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Chapter 5

Components of a Corporation

Reporter:

Patrick Anthony E. Ngojo


OSM3A-E
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

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


upon full payment of his subscription.

10. Both the partnership’s owners and a


corporation’s owners have limited liability for
business debts.
Answer Key
1. True
2. True
3. True
4. True
5. True
6. True
7. True
8. True
9. True
10. True
Thank
You!!!