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
Formed by 2 persons
Starts with agreement among partners; may be formed orally
Unlimited liability
Limited life
Transfer of equity of a partner needs the consent of other partners
Partner is an agent of the partnership
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 – • 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 – 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