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INTRODUCTION TO CORPORATION

Definition
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 to its
existence. (Sec. 2 Corporation Code)
Attributes of a Corporation
• Artificial being
• Created by operation of law
• Having the right of succession
• Has only the powers, attributes and properties expressly authorized by law or incident to its
• Continuity of existence
• Centralized management
• Limited liability of stockholders
• Greater source of funds
Disadvantages of a Corporation
• Complications in formation and management
• Greater degree of governmental control and supervision
• Weakened credit by the limited liability of the stockholders
• Heaver income tax
• Lack of personal element in view of the transferability of shares
Types of Corporation
In general, private corporations can be classified as stock corporations or non-stock
corporations.
1. Stock Corporation - ese corporations issue shares of stocks to the stockholders who
are entitled to receive dividends. Composing such corporations are the stockholders,
and the Board of Directors is in charge of making decisions.
2. Non-stock Corporation - ese corporations do not issue shares of stock because they
are not created for profit but for public good and welfare like religious, social,
charitable, civic, and political organizations and societies. ey are composed of
members and not stockholders. Additionally, management of such corporation is vested
upon the Board of Trustees.
As to nationality
1. Domestic Corporation - one incorporated under the laws of the Philippines
2. Foreign Corporation - one formed, organized and existing under any laws other than
those of the Philippines
3. Multinational Corporation - a domestic or foreign corporation which extends its
corporate business to other territories or countries.
As to purpose
1. Public Corporation - those formed or organized for the government of a portion of the
state.
2. Private Corporation - those formed for some private purpose or benefit. ese include
government owned and controlled corporations (ose created or organized by the
government or of which the government is the majority stockholder.) and quasi-public
corporations (ose which have accepted from the State the grant of a franchise or
contract for the performance of public service but which are organized for profit. ey
are also known as public utilities or public services corporation).
* e true test is the purpose of the corporation. If the corporation is created for
political or public purpose connected with the administration of government, then
it is a public corporation *
Number and Qualifications of Incorporators
Any number of natural persons not less than five (5) but not more than fieen (15), all of legal age
and a majority of whom are residents of the Philippines, may form a private corporation for any
lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a
subscriber to at least one (1) share of the capital stock of the corporation. (Sec. 10 Corporate
Code of the Philippines)
Number and Qualifications of the Board of Directors
Every director must own at least one (1) share of the capital stock of the corporation of which he
is a director, which share shall stand in his name on the books of the corporation. Any director
who ceases to be the owner of at least one (1) share of the capital stock of the corporation of
which he is a director shall thereby cease to be a director. Trustees of non-stock corporations
must be members thereof. a majority of the directors or trustees of all corporations organized
under this Code must be residents of the Philippines. (Sec. 23 Corporate Code of the Philippines)
Pre-Incorporation Subscription Requirement
At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of
incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per
cent 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 call, or in the absence of a fixed date
or dates, upon call for payment by the board of directors: Provided, however, at in no case shall
the paid-up capital be less than five ousand (P5,000.00) pesos.
Articles of incorporation
All corporations organized under this code shall file with the Securities and Exchange
Commission 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:
1. e name of the corporation;
2. e specific purpose or purposes for which the corporation is being incorporated. Where
a corporation has more than one stated purpose, the articles of incorporation shall state
which is the primary purpose and which is/are the secondary purpose or purposes:
Provided, at a non-stock corporation may not include a purpose which would change
or contradict its nature as such;
3. e place where the principal office of the corporation is to be located, which must be
within the Philippines;
4. e term for which the corporation is to exist;
5. e names, nationalities and residences of the incorporators;
6. e number of directors or trustees, which shall not be less than five (5) nor more than
fieen (15);
7. e names, nationalities and residences of persons who shall act as directors or trustees
until the first regular directors or trustees are duly elected and qualified in accordance
with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of
the Philippines, the number of shares into which it is divided, and in case the share are par
value shares, the par value of each, the names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each on his subscription, and if some
or all of the shares are without par value, such fact must be stated;
9. 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 each; and
10. Such other matters as are not inconsistent with law and which the incorporators may
deem necessary and convenient.
