CORPORATE FORMATION

CORPORATION
“An artificial being created by operation of law, having the right of succession
and powers, attributes and properties expressly authorized by law or incident to its
existence” (New Corporation Code)

CHARACTERISTICS:
1. Separate legal entity – artificial being
2. Created by operation of law
3. Right of succession
4. Powers, attributes, properties authorized by law
5. Ownership divided into shares
6. Management is vested in a Board of Directors

ADVANTAGES:
1. capacity to act as a legal entity
2. large scale of business undertaking
3. unlimited life
4. limited liability of stockholders for corporate debts
5. shares can be transferred without the prior consent of other stockholders
6. centralized management under Board of Directors

DISADVANTAGES
1. not easy to form because of complicated legal requirements
2. activities limited by the articles of incorporation
3. subject to rigid government control
4. possibility of abuse of powers.
5. restricts active participation by stockholders
CLASSES OF CORPORATION
1. Stock Corporation -capital is divided into shares of stock.
2. Non-stock Corporation- capital comes from fees paid by individuals
composing it.
 3. Public Corporation-organized to govern a portion of the state.
4. Private Corporation-organized for private benefit, aim or end
5. Quasi-public Corporation- private corporation performing public functions.
6. Domestic Corporation -organized under Philippine laws
7. Foreign Corporation-organized under the laws of other countries.
8. Open Corporation- ownership is widely held by many investors.
9. Closely-held Corporation -50% or more of its stock is owned by 5 or less.
COMPONENTS
1. Incorporators – persons who originally formed the corporation.
2. Corporators – persons who compose the corporation. (stockholders or
members)
3. Stockholders – corporators of stock corporation.
4. Members– corporators of non-stock corporation.
5. Subscribers – persons who agreed to take original, unissued shares but
will pay at later date.
6. Promoters – persons who undertake the formation of a company, set it
going and take necessary steps to accomplish its purpose.
7. Underwriters – in charge of disposing the shares of stock to the gen.
public.

PROCESS OF ORGANIZING A CORPORATION:

1. Promotion – set up tentative working organization to solicit subscriptions to
raise sufficient capital.
2. Incorporation – the process of formalizing the organization of the
corporation.
3. Commencement of the business – should start within 2 years from date of
incorporation.

DOCUMENTS FILED WITH SEC:

1. Articles of Incorporation – enumerates the powers and restrictions
conferred upon the corporation by the government.
2. By-Laws – contains provisions for internal administration of the
corporation.
CORPORATE RECORDS:
1. Record of all business transactions – journals, ledgers, vouchers and other
supporting documents.
2. Minutes of all meeting of directors and stockholders.
3. Stock and transfer book – stockholders’ journal, ledger and subscribers’
ledger.

BASIC RIGHTS OF SHAREHOLDERS

1. to share in the distribution of corporate profit;
2. to share in the distribution of assets upon corporate liquidation;
3. to vote in stockholders’ meeting;
4. pre-emptive right- to maintain one’s ownership in the corporation by buying
additional shares.

PRE-INCORPORATION REQUIREMENTS

1. 25% OF THE AUTHORIZED CAPITAL STOCK MUST BE

SUBSCRIBED.
2. 25% OF THE SUBSCRIPTION MUST BE PAID.

Example
The corporation was authorized the issue 100,000 shares of share capital at
P100 par value.
1) 1,000,000 X 25% P250,000
2) 250,000 X 25% P62,500

ACCOUNTING FOR SHARE CAPITAL AT PAR

1. Authorization of share capital

Memorandum Entry Method Journal Entry Method
Authorized to issue xxx shares at Unissued Share Capital
P100 par value Authorized Share Capital

2. Subscription of share capital

Memorandum Entry Method Journal Entry Method

Subscription Receivable xx Subscription Receivable xx
Subscribed Share Capital xx Subscribed Share Capital xx

3. Collection of Subscription
Memorandum Entry Method Journal Entry Method
Cash xx Cash xx
Subscription Receivable xx Subscription Receivable xx

