CHAPTER 13

CORPORATIONS: BASIC CONSIDERATIONS

 Nature of Corporation
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 to its existence1

 Characteristics
 Separate legal entity
 Transferable unit of ownership
 Limited liability of shareholders
 Continuity of existence
 Governing body

 Partnership vs. Corporation

Partnership Corporation
Created by mere agreement of parties Created by operation of law
Requires at least 2 persons to form Requires at least 5 persons to form2
Acquire juridical personality from the Acquire juridical personality at the time
moment the contact is executed Certificate of Incorporation is issued by
SEC
May exercise power authorized by the Exercise only the powers expressly
partners authorized by law or incident to its
existence
Unlimited liability for general partners Limited liability to shareholders
Ownership cannot be transferred Ownership can be transferred without
without the consent of all the partners the consent of other shareholders
May be dissolved anytime at will of the Can only be dissolved with the consent
partners of the state

 Advantages and Disadvantages of a Corporation

Advantages Disadvantages
1. The corporation has the legal 1. A corporation is relatively
capacity to act as a legal entity. complicated in formation and
2. Shareholders have limited liability. management.
3. It has continuity of existence. 2. There is a greater degree of
4. Shares of stock can be transferred government control and supervision.
without the consent of the other 3. It requires a relatively high cost of
shareholders. formation and operation.
5. Its management is centralized in the 4. It is subject to heavier taxation than
board of directors. other forms of business
6. Shareholders are not general agents organizations,
1
per Revised Corporation Code of the Philippines, Sec. 2
2
per Corporation Code (BP 68), at least five (5) incorporators are needed; but with RCCP (RA 11232) one (1)
incorporator is enough
 of the business. 5. Minority shareholders are
7. Greater ability to acquire funds. subservient to the wishes of the
majority.
6. In large corporations, management
and control have been separated
from ownership.
7. Transferability of shares permits the
uniting of incompatible and
conflicting elements in one venture.

 Classifications of Corporations
1. As to membership holdings:
 Stock Corporation. 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. No part of its income is distributable as dividends to its
members, trustees, or officers. Any profit shall whenever necessary or proper,
be used for the furtherance of the purpose or purposes for which the
corporation was organized.
It may be formed or organized for charitable, religious,
educational, professional, cultural, recreational, fraternal, literary, scientific,
social, civil service, or similar purposes.

2. As to number of persons:
 Corporation Aggregate. Composed of more than one corporator.
 Corporation Sole. Consists of only one member or corporator and his successors
(usually associated with the clergy)

3. As to law of creation/ nationality:

 Domestic Corporation. Organized under the Philippine law.
 Foreign Corporation. Organized under foreign laws.

4. As to purpose:
 Public Corporation. Formed or organized for the government of a portion of the
state (e.g., provinces, cities, municipalities, and barangays)
 Private Corporation. Created for private aim, benefit, or purpose.

5. As to other purpose:
 Ecclesiastical Corporation. Organized for religious purposes.
 Eleemosynary Corporation. Established for public charity.
 Civil Corporation. Established for business or profit.

6. As to legal right:
 De Jure Corporation. Corporation existing in fact and in law and is organized in
strict conformity with the law.
 De Facto Corporation. Corporation existing in fact but not in the law.
 7. As to admission of shareholders:
 Close Corporation. Share ownership is limited to selected persons or members
of a family not exceeding 20 persons.
 Open Corporation. Share is available for subscription or purchase by any
person.
 Publicly-held Corporation. Corporation with a class equity securities listed on an
exchange or with assets in excess of P50,000,000 and having 200 or more
holders, at least 200 of which are holding at least 100 shares of a class of its
equity securities3

8. As to relation to another corporation

 Parent or Holding Corporation. Related to another corporation and it has the
power to directly or indirectly elect the majority of the directors of a subsidiary
corporation
 Subsidiary Corporation. Corporation controlled by another corporation known
as a parent corporation.

