Definitions

an artificial being created by

- A corporation is 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.

Attributes of a Corporation

 A corporation is an artificial being with a personality separate and apart from its
individual shareholders or 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. Corporation requires 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 of 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.
 It has the powers, attributes and properties expressly authorized by law or incident to its
existence.

Advantages of a Corporation

 The corporation has the legal capacity to act as a legal entity

 Shareholders have limited liability
 It has 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 agents of the business
 Greater ability to acquire funds

Disadvantages of a Corporation

 A corporation is relatively complicated in formation and management

 There is a 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 majority
 In large corporations, management and control have been separated from ownership
 Transferability of shares permits the uniting of incompatible and conflicting elements in
one venture.
Classes of Corporations

Stock Corporation- Corporations which have 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 may
obtain as an incident to its operation shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the corporation was organized.
Non-stock corporations may be formed or organized for charitable, religious, educational,
professional, cultural, recreational, fraternal, literary scientific, social, civil service or similar
purposes.

Other Classifications of Corporation

1. According to number of persons:

 .Corporate Aggregate- a corporation consisting of more than one corporator.
 Corporate sole – or a special form of corporation usually associated with the clergy. It
is a corporation which consists of only one member or corporator and his successors such
as a bishop.
2. According to nationality
 Domestic corporation – corporation organized under Philippine laws.
 Foreign corporation – corporation organized under foreign laws.
3. According purpose
 Public corporation – a corporation formed or organized for the government of a portion
of the state (provinces, cities, municipalities)
 b. Private corporation – a corporation created for private aim, benefit or purpose.
4. According to their legal right to corporate existence
 De Jure corporation – A corporation existing in fact and in law. It is organized in strict
conformity with the law.
 De facto corporation – a corporation existing in fact but not in law.
5. According charitable purpose
 Ecclesiastical corporation – organized for religious purposes
 Eleemosynary corporation – established for public charity.
 Civil corporation- established for business or profit.
6. According to degree of public participation with regard to share ownership
 Close corporation – those whose share ownership is limited to selected persons or
members of a family not exceeding 20 persons.
 Open corporation – those where the share is available for subscription or purchase by
any person.
7. According to their relation to another corporation
  Parent or holding corporation – one 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.

Steps in the creation of a corporation

1. Promotion - 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. This step includes the following:

a. Verification from the records of 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.
c. Deposit by the treasurer of the cash paid for the shares subscribed
d. Filing of the Articles of Incorporation with the SEC
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 - This would

require adoption of Bylaws and the election of the board of directors and of the
administrative officers.

Articles of Incorporation

In In the Philippines, the general law which governs the creation of private corporation is the
Corporation Code of the Philippines. Sec.14 of the code provides that all corporations organized
shall file with the SEC Articles of Incorporation in any of the official languages duly signed and
acknowledged by all of the incorporators, containing the substantially the following matters
except as otherwise prescribed by the Code or by special law.

1. Name of the corporation

2. The specific purpose/s 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 the 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 or 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 peso’s;
b. Number of shares into which it is divided
c. In case the shares are par value shares
1. the par value of each share
2. names, nationalities and residences of the original subscribers
3. the amount subscribed and paid by each subscriber on his subscription
9. If it be non-stock corporation, the amount of its capital, the names, nationalities and residences
of the contributors and the amount contributed.

BY-LAWS of the Corporation

These are the rules of action adopted by the corporation for its internal government and for the
government of its officers, shareholders and members. The by-laws shall be adopted within one
(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. By-laws
provides the following:

1. Time, place, and manner of calling and conducting regular and special meetings of the
directors or trustees;
2. Time and manner of calling and conducting regular and special meetings of the shareholders
or members;
3. Required quorum in meetings of shareholders or members and the manner of voting
4. Form for proxies of shareholders and members and manner of voting them
5. Qualifications, duties and compensation of directors or trustees, officers and employees;
6. Time for holding the annual election of directors or trustees and the mode or manner of giving
notice
7. The manner of election or appointment and the term of office of all officers other than
directors or trustees
8. Penalties for violation of the bylaws
9. In the case of stock corporations, the manner of issuing stock certificates
10. Such other matters as may be necessary for the proper or convenient transaction of its
corporate business and affairs

Rights of a Shareholder
1. Right to be issued certificate of stock or other evidence of share ownership and to transfer
such shares
2. Right to attend and vote in person or by proxy at shareholders’ meeting
3. Right to elect and remove directors
4. Right to adopt, amend or repeal the by-laws
5. Right to purchase a portion of any new shares issued to maintain the same percentage of stock
ownership
6. Right to receive dividends when declared
7. Right to inspect corporate books and records and to receive financial reports of the
corporation’s operations
8. Right to participate in the distribution of corporate assets upon dissolution.

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.
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.
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
incorproation. They must be a natural person as distinguished from artificial beings. An
incorporator will always retain his status as such though no longer having an interest in the
corporation.
Shareholders or stockholders are corporators in a stock corporation. Shareholders may be
natural or juridical persons.
Members- are corporators of a non-stock corporations
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

Classes of Shares

1. 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 shares.
Note: Sec. 6 of the Code states that PREFERENCE or PREFERRED SHARES of stock may
be issued only as PAR
VALUE SHARES.
2. NO PAR VALUES: One without any values 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.
Note: The minimum stated value of a no par value share is five pesos (P5.00) per share. 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.
3. VOTING SHARES: issued with the right to vote.
4. NON-VOTING shares: issued without the right to vote
5. ORDINARY SHARES: these shares entitle the holder to an equal pro-rata division of profits
without any preference.
6. PREFERENCE SHARES: these shares entitle the holder to certain advantages or benefits
over the holders of ordinary shares.
7. 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.
8. TREASURY SHARES: a stock that has been issued by the corporation as fully paid and later
reacquired but not retired.
9. CONVERTIBLE SHARES: a stock which is convertible or changeable from one class to
another class.

Minimum Subscription and Paid -in Capital

 At the time of incorporation, at least twenty five (25%) percent 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 the date fixed in the contract of subscription
without need of a call, or in the absence of a fixed date, upon call for payment by the
board of directors.
 In no case, shall the paid in capital be less than P5,000 pesos
 In case of NO PAR VALUE SHARES, the 25% requirement will be based on the
authorized number of shares.
Example: If the authorized capital is pegged at 2,000 no par value shares, then at least
500 no par value shares must be subscribed.

Illustration for the 25-25 Rule

Assumed 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 of P2,000,000. The Paid In Capital should be P125,000 which is 25% of
the subscribed share capital of P500,000.

TRY THIS ONE: Suppose that the AUTHORIZED SHARE CAPITAL is P60,000 divided
into 6,000 shares at P10 par value per share. How much is the minimum paid in capital required
by law?

Corporate Books and Records

Every private corporation, stock or non stock, is required to keep books and records at its
principal office of the following:

1. Minutes Book- contains the minutes of the meetings of the directors and shareholders.
2. Stock and transfer book – 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.
3. Books of accounts. These represent the record of all business transactions. This include the
journal and the ledger.
4. Subscription book – book of printed blank subscription.
5. Shareholders’ ledger – ledger which details the number of shares issued to each shareholder
6. Subcribers’ledger – subsidiary ledger for the subscriptions receivable account. It reports the
individual subscriptions of the subscribers.
7. Stock Certificate book – it is a book of printed blank certificates of stock.