4. Issuance of Stock Certificate (upon full payment)

Memorandum Entry Method Journal Entry Method
Subscribed Share Capital xx Subscribed Share Capital xx
Share Capital xx Unissued Share Capital xx

5. Issuance for cash (at par)

Memorandum Entry Method Journal Entry Method
Cash xx Cash xx
Share Capital xx Unissued Share Capital xx
6. Issuance in Exchange for Non-cash assets (at par)
Memorandum Entry Method Journal Entry Method
Land (FMV) xx Land (FMV) xx
Share Capital xx Unissued Share Capital xx
ACCOUNTING FOR SHARE CAPITAL ABOVE PAR

1. Authorization of share capital

Memorandum Entry Method Journal Entry Method
Authorized to issue xxx shares at Unissued Share Capital
P100 par value Authorized Share Capital

2. Subscription of share capital

Memorandum Entry Method Journal Entry Method

Subscription Receivable xx Subscription Receivable xx
Subscribed Share Capital (at par) xx Subscribed Share Capital (at par) xx
Share Premium xx Share Premium xx

3. Collection of Subscription
Memorandum Entry Method Journal Entry Method
Cash xx Cash xx
Subscription Receivable xx Subscription Receivable xx

4. Issuance of Stock Certificate (upon full payment)

Memorandum Entry Method Journal Entry Method
Subscribed Share Capital xx Subscribed Share Capital xx
Share Capital xx Unissued Share Capital xx

5. Issuance for cash

Memorandum Entry Method Journal Entry Method
Cash xx Cash xx
Share Capital (at par) xx Unissued Share Capital (at par) xx
Share Premium xx Share Premium xx
6. Issuance in Exchange for Non-cash assets (at par)
Cash xx Cash xx
Share Capital (at par) xx Unissued Share Capital (at par) xx
Share Premium xx Share Premium xx
CORPORATION ACCOUNTING TERMINOLOGIES

OLD TERMINOLGIES NEW TERMINOLGIES

UNISSUED CAPITAL STOCK UNISSUED SHARE CAPITAL
AUTHORIZED CAPITAL STOCK AUTHORIZED SHARE CAPITAL
CAPITAL STOCK SHARE CAPITAL
SUBSCRIPTION RECEIVABLE SUBSCRIPTION RECEIVABLE
ADDITIONAL PAID IN CAPITAL SHARE PREMIUM

UNISSUED COMMON STOCK UNISSUED ORDINARY SHARE CAPITAL

AUTHORIZED COMMON STOCK AUTHORIZED ORDINARY SHARE CAPITAL
COMMON STOCK ORDINARY SHARE CAPITAL
ADDITIONAL PAID IN CAPITAL-COMMON STOCK ORDINARY SHARE PREMIUM
SUBCRIPTION RECEIVABLE-COMMON STOCK SUBCRIPTION RECEIVABLE-ORDINARY SHARE
SUBSCRIBED COMMON STOCK SUBSCRIBED ORDINARY SHARE CAPITAL

UNISSUED PREFERRED STOCK UNISSUED PREFERENCE SHARE CAPITAL

AUTHORIZED PREFERRED STOCK AUTHORIZED PREFERE CE SHARE CAPITAL
COMMON STOCK PREFERENCE SHARE CAPITAL
ADDITIONAL PAID IN CAPITAL-PREFERRED STOCK PREFERENCE SHARE PREMIUM
SUBCRIPTION RECEIVABLE-PREFERRED STOCK SUBCRIPTION RECEIVABLE-PREFERENCE SHARE
SUBSCRIBED PREFERRED STOCK SUBSCRIBED PREFERENCE SHARE CAPITAL

ADDITIONAL PAID IN CAPITAL IN EXCESS OF ORDINARY SHARE CAPITAL IN EXCESS OF

STATED VALUE- COMMON STOCK STATED VALUE
ADDITIONAL PAID IN CAPITAL IN EXCESS OF PREFERENCE SHARE CAPITAL IN EXCESS OF
STATED VALUE- PREFERRED STOCK STATED VALUE

