60% to even 100% depending on what corporation it
is.
Basic provisions of the corporation law regarding board of directors
include the following:
1. The directors are elected annually.
2. The cumulative method of voting should be followed.
3. Notice of meetings sgould be sent to the stockholders and published two
weeks before the election in a newspaper of general circulation. In the
absence of a local newspaper, the notice shall be posted in three
conspicuous locations such as publisc places for three weeks prior to the
election.
4. The term of office of the board of director is one year.
5. The majority of all outstanding subscribed stocks are entitled to vote.
Voting may either be in person or by proxy.
6. In case the date of election is mot indicated in the by-laws, it should take
place on the first (1st) Tuesday of every year.
Quorum
Quorum is specified in the by-laws. Majority of the board of directors generally
constitute a quorum.

Liabilities of the Board of Directors Directors' acts must be within the powers of
the corporate powers. They should be formed in good faith and exercised with
care and diligence. As long as these are taken into consideration, the directors
are not liable for their corporate acts. The following acts can make the directors
liable:
1. When they are negligent in the performance of the task.
2. When they acted in bad faith.
3. When they commit ultra viris act, that is, they acted beyond what is
provided for in the corporate charter.
4. When they commit fraudulent and wrongful acts inimical to the welfare of the
corporation.
Functions of the Board of Directors
1. Elects the chairman of the board from among themselves.
2. Elects the president and chief executive officer of the corporation.
3. Appoints the heads of the various committees created by them.
4. Elects the executive secretary.
5. Appoints with the recommendation of the chairman of the board and the
president, the senior and junior officers.
6. Approves the compensation to be paid to tue various officers and
employees.
7. Approves the general assignment of duties and responsibilities of each
officer as submitted by the chairman and the president.
8. Appoints the auditor and define his duties and responsibilities and
directing him to report directly to the board.
9. Formulates the major policies of the corporation.
10. Has overall supervision and control of personnel.
11. Evaluates the performance of the firm.

The board of directors is not compensated for their services except when they
are performing other functions in the firm at the same time.
- Directors do jot act individually but as a corporate body to decide in a regular
or special meeting of the board for which there us quorum. Hence, the directors
must be physically present unlike in a stockholders' meeting wherein they can
appoint a proxy.

- In small closely held business corporation, many of the stockholders act both
as officers and board of directors.
- In large corporations where the operation is too much for the board of directors
to handle, they create committee to assist them in their functions. Committees
which may be created are the following:
Executive Committee Composed of very capable members who devote
considerable time in the day-to-day management of the business.
Finance Committee Deals with the financial operations of the firm. The
head of thr budget office, treasurer and comptroller, report to this commitee.
The vice president of finance must be in constant liaison with the committee on
finance.
Proxy Committee In charge of receiving proxies from the stockholders in
behalf of the management of the corporation.
Operations Committee
Other committees needed depending on the needs of the corporation.

Corporate Officers
The President He is the executive of the firm. He is in charge of the internal
management and operation of the corporation. He takes charge of al the
various departments of the firm.
Vice President Assists the president when he is present in acts as president
when the president is absent. Some corporations call him the first vice
president. Common positions created are vice president for finance, vice
president for accounting, vice president for production, etc.
Treasurer He is in charge of the corporate funds including securities of the
corporation. He is in charge of disbursememt of funds like the signing of
checks, notes and obligations. He is usually responsible to the finamce
committee under the board of directors .
Comptroller/Controller In charge of the accounts of the firm. He supervises
the bookkeeping, accounting and reporting precedures.
Auditor In charge of verifying thr authenticity of recording of transactions in
the books of the corporation. He determines whether the firm earned a profit
or a loss. He keeps the directors informed of tge financial status of the firm.
Secretary Prepares the agenda for the meetings and keeps the minutes of
the meeting of the stockholders, board of directors and committee meetings.
He signs with the president all contracts entered into by the corporation such
as leases, mortgages, bond certificates and other such documents. He is in
charge of the stock transfer in the books of the ccorporation.

Corporate Powers
Express Power Specifically conferred upon by its charter and expressed in
the certificate of incorporation. Examples: power of succession, power of the
corporation to sue and be sued in any court of law, etc.
Implied Power Power necessary to carry out the express power. Example:
Borrowing money to be used in the business, making ordinary contracts,
signing check, etc.