Corporation

• An artificial being created by operation of

law, having the right of succession and the
powers, attributes and properties expressly
authorized by law or incident of its existence
(The Corporation Code of the Philippines,
Sec. 2).

• One way in corporations raise new capital

is by issuing stock.
Equity financing – the method of obtaining funds
by issuing ordinary or preference shares – is less
risky than debt financing – issuance of bonds,
notes or mortgage, because dividends on
ordinary shares are not paid unless declared by
the board of directors.

When a company does not declare cash

dividends, the cash from profitable operating
activities may be invested to finance expanded
operations.

A corporation may need the proceeds from an

ordinary share issue to improve the balance
between liabilities and shareholders’ equity.
Attributes of a corporation
• A corporation is an artificial being with a
personality separate and apart from its individual
shareholders and members.

• It is created by operation of law. It cannot come

into existence by mere agreement of the parties
as in the case of business partnerships.

• Corporations require special authority or grant

from the State, either by a special incorporation
law that directly creates the corporation or by
means of a general corporation law.
• It enjoys the right to succession. A
corporation has the capacity of continued
existence subject to the period stated in the
Articles of Incorporation. The death,
withdrawal, insolvency or incapacity of the
individual shareholders or members will not
dissolve the corporation. The transfer of
ownership of shares of stock does not
dissolve the partnership.

• It has the power, attributes and properties

expressly authorized by law or incident to its
existence.
• Ownership of a corporation is divided into
shares. Proprietorship in a corporation is
divided into units known as shares of stocks.

• Management of the business is vested in a

board of directors (BOD) elected by the
stockholders. The BOD is the governing body
or decision- making body of the corporation.
Comparison between Partnership and Corporation
Partnership Corporation

Formed by 2 persons Formed by 5 persons

Starts with agreement among Starts with the issuance of a certificate

partners; may be formed orally of incorporation issued by SEC

Unlimited liability Limited liability

Limited life Unlimited life

Transfer of equity of a partner needs Shares can be transferred from one

the consent of other partners shareholder to another without
getting the consent of other
shareholders

Partner is an agent of the partnership Shareholders do not act as agents of

the corporation
Advantages of a corporation

• The corporation has the legal capacity to act as a legal

entity.

• Shareholders have limited liability.

• It has the continuity of existence.

• Shares of stock can be transferred without the consent of

the other shareholders.

• Its management is centralized in the board of directors.

• Shareholders are not general agent of the business.

• Greater ability to acquire funds.

Disadvantages of a corporation
• A corporation is relatively complicated in formation
and management.

• The greater degree of government control and

supervision.

• It requires a relatively high cost of formation and

operation.

• It is subject to heavier taxation than other forms of

business organizations.

• Minority shareholders are subservient to the wishes

of the majority.
• In large corporations, management
and control have been separate from
ownership.

• Transferability of shares permits the

uniting of incompatible and conflicting
elements in one venture.
Classes of Corporations
Section 3 of the Corporation Code classified
private corporations into:

• Stock corporation. Corporations which have

share capital divided into shares and are
authorized to distribute to the holders of such
shares dividends or allotments of the surplus
profits on the basis of the shares held
• Non-stock corporation. A non- stock
corporation is one where no part of its income is
distributable as dividends to its members,
trustees or officers. Any profit that a non-stock
corporation may obtain as an incident to its
operation shall, whenever necessary or proper,
be used for the furtherance of the purpose/s for
which the corporation was organized (The
Corporation Code of the Philippines, Sec. 87).
Non-stock corporations may be formed or
organized for charitable, religious,
educational, professional, cultural,
recreational, fraternal, literary, scientific,
social, civil service, or similar purposes (Sec.
88).
Other Classifications of Corporations
• According to number of persons:

Corporation aggregate – consisting of more than

one corporator. – Corporation sole or a special
form of corporation usually associated with the
clergy – consists of only one member or
corporator and this successors such as a bishop.

