ACCOUNTING FOR BUSINESS INCORPORATION

DEFINITION OF 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 to its existence.

CHARACTERISTICS OF CORPORATION
 Artificial being
 Created by operation of law
 Right of succession
 Powers, attributes and properties expressly authorized by law or incident to its existence

Artificial Being
It can perform practically all business functions which a natural person can do

Created by Operation of Law

“This means that corporations cannot come into existence by mere agreement of the parties
as in the case of business partnerships. They require special authority or grant by the State
through the legislative department either by a special incorporation law…”

Power of Succession
The shares of stock, which is an evidence of ownership in a corporation, can be transferred
from one person to another.

Powers, Attributes and Properties

As a creation of law, a corporation can only exercise powers that it is expressly authorized
to perform in accordance with the Corporation Code, its Articles, By – Laws, and other special
laws.

ADVANTAGES OF A CORPORATION
 Limited liability of stockholders
 Transferability of shares
 Continued life existence
 Greater source of funds

Limited Liability of Stockholders

Corporate stockholders are liable only to the extent of their subscriptions. They are not held
liable for corporate liabilities not covered by corporate assets.

Transferability of Shares
A stockholder can sell and transfer his acquired shares of stock even without the knowledge
or consent of all the stockholders.

Continued Life Existence

“A corporation can continue to exist for the duration of its lifetime, unaffected by the internal
changes which may arise within the corporation, such as death, insanity, insolvency of any
of its directors, officers, agents or employees.”

Greater Source of Funds

Corporation can issue shares to public for additional funds.

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DISADVANTAGES OF A CORPORATION
Despite the advantages of a corporate organization, some disadvantages can still be traced as
follows:
 Complicated in formation and operation
 Greater degree of government control and supervision
 Centralized management
 Weakened credit standing
 Heavier income tax

Complicated in Formation and Operation
o Not form by mere desire of the owner
o Formal existence starts upon issuance of its certificate of incorporation by the Securities
and Exchange Commission (SEC)

Greater Degree of Government Control and Restriction

o Minimum Requirements:
o 25% of the authorized must be subscribed and 25% of the subscribed must be paid up
but the minimum paid up capital must not be less than P5,000.
o It can only issue shares of stock and certificate of indebtedness if authorized by the
government (SEC).

Centralized Management
The management of a corporate business is vested in the Board of Directors or Trustees,
the governing and controlling body of a corporation. They are composed of at least five
individuals from the stockholders.

Weakened Credit Standing

Due to limited liability of the stockholders, corporations have lesser borrowing standing.

Heavier Income Tax

30% INCOME TAX RATE

KINDS OF CORPORATION
Stock Corporations. These corporations issue shares of stock to the stockholders, who are
entitled to receive dividends representing their earnings from the corporation.

Non-Stock Corporations. These corporations do not issue shares of stock because they are
created for civic, charitable, or religious purposes. They are composed of members, not
stockholders.

OTHER CLASSES OF CORPORATION

Nationality
 Domestic Corporation. Organized through the operation of Philippine laws

 Foreign Corporation. Organized under the laws of other countries.

 Multi-National Corporation. A domestic or foreign corporation which extends its corporate

business to other territories or countries.

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Purpose
 Government Corporations. These corporations are formed by the government either for
governmental functions or proprietary functions.
a. Public Corporations. These corporations are created for the governance of a State
territory. Examples are province, cities and municipalities.
b. Government Owned and Controlled Corporations. These corporations are primarily
intended for profits but owned or controlled by the State. Examples are National
Power Corporation and Philippine Gambling Corporation.

 Privately Owned Corporation

a. Civil Corporation. A corporation established for business or for profit.
b. Wasting Asset Corporation. A corporation whose main purpose is to extract natural
resources. Examples are mining property, oil or gas.
c. Eleemosynary Corporation. A corporation established for charitable purposes.
d. Ecclesiastical Corporation. A corporation established for religious purposes.

 Quasi-Public Corporations. These are privately financed and managed corporations for a
public purpose. Examples are public utility corporations such as Meralco, PLDT, etc.

Legal right

De Jure Corporation. A corporation duly registered for having complied with all the
requirements of the law for its legal existence.

De Facto Corporation. A corporation that fails to comply completely with the requirement of
the law.

Number of persons
 Sole Corporation. A corporation owned and registered by only one corporator or member
and his successors, who are members of a religious denomination.

 Aggregate Corporation. A corporation comprised of more than one corporator or member.