 Stages of Corporation Formation

1. Promotion – 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 – 5 to 15 persons can be incorporators of a corporation
a. Name verification at Securities and Exchange Commission (SEC).
b. Drafting and execution of the articles of incorporation by the incorporators.
c. Deposit on bank by the elected treasurer.
d. Filing of the articles of incorporation with SEC.
e. Payment of filing fees.
f. Endorsement from other government agencies.
g. Issuance by the SEC of the certificate of incorporation.
3. Formal organization and commencement of business
operations - requires adoption of by-laws and election of BOD Who may form a
and administrative officers corporation?
- Other steps required of a corporation to • Natural persons
transact as legitimate business. • Not less than 5
- Within 2 years from date of its incorporation but not more
otherwise dissolved than 15
- However, if a corporation has commenced • Legal age
business but subsequently becomes • Majority are
continuously inoperative for a period of at residents of the
Philippines

3
per SRC Rule 3-1.M, Amended IRR of the Securities Regulations Code (R.A. 8799)
 least 5 years, the same shall be ground for the suspension or
revocation of the certificate of incorporation

 Components of a Corporation
 Corporators – people who compose the
corporations whether as shareholders or
Note: A corporation or a partnership
members at any time.
can be a corporator, but cannot be an
 Incorporators – shareholders or members incorporator.
mentioned in the articles of incorporation. A partnership can be a
 Shareholders or Stockholders - corporators corporator in a corporation but a
of a stock corporation and maybe a natural corporation cannot be a general
or juridical persons. partner.
 Members – corporators of a nonstock
corporation.
 Subscribers – persons who have agreed to
Notes: An incorporator will always
take and pay the original, unissued shares
retain his status as such though no
of a corporation formed or to be formed: All
longer having interest in the
incorporators are subscribers.
corporation.
 Promoters – persons who bring about or
All incorporators (if they
cause to bring about the formation and
continue to be shareholders) are
organization of a corporation.
corporators of a corporation, but not
 Underwriters – Are usually investment
all corporators are incorporators.
bankers who have:
o Agreed, alone with other, to buy at
stated terms an entire or a
substantial part of an issue of Note: All incorporators, are subscribers
securities; or but a subscriber need not be an
o Guaranteed the sale of an issue by incorporator.
agreement to buy from the issuing
corporation any unsold portion at a stated price; or
o Agreed to use his best efforts to market all or part of an issue; or
o Offered for sale shares he has purchased from a controlling stockholder.
 Independent Director – Is a person who apart from his fees and shareholdings is
independent of management and free from any business or other relationship which
could, or could reasonably be perceived to, materially interfere with his exercise of
independent judgment in carrying out the responsibilities of a director.
- A publicly held corporation, as earlier defined, shall have at
least two independent directors or at least 20% of the
members of the board, whichever is the lesser.
- This is done to protect the interest of the shareholders and
investors.
- The election of the independent directors is done during the
annual stockholders meeting by the stockholders themselves.
 Classes of Shares in General
 Par value shares – a specific amount is fixed in the
articles of incorporations and appearing on the Note: Minimum stated value of a no-
certificate of stock. It is the minimum issue price of par value shares is five pesos (P5.00)
the shares. per share. In addition, shares issued
 No-par value shares – without any value appearing without par value are deemed fully
on the face of the certificate of stock. It can have a paid.
stated value which may be fixed in the articles of
incorporation or by the board of directors or
shareholders. The issue price may vary from time to Minimum Subscriptions and Paid-in
time as it is usually fixed based on the book value of Capital
the corporation’s shares.
 Voting shares – issued with the right to vote. At the time of incorporation, at
 Non-voting shares – issued without the right to vote. least 25% of the authorized capital
 Ordinary shares – hares entitle the holder to an equal stock as stated in the articles of
pro-rata division of profits without any preference. incorporation must be subscribed
 Preference shares – shares entitle the holder to and at least 25% of the total
certain advantages or benefits over ordinary shares subscription must be paid upon
holders. subscription, the balance to be
 Promotion shares – issued to promoters as a payable on a dates or dates fixed in
compensation in promoting the incorporation, or for the contract of subscription without
services rendered in launching or promoting the need of a call, or in the absence of a
welfare of the corporations. fixed date, upon call for payment by
 Treasury shares – stock that has been issued by the the Board of Directors. In no case
corporation as fully paid and later reacquired but not shall the paid-in capital be less than
retired. 5,000.
 Convertible shares – stock which is convertible or
changeable from one class to another class.

