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Corporation
Module 2

Definition:
SEC. 2. Corporation Defined. – 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
incidental to its existence.

Attributes of a Corporation:

1. It is an artificial being - a personality separate and distinct from the stockholders and
members and which commences upon the issuance of its certificate of incorporation.

Consequences of such separate juridical personality:

a. Limited liability
b. Stockholders are not the owners of the assets of the corporation.
c. Stockholders cannot maintain actions in their own name.
d. In taxation, the income of the corporation is not the income of the stockholders who
may still be required to pay taxes on the dividends that may derive from such income.

Doctrine of piercing the veil of corporate entity or corporate fiction

- Exception to the separate entity rule:
- When the corporation is used to defeat public convenience, justify a wrong, or
protect fraud, or defend crime (Koppel vs. Yatco, 77 Phil 496) such as when it is used
to evade the faithful compliance of obligation under a contract or for the benefit of a
single person who controls the corporation, or to evade taxes.

- When the personality is disregarded, the corporation, i.e. liability will attach personally
or directly to the officers and stockholders (Yao, Sr. vs. People G.R. No. 168306, June
19, 2007)

2. Created by Operation of law - must comply with the requirements of law governing its
creation

3. It has the right of succession - continues to exist for a period for which it has been formed
regardless of the changes in the ownership of its stocks or in its membership. (i.e. death,
insolvency, or incapacity of the individual stockholders or members.

4. Doctrine of limited capacity - it has the powers, attributes and properties, expressly
authorized by law or incident to its existence.
❖ Ultra Vires - an act exercised outside of such powers (Sec. 45)

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Classification of Corporation:

1. As to whether shares of stock are issued or not:

a. Stock Corporation - with capital stock divided into shares and is authorized to distribute dividends or allotments
of the surplus profits on the basis of the shares held. (Sec. 3)
b. Non-stock Corporation – does not issue stocks and one where no part of its income is distributable as dividends
to its members, trustees, or officers (Sec. 86)
2. As to the state or country to whose laws it was created:
a. Domestic Corporation - incorporated under Philippine laws.
b. Foreign Corporation - formed, organized and existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do business in its own country or State. (Sec. 140)

Test to determine the Nationality of the Corporation:

a. Incorporation Test- the nationality of the corporation follows that of the country under whose
laws it was incorporated.
b. Control Test - the nationality of the corporation follows that of the stockholders owning the
controlling interest

c. Grandfather Rule - a method by which the percentage of Filipino equity in corporations engaged in nationalized
and/or partly nationalized areas of activities, provided for under the Constitution and other nationalization laws, is
accurately computed, and the diminution of said equity prevented (SEC Opinion,1977)

- The rule applies with respect to the registration of the subsidiary if the capital structure of both the parent
corporation and its subsidiary do not comply with the 60%:40% Filipino to foreign ratio.

3. As to numbers of persons composing them

a. Corporation aggregate - one that is composed of more than one corporator.

b. Corporation sole- one composed of only one person, like a bishop or rabbi.
c. One Person Corporation - a corporation with a single stockholder. (Sec 116)

4. As to whether its purpose is for public or private

a. Public corporation - one that is organized for the government of a portion of the State (i.e. provinces,
cities, municipalities and barangays).

b.Private corporation - one that is formed for a private purpose or end.

It includes the following:

➢ Government-owned and controlled corporations - corporations created under special laws

other than those of the government of a portion of the State (i.e. GSIS, Landbank etc.)
➢ Quasi-public corporation - those organized for profit which are granted a franchise by the
State to perform public services (i.e. Meralco, MWSS, ABS-CBN)

5. As to whether its purpose is religious or not:

a. Ecclesiastical or religious corporation - formed for a religious purpose

b. Lay corporation - formed other than ecclesiastical or religious

6. As to whether its purpose is charitable or not

a. Eleemosynary corporation - organized for public charity

b. Civil corporation - one organized for business or profit

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7. As to legal right to corporate existence

a. De jure corporation - one created in strict compliance with all the legal requirements and whose
right to exist as a corporation cannot be successfully attacked in a direct proceeding for that purpose
by the State.
b. De facto corporation - one that is defectively created but there is an exercise of corporate rights and
franchise resulting from an attempt in good faith to incorporate on the part of its members.
- Requisites of a de facto corporation:
- There must be a valid law under which it is incorporated.
- There must be an attempt in good faith to incorporate.
- There must be an actual exercise of corporate powers.
- A certificate of incorporation is issued despite a defect in its
incorporation.
- May be attacked directly in a quo warranto proceedings but not collaterally.

8. As to their relationship to another corporation or other companies:

a. Parent or Holding Corporation - one which owns the shares of another corporation and having
powers (directly or indirectly) over the latter including the election of directors.

b. Subsidiary Corporation - one whose shares of stock are owned by another corporation, called
the parent corporation, which has a power to elect its directors.

9. As to whether its shares may be held by the public or not

a. Close Corporation - one whose shares are limited to a few, restricted as to their transfer, and
not listed in any stock exchange (Sec. 95)
b. Open Corporation - one whose shares are open to the public such as those whose shares are
listed in the stock exchanges.

10. Other classifications:

a. Corporation by prescription - one which has exercised corporate powers for such a length of
time without the interference of the State, which, by fiction of law, its given the status of a
corporation.
b. Corporation by estoppel - one that is in reality not a corporation but is
considered as one with respect to those who are precluded by their
admission or conduct denying its existence. (Sec.20)

Liability of persons assuming to act as a corporation and those dealing with it (Sec. 20):

1. All persons who assume to act as a corporation knowing it to be without authority to do

so shall be liable as general partners for all debts, liabilities and damages incurred or
arising as a result thereof.

Provided, however, That when any such ostensible corporation is sued on any
transaction entered by it as a corporation or on any tort committed by it as
such, it shall not be allowed to use its lack of corporate personality as a
defense.

2. Anyone who assumes an obligation to an ostensible corporation as such cannot resist

performance thereof on the ground that there was in fact no corporation.

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The End…..