SAMPLE TRANSACTIONS:
TRANSACTIONS MEMO ENTRY METHOD DR CR
ISSUANCE OF STOCKS AT PAR VALUE
1. ABC Corporation was Jan 5 Authorized to issued 10,000 share
authorized to issue 10,000 capital at P10 par value
share capital with P10 par value
2. The 5 incorporators 5 Subscription Receivable 25,000
subscribed to 500 shares each Subscribed Share Capital 25,000
at par To record subscription.
3. The incorporators paid 25% 5 Cash 6250
of their subscription. Subscription Receivable 6250
To record 25% payment.
4. Attorney’s fees and other 6 Pre-Operating Expense 7,000
expenses incurred in the Share Capital 7,000
formation of the corporation Issued 1,000 shares at par.
totaled P7,000. Issued 700
shares.
5. Sold 1,000 shares at par. 7 Cash 10,000
 Share Capital 10,000
Issued 1,000 shares at par.
6. Collected 50% of the Cash 9,375
incorporators’ subscription Subscription Receivable 9,375
balance. To record collection.
7. Issued 500 shares in 9 Office Equipment 5,000
exchange for office equipment Share Capital 5,000
worth P5,000 Issued 500 shares at par.
8. Collected the subscription 10 Cash 9,375
balance of the incorporators in Subscription Receivable 9,375
full and issued stock certificates. To record collection in full
10 Subscribed Share Capital 25,000
Share Capital 25,000
Issued stock certificate.
ISSUANCE OF STOCKS ABOVE PAR VALUE
9. Received subscriptions for Subscription Receivable 12,000
1,000 shares at P12 per share. Subscribed Share Capital 10,000
Share Premium 2,000
To record subscription.
10. Issued 1,000 shares at P15 15 Cash 15,000
per share Share Capital 10,000
Share Premium 5,000
Issued 1,000 shares at par.

TRANSACTIONS JOURNAL ENTRY METHOD DR CR

ISSUANCE OF STOCKS at PAR VALUE
1. ABC Corporation was Jan 5 Unissued Share Capital 100,000
authorized to issue 10,000 Authorized Share Capital 100,000
share capital with P10 par To record authorized capital stock.
value
2. The 5 incorporators 5 Subscription Receivable 25,000
subscribed to 500 shares each Subscribed Share Capital 25,000
at par To record subscription.
3. The incorporators paid 25% 5 Cash 6250
of their subscription. Subscription Receivable 6250
To record 25% payment.
4. Attorney’s fees and other 6 Pre-Operating Expense 7,000
expenses incurred in the Unissued Share Capital 7,000
formation of the corporation Issued 1,000 shares at par.
totaled P7,000. Issued 700
shares.
5. Sold 1,000 shares at par. 7 Cash 10,000
Unissued Share Capital 10,000
Issued 1,000 shares at par.
6. Collected 50% of the Cash 9,375
incorporators’ subscription Subscription Receivable 9,375
balance. To record collection.
7. Issued 500 shares in 9 Office Equipment 5,000
exchange for office equipment Unissued Share Capital 5,000
worth P5,000 Issued 500 shares at par.
8. Collected the subscription 10 Cash 9,375
balance of the incorporators in Subscription Receivable 9,375
full and issued stock certificates. To record collection in full
10 Subscribed Share Capital 25,000
Unissued Share Capital 25,000
Issued stock certificate.
ISSUANCE OF STOCKS ABOVE PAR VALUE
9. Received subscriptions for Subscription Receivable 12,000
1,000 shares at P12 per share. Subscribed Share Capital 10,000
Share Premium 2,000
To record subscription.
10. Issued 1,000 shares at P15 15 Cash 15,000
per share Unissued Share Capital 10,000
Share Premium 5,000
Issued 1,000 shares at par.