• According to nationality:

Domestic corporation – organized under

Philippine laws. – Foreign corporation – organized
under foreign laws.
• According to whether for public or private purpose:

Public corporation – formed for the government of a

portion of the state – Private corporation – created for
private aim, benefit or purpose

• According to whether for charitable purpose or not:

Ecclesiastical corporation – organized for religious

purposes – Eleemosynary corporation – established for
public charity – Civil corporation – established for
business or profit
• According to their legal right to corporate
existence:

De jure corporation – existing in fact and in law. – De

facto corporation – existing in fact but not in law.

• According to degree of public participation with

regard to their share ownership:

Close corporation – share ownership is limited to

selected persons or member of a family not
exceeding 20 persons.
Open corporation – the share is available for
subscription or purchase by any person.

• According to their relation to another corporation:

Parent or holding corporation – a corporation that is

related to another corporation that it has the power
to either directly or indirectly elect the majority of the
directors of a subsidiary corporation. – Subsidiary
corporation – a corporation controlled by another
corporation known as a parent corporation.
Steps in the creation of a corporation

• 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.

– At least 25% of the authorized share capital must

be subscribed.
– At least 25% of total subscriptions must be paid.
– Filing of the articles of incorporation with the SEC
together with treasurer’s affidavit, statement of
financial position, certificate of bank deposit, and
certificate as to the name of the corporation.
– Payment of the filing and publication fees; and
– Issuance by the SEC of the certificate of
incorporation

• 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.
• Incorporation

– 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.

– 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
submit a sworn statement of assets and liabilities of the
corporation.

– 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.
– 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.

– Sec. 22 of the Corporation Code states that if a

corporation does not formally organize and
commence the transaction of its business within 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 5 years, the same shall be a ground
for the suspension or revocation of its certificate of
incorporation.
Articles of incorporation

• In the Philippines, the general law which governs the

creation of private corporations is the Corporation
Code of the Philippines. Sec. 14 provides that all
corporations organized under this Code shall file with
the SEC 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
by special law:
– The name of the corporation;

– The specific purpose/s for which the corporation is formed;

– The principal place of business which must be within the

Philippines;

– The term of existence;

– The names, nationalities and residences of the

incorporators;

– The number of directors or trustees, which shall not be less

than 5 nor more than 15;

– The names, nationalities and residences of the persons who

shall act as directors or trustees until the first regular directors
or trustees are elected and qualified.
– If it be a stock corporation:
• Amount of authorized share capital in pesos,
• Number of shares into which it is divided,
• 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. • In case of no par value, the articles need
only state such fact, and the number of shares into which
said share capital is divided.

– 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

• The rules of action adopted by the corporation

for its internal government and for the government
of its officers, shareholders or members.

• The by-laws shall be adopted within 1 month from

the issuance of the certificate of incorporation by
the SEC.

• Failure to file a code of by-laws shall render the

corporation liable for the revocation of its
registration.
• A private corporation may provide in its by-laws for:

– The time, place and manner of calling and

conducting regular or special meetings of the directors
or trustees;

– The time and manner of calling and conducting

regular or special meetings of the shareholders or
members;

– The required quorum in meetings of shareholders or

members and the manner of voting therein;

– The form for proxies of shareholders and members

and manner of voting them;
– The qualifications, duties and compensation of
directors or trustees, officers and employees;

– The time for holding the annual election of directors or

trustees and the mode or manner of giving notice
thereof;

– The manner of election or appointment and the term

of office of all officers other than directors or trustees;

– The penalties for violation of the by- laws; – In the case

of stock corporation, the manner of issuing stock
certificates;

– Such other matters as may be necessary for the

proper or convenient transaction of its corporate
business and affairs.
Rights of a Shareholder
• Right to be issued certificate of stock or other
evidence of share ownership and to transfer such
shares.

• Right to attend and vote in person or by proxy at

shareholders’ meetings.

• Right to elect and remove directors.

• Right to adopt, amend or repeal the by-laws.

• Right to purchase a portion of any new shares

issued to maintain the same percentage of stock
percentage.
• This is known as the pre-emptive right. However,
this right is not absolute and may be denied.

• Right to receive dividends when declared.

• Right to inspect corporate books and records,

and to receive financial reports of the
corporation’s operations.