Extent of membership
 Open Corporation. The stocks of this corporation are open for public subscription.
Generally, stockholders are not related to each other.

 Close Corporation. Owned and managed by a family or close relatives not exceeding 20
persons. The stocks of this corporation are not open for public subscription.

Relation to other corporations

 Parent or Holding Corporation. A corporation that acquires significant influence over
another corporation. It has the power to elect directly or indirectly the majority directors of
a subsidiary corporation.

 Subsidiary Corporation. This corporation is controlled by the parent or holding corporation.

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COMPONENTS OF A CORPORATION
1. incorporators,
2. corporators,
3. stockholders, or members, and
4. subscribers.

Incorporators
5 member who originally formed the corporation

Corporators
These compose the total number of persons in the corporation after its formation. Include
as corporators are incorporators, stockholders and/or members.

Stockholders or Members
Shareholders= owner of stocks in a stock corporation
Members= corporators of non-stock corporation

RIGHTS OF STOCKHOLDERS
o Right to vote. To vote by himself or by proxy at all meetings of the corporations;
o Right to profit. To receive his proportionate share from the corporate profits;
o Right to inspect. To inspect corporate books and records.
o Right to financial statements. To request financial statements and reports.
o Right to corporate assets. To participate in the distribution of corporate assets in case of
dissolution.

Subscribers
Subscribers are those who have made an agreement with the corporation to buy the
corporate capital stock at future payments. A subscriber who does not pay his subscriptions
at the date agreed upon may be declared “delinquent” by the board of directors.

ORGANIZATION OF A CORPORATION
There are three main stages in the creation and organization of a corporation. These are the
following:
• Promotion stage
• Incorporation stage, and
• Formal organization and commencement of business operations.

Promotion
involves issuing of prospectus, procuring of subscriptions from prospective investors, and
securing a charter for the proposed corporation by the persons interested in the firm called
“promoters.”

Incorporation
• Registration of Corporate Name to the Securities and Exchange Commission. name of the
corporation not same of the name of existing registered corporation.
• Drafting and Execution of the Articles of Incorporation. The incorporators shall draft this
corporate basic instrument and file it with the Securities and Exchange Commission (SEC).
• Execution of Sworn Affidavits and Bank Deposit Certificate. The Articles of Incorporation
should be submitted to the SEC together with a corporate temporary treasurer’s sworn

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 statements regarding the capital subscribed and paid-up, and the statements of corporate’s
asset and liabilities. The incorporators should also attach the bank deposit certificate to the
credit of the corporation evidencing payment of the 25% of the subscribed capital stock.
• Payment of the filing and publication fees.
• ssuance of Certificate of Incorporation. The SEC issues certificate of incorporation to
evidence approval of incorporation. Corporate Code of the Philippines, Sec. 139.

Formal Organization and Commencement

requires the adoption of by-laws and the election of the board of directors (or trustees) and
of the officers by the board pursuant to the by-laws.

ARTICLES OF INCORPORATION
refers to the basic instrument by which a corporation is formed under the corporation
statutes, executed by several persons as incorporators and filed in some designated public
office such as the Securities and Exchange Commission (SEC) as evidence of its corporate
existence.

CONTENT OF ARTICLES OF INCORPORATION

1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being incorporated;
3. The place where the principal office of the corporation to be located, which must be
within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees which shall not be less than five (5) or 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 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 shares
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 this
subscription, and if some or all of the shares are without par value, such fact must be
stated;
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 each; and
10. Such other matters as are not inconsistent with law and which the incorporators may
deem necessary and convenient.”

By – Laws
“regulations, ordinances, rules or laws adopted by any association or corporation for its
government.”

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BOOKS AND RECORDS OF A CORPORATION

1. Minutes Book. Contains board of directors and stockholders’ minutes of meetings.

2. Stocks and Transfer Book. Records all original and subsequent issuance, alienation, sales or
transfer of corporate stocks. It contains the name of stockholders, installments paid and
unpaid by stockholders and dates of payment, any transfer of stock and dates thereof, by
whom and to whom made.
3. Books of Accounts. Refers to the journals and ledgers of the corporation wherein the corporate
business transactions are recorded.
4. Subscription Book. Contains printed blank subscriptions.
5. Stockholders’ Ledger. Records the number of capital stock issued to individual stockholder.
6. Subscribers’ Ledger. Contains the subscribed capital stock and subscriptions receivable
account of the stockholders.
7. Stock certificate book. Contains the printed blank certificates of stocks that are to be issued
to the stockholders.