e Securities and Exchange Commission 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 that at least twenty-five (25%) percent of the authorized capital stock of the
corporation has been subscribed, and at least twenty-five (25%) of the total subscription has been
fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least
twenty-five (25%) percent of the said subscription, such paid-up capital being not less than five
thousand (P5,000.00) pesos. (Sec. 14 Corporate Code of the Philippines)
By-Laws
By-Laws are the rules of action adopted by the corporation for its internal government and for the
government of its officers and of its stockholders or members. A corporation may provide in its
by laws for:
1. e time, place and manner of calling and conducting regular or special meetings of the
directors or trustees;
2. e time and manner of calling and conducting regular or special meetings of the
stockholders or members;
3. e required quorum in meetings of stockholders or members and the manner of voting
therein;
4. e form for proxies of stockholders and members and the manner of voting them;
5. e qualifications, duties and compensation of directors or trustees, officers and
employees;
6. e time for holding the annual election of directors or trustees and the mode or manner
of giving notice thereof;
7. e manner of election or appointment and the term of office of all officers other than the
directors or trustees;
8. e penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing certificates; and
10. Such other matters as may be necessary for the proper or convenient transaction of its
corporate business and affairs.
Classes of Share Capital
1. Ordinary share capital – e ordinary shareholders have the same rights and privileges. ey
enjoy no preference over each other. Generally, the ordinary share gives the owner the right to
vote, to share in the income, and in the event of liquidation, to share in all assets aer
satisfying creditors’ and preference shareholders’ claims. e ordinary shareholders do not
have a fixed or specific return on investment. If there is only one class of share, it necessarily is
ordinary stock.
2. Preference share capital – e preferences usually pertain the preferred shareholders claims
on dividends and net assets in the event of liquidation. e preference shareholders have only
a limited or fixed return on investments.
3. Par value – Share with a nominal value on the face of the stock certificate. Par value refers to
the fixed amount assigned for each share of stocks. Additionally, issuing shares of stocks at an
amount below par value is prohibited in Philippine setting.
4. No par value – Share with no nominal value on the face of the stock certificate. However, the
Board of Directors can arbitrarily select an amount for its stock when issued. is value is
called stated value. Shares without par value may not be issued for a consideration less than
five pesos (P5.00) per share.
Four Basic Rights of a Stockholder
1. e right to vote and attend annual stockholders’ meeting
2. e right to share in corporate profit
3. e right to share in the distribution of assets upon corporation liquidation
4. e pre-emptive right or the right to purchase additional shares of stock in the event that the
corporation increases the amount of stock outstanding. is is to maintain the respective
percentage ownership of the stockholders in the corporation.
Two Methods of Accounting for Share Capital Transactions
1. Memorandum entry method – No entry is made to record the authorized share capital. Only
a memorandum is made for the authorized capital stock. When share capital is issued, it is
credited to the Share Capital account.
2. Journal entry method – e authorization to issue share capital is recorded by debiting
Unissued Share Capital and crediting Authorized Share Capital. When share capital is issued, it
is credited to the Unissued Share Capital account.
Terms Peculiar to Corporation Accounting
1. Authorized Shares - refers to the maximum number of shares which may be issued by the
corporation as set forth in the articles of incorporation. is maximum number of shares
multiplied by the par value of the share will yield the authorized share capital.
2. Issued Shares – represent shares which were issued to stockholders in the past which at
present may or may not be in the hands of stockholders. Share Capital, either Ordinary Share
Capital account or Preference Share Capital account, is credited for the total par value of fully
collected subscriptions or in the case of no-par value shares, for the total consideration
received in relation to the issued shares.
3. Outstanding Shares – are shares which were issued and in the hands of the stockholders.
4. Treasury Shares – are shares issued by the corporation to stockholders but which are later on
reacquired by the corporation either by purchase or by donation and which are not cancelled
or reissued.
5. Subscribed Shares – represent shares which investors have contracted to acquire but which are
to be paid at some future date.

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