• Right to participate in the distribution of

corporate assets upon dissolution.
• Incorporators are shareholders or members
mentioned in the articles of incorporation as
originally forming and composing the corporation
and are signatories to said articles of incorporation
(Sec. 5). They must be natural persons as
distinguished from artificial beings. An incorporator
will always retain his status as such though no longer
having an interest in the corporation.
Components of a Corporation

• Corporators are those who compose a

corporation whether as shareholders or members,
at any time. This term includes incorporators,
shareholders or members (Sec. 5).

Note: A corporation or a partnership can be a

corporator, but cannot be an incorporator. A
partnership can be a corporator in a corporation
but a corporation cannot be a general partner in a
partnership.
The Code specifies that 5 or more persons, not
exceeding 15, may form a private corporation
provided that they are of legal age, owners or
subscribers to at least 1 share of capital stock and
that the majority are residents of the Philippines.

Note: all incorporators are corporators of a

corporation, but not all corporators are
incorporators.

• Shareholders or stockholders are corporators in a

stock corporation (Sec. 5). Shareholders may be
natural or juridical persons.
• Members are corporators of a non-stock corporation
(Sec. 5).

• Subscribers are persons who have agreed to take

and pay for original, unissued shares of a corporation
formed or to be formed.

Note: All incorporators are subscribers but a subscriber

need not be an incorporator.

• Promoters are persons who bring about or cause to

bring about the formation and organization of a
corporation.
• Underwriters are usually investment bankers
who have: Agreed, alone or with others, to buy
at stated terms an entire or a substantial part of
an issue of securities; or

– Guaranteed the sale of an issue by agreement

to buy from the issuing corporation any unsold
portion at a stated price; or

– Agreed to use his best efforts to market all or

part of an issue; or

– Offered for sale shares he has purchased from

a controlling stockholder.
Classes of Shares in General
• Par value shares. One in which a specific amount
is fixed in the articles of incorporation and
appearing on the certificate of stock. The par value
is the minimum issue price of the share.

– Section 6 of the Code states that preference (or

preferred) shares of stock may be issued only as
par value shares
• However, the minimum stated value of a no-par
value share is 5 pesos (P5.00) per share (Sec. 6). In
addition, shares issued without par value are
deemed fully paid. Banks, trust companies,
insurance companies. Public utilities, and building
and loan associations are not permitted to issue
no-par value shares of stock.
• No-par value shares. One without any value
appearing on the face of the certificate of stock. A
no-par value share may have a stated value which
may be fixed in the articles of incorporation or by
the board of directors or the shareholders. Thus, the
issue price may vary from time to time as it is usually
fixed based on the book value of the corporation’s
shares.
• Voting shares. Those issued with the right to vote.

• Non-voting shares. Those issued without the right

to vote.

• Ordinary shares. These shares entitle the holder

to an equal pro- rata division of profits without any
preference.

• Preference shares. These shares entitle the

holder to certain advantages or benefits over the
holders of ordinary shares.
• Promotion shares. Those issued to promoters as
compensation in promoting the incorporation of
a corporation, or for services rendered in
launching or promoting the welfare of the
corporation.

• Treasury shares. A stock that has been issued by

the corporation as fully paid and later reacquired
but not retired.

• Convertible shares. A stock which is convertible

or changeable from one class to another class.
• Authorized shares. The maximum number of
shares which a corporation may issue.

• Issued shares. Shares issued to shareholders

which at present may or may not be in the hands
of the shareholder.

• Unissued shares. Shares which never been issued

and are available for issuance.

• Outstanding shares. Shares issued to shareholders

or subscribers whether fully or partially paid except
for treasury shares.

• Subscribed shares. Shares which investors have

contracted to acquire.
Minimum Subscription and Paid-in Capital

• At the time of incorporation, at least 25% of the

authorized capital stock (or share capital) as stated
in the articles of incorporation must be subscribed
and at least 25% of the total subscription must be
paid upon subscription, the balance to be payable
on a date or dates fixed in the contract of
subscription without need of a call, or in the
absence of a fixed date or dates, upon call for
payment by the board of directors.
• In no case shall the paid-in capital be less than
5,000 (P5,000) pesos (The Corporation Code of the
Philippines, Sec. 13). In practice, the SEC requires
higher minimum capital requirement for particular
types of corporation.