 Articles of Incorporation
a. Name of the corporation;
b. Specific purpose or purposes for which the corporation is created;
c. Principal place of the business which must be in the Philippines;
d. Term of existence;
e. Names, nationalities, and residences of the incorporators;
f. Number of directors or trustees which should be 5 to 15 members
g. Names, nationalities, and residences of the persons who shall act as directors or trustees
until the first regular directors and trustees are elected and qualified;
h. If it is a stock corporation: amount of authorized share capital, number of shares which it
is divided, for par value shares (par value of each share, names, nationalities, and
 residences of original subscribers, and amount paid by each), and in no par value (the
articles needed to state such fact and the number of shares the share-capital is divided)
i. For non-stock corporations: amount of its capital, names, nationalities, and residences of
the contributors, and their amount contributed.
 Comparison of the Articles of Incorporation per RCCP and Corporation Code

RCCP4 Corporation Code

(RA 11232) (BP 68)
Name If the corporation is an OPC5, the
letters “OPC” is included in the OPC is not allowed
corporate name.
Who can Be An Any natural person, partnership,
Only natural persons
Incorporator corporation, or association
Number of At least five (5) incorporators
One incorporator is enough
Incorporator(s) needed
Residence of A majority of the incorporators
No residency requirement for
Incorporators must be residents of the
incorporators
Phiippines
Term Shall have perpetual term by default
Not exceeding 50 years.
unless the AOI6 provides otherwise
Number of No minimum number of
Directors directors/trustees except for Minimum number of directors is
educational corporations and five (5)
religious societies
Residence of No residency requirement for A majority of the directors must
Directors directors be Phil. residents
Amount of No minimum capital stock required
At least 25% of the authorized
Subscribed and unless required by special law. There
capital stock must be subscribed
Paid-In Capital is also no minimum subscribed
and atleast 25% of the subscribed
capital and no minimum paid-in
capital must be paid-up
capital
Statement of Subscribed and paid-in capital are in In two (2) separate clauses (8th
Subscribed and the 8th clause of the AOI (Sec. 14, and 9th) of the AOI, (Sec. 15,
Paid-In Capital RCCP) Corporation Code)
Treasurer’s A separate treasurer’s affidavit is no
Affidavit longer required but the certification A separate treasurer’s affidavit is
of the treasurer is part of the AOI (9 th required
clause)
Undertaking to No longer required to submit a There is a separate undertaking
Change Name separate undertaking, see the 10th to change the corporate name to
Clause of the AOI. be signed by directors
Signatories The incorporators and the treasurer
Only incorporators sign the AOI
sign the AOI.

4
Revised Corporation Code of the Philippines
5
One Person Corporation (OPC) is a corporation with a single stockholder, who may be a natural person, a trust or
an estate (Sec. 116).
6
Articles of Incorporation
  Basic Corporate Organizational Structure
The ultimate control of the corporation rests with the shareholders. They are the
owners of the corporations and they elect the top governing body of the corporation, 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. They also
elect the chairman of the board.
The president of the corporation must be a director of the corporation but he cannot
act as president and secretary or president and treasurer at the same time. The president is
the only officer required to be a director. The corporate secretary makes and keeps the
records of the corporation and make proper entries of the votes, resolutions, and
proceedings of the shareholders and directors. The corporate treasurer is entrusted with the
authority to receive and keep the money of the corporation and to disburse them as he may
be authorized.

Hierarchy of Corporate Structure

Shareholders
elect the

Board of Directors

elect the
Officers

hire the
Employees

 Rights of Shareholders
1. Rights 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’ meetings
3. Right to elect and remove directors
4. Right to adopt, amend or repeal the by-laws
5. Preemptive right
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.

 Corporation Books and Records

 Minutes book – records of meetings
 Share and transfer book - names of shareholders
 Subscription book – printed blank subscription
 Shareholder’s ledger – ledger for number of shares issued to shareholders
 Subscriber ledger – subsidiary ledger for subscription receivable account
 Stock certificate book - printed blank stock certificate
 Book of accounts – Journal and Ledger