• These requirement are mandatory. The SEC shall

not accept the articles of incorporation of any
stock corporation unless accompanied by a
sworn statement of the treasurer elected by the
subscribers showing the minimum subscription
and paid-in capital requirements have been
complied with.
Example

• Assume that the authorized share capital is

P2,000,000 divided into 20,000 shares with a par
value of P100 per share. The subscribed share
capital must be P500,000 which is 25% of the
authorized share capital. The paid-in capital
should be P125,000 which is 25% of the
subscribed share capital.

– Suppose that the authorized share capital is

P60,000 divided into 6,000 P10 par value. The
paid-in capital will only amount to P3,750. the
incorporators must may P5,000 because this is
the minimum paid-in capital required by law.
– In case of no-par value shares, the 25%
requirement will be based on the authorized
number of shares. If the authorized capital is
pegged at 2,000 no-par value shares, then at least
500 no-par value shares must be subscribed.
Basic Corporate Organizational Structure
• The ultimate control of the corporation rests with
the shareholders. They are the owners of the
corporation. The shareholders elect the members
of the board of directors. • The board of directors is
responsible for the formulation of the overall
policies for the corporation and for the exercise of
corporate powers. The board also elects a
chairman of the board.
• The President must be a Director of the
corporation, but he cannot act as President and
Secretary or as President and Treasurer at the
same time. The President is the only officer
required by law to be a Director.

• The Corporate Secretary must be a resident and

a citizen of the Philippines. He need not be a
director unless required by the corporate by-laws.
It is his duty to make and keep its records and to
make proper entries of the votes, resolutions and
proceedings of the shareholders and directors in
the management of the corporation.
• The Corporate Treasurer is the officer entrusted
with the authority to receive and keep the money of
the corporation and to disburse them as he may be
authorized. He may or may not be a director.

• There is no prohibition in the law against a

shareholder being a director or officer of two or
more corporations. The Corporation Code does not
prohibit a corporate officer from occupying the
same position in another corporation organized for
the same purpose. However, such situation may be
prohibited by special law, the articles of
incorporation or the by-laws.
• The designation of the professional
management team or the administrative officers
is entrusted to the board. These officers
implement the policies of the board of directors
and actively manage the day-to-day affairs of
the corporation.

• Annually, a corporation holds the shareholders’

meeting during which the shareholders elect their
directors and make other decisions.
• Subscription book. It is a book of printed blank
subscription. • Shareholders’ ledger. It is a ledger
which details the number of shares issued to each
shareholder.

• Subscribers’ ledger. It is a subsidiary ledger for

the subscriptions receivable account; it reports the
individual subscriptions of the subscribers.

• Stock certificate book. It is a book of printed

blank certificates of stock.
Corporate Books and Records
• Minutes book. It contains the minutes of the
meetings of the directors and shareholders.

• Stock and transfer book. It is the record of the

names of shareholders installments paid and
unpaid by shareholders and dates of payment, any
transfer of stock and dates thereof, by whom and
to whom made.

• Books of accounts. These represent the record of

all business transactions. These normally include the
journal and the ledger.
Seatwork (True or False)

1. All incorporators are shareholders but not all

shareholders are incorporators.

2. A corporation, like a partnership, may be

formed by the mere agreement of 5 or more
persons.

3. The authorized shares represent the maximum

number of shares that a corporation may issue.

4. Unissued shares represent the number of

shares that may still be subscribed.
5. It is legal to issue share capital at par or at
more than par but not at less than par.

6. Share capital that has been sold and issued to

a shareholder is called an outstanding share
capital.

7. The owners of a stock corporation are called

shareholders; the owners of a non-stock
corporation are called members.
8. When a partnership is incorporated, a new set
of books should always be opened for the new
corporation.

9. A stock certificate is issued to the subscriber

upon full payment of his subscription.

10. Both the partnership’s owners and a

corporation’s owners have limited liability for
business debts.