ALFONSO T.

YUCHENGCO COLLEGE OF BUSINESS

MODULE 3

Topic 7: CORPORATION: ITS NATURE &

CHARACTERISTICS

7.1 Nature of a Corporation

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.”
- Corporation Code of the Philippines

Major Characteristics of a Partnership:

a. Artificial being
b. Created by operation of law
c. Right of succession
d. Powers, attributes and properties expressly authorized by law or incident to its
existence
e. Ownership interest comprised of share capital
f. Managed by a Board of Directors

7.2 Advantages and Disadvantages of Corporation

Advantages Disadvantages
Limited liability of shareholders Complicated in formation and
operation
Transferability of shares Greater degree of government
control and supervision
Continued life existence Centralized management
Greater source of funds Heavier income tax

7.3 Different Class of Corporation

Kinds of Corporation:

1. Stock corporation – issues shares of stock to the shareholders, who are entitled
to receive dividends representing their earnings from the corporation. This
corporation is subject to income and business taxes.
2. Non-stock corporation – does not issue shares of stock since it is created for
civic, charitable, or religious purposes. It is composed of members, not
shareholders. It is generally tax-exempt.
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Other Kinds of Corporation:

1. As to nationality
a. Domestic corporation – is organized through the operation of Philippine
laws – the Corporate Code of the Philippines and other special corporate
laws.
b. Foreign corporation – is organized under the laws of other countries. It
may be a resident or nonresident.
b.1 Resident foreign corporation – establishes a branch operating in the
Philippines just like a domestic corporation.
b.2 Non-resident foreign corporation – does not establish a branch in the
Philippines but earns in the Philippines in the form of rent, interest and
dividend.
c. Multi-national corporation – is a domestic or foreign corporation which
extends its corporate business to other territories or countries.

2. As to purpose
a. Government corporation
a.1 Public corporation – is created for the government of a state territory
such as province, cities and municipalities.
a.2 Government-owned and controlled corporation – is primarily intended
for profits but owned or controlled by the state such as National Power
Corporation and Philippine Gambling Corporation
b. Privately-owned corporation
b.1 Civil corporation – is established for business or for profit.
b.2 Wasting asset corporation – is formed for the purpose of extracting
natural resources such as those with mining property, oil or gas.
b.3 Eleemosynary corporation – is established for charitable purposes.
b.4 Ecclesiastical corporation – is established for religious purposes.
c. Quasi-public corporation – is privately financed and managed corporation
for public purpose such as public utility corporation (MERALCO, PLDT, etc.)

3. As to legal right
a. De jure corporation – is duly registered for having complied with all the
requirements of the law for its legal existence.
b. De facto corporation – is a corporation that fails to completely comply with
the requirements of law.

4. As to number of persons
a. Sole corporation – is owned and registered by only one corporator or
member and his successors, who are members of a religious denomination.
b. Aggregate corporation – is comprised of more than one corporator or
member.

5. As to extent of membership
a. Open corporation – is open to public subscription. Generally, stockholders
are not related to each other.
b. Close corporation – is owned and managed by a family or close relatives
not exceeding 20 persons. The stocks are not open for public subscription.

6. As to relation to other corporations

a. Parent or holding corporation – acquires significant influence over another
corporation and has the power to elect directly or indirectly the majority
directors of a subsidiary corporation.
b. Subsidiary corporation – is controlled by the parent or holding corporation.
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7.4 Components of a Corporation

1. Incorporators – are founders of the corporation or original organizers of the

corporation, stock or nonstock, whose names appear in the Articles of
Incorporation. Artificial persons cannot be incorporators. The law requires that
incorporators must consist of at least five but not more than fifteen natural
persons, of legal age, owners or subscribers of at least one share of capital
stock, and majority of them must be residents and citizens of the Philippines.
2. Corporators – represent the several classifications of owners of a corporation
after its formation. Specifically, corporators are incorporators, shareholders
and/ or members.
3. Shareholders or members – whose ownership are evidenced by acquiring shares
in a stock corporation either by subscription, or by direct purchase or by transfer
of stock from another stockholder. A member refers to a corporator of a non-
stock corporation. A shareholder may be a natural person or an artificial
person.

7.5 Rights of Shareholders

1. Right to vote at all meetings

2. Right to receive proportionate share in profit
3. Right to inspect corporate books and records
4. Right to request financial statements
5. Right to corporate assets in case of liquidation

7.6 Steps in Organizing a Corporation

There are three main stages in the creation and organization of a corporation.
These are:
1. Promotion stage – is where the promoter’s work 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.
2. Incorporation stage – includes the following:
a. Registration of corporate name with Securities and Exchange Commission;
b. Drafting and execution of the Articles of Incorporation;
c. Execution of sworn affidavits and bank deposit certificate;
d. Payment of the filing and publication fees;
e. Issuance of certificate of incorporation; and
3. Formal organization and commencement of business – 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 SEC
as evidence of its corporate existence. It generally consists of:
a. The name of the corporation
b. The specific purpose or purposes for which the corporation is being
incorporated
c. The place where the principal office of the corporation to be located, which
must be within the Philippines
d. The term for which the corporation is to exist
ALFONSO T. YUCHENGCO COLLEGE OF BUSINESS

e. The names, nationalities and residences of the incorporators

f. The number of directors or trustees which shall not be less than five or
more than fifteen
g. The names, nationalities, and residence addresses of persons who shall act
as directors or trustees until the first regular directors or trustees are duly
elected and qualified in accordance with the Corporation Code
h. If it be a stock corporation, the amount of its authorized capital stock,
number of shares into which it is divided, the par value of each, names,
nationalities, and residence addresses of the original subscribers, amount
subscribed and paid by each on the subscription, and a statement that
some or all of the shares are without par value, if applicable
i. If it be a nonstock corporation, the amount of its capital, the names,
nationalities, and residence addresses of the contributors, and amount
contributed by each
j. Such other matters consistent with law and which the incorporators may
deem necessary and convenient

By-laws – refers to the regulations, ordinances, rules or laws adopted by any

association or corporation for its government. It generally consists of:
a. The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees
b. The time and manner of calling and conducting regular or special meetings
of the stockholders or members
c. The required quorum in meetings of stockholders or members and the
manner of voting thereto
d. The form for proxies of stockholders and members and the manner of
voting them
e. The qualifications, duties and compensation of directors, trustees, officers
and employees
f. The time for holding the annual election of directors or trustees and the
mode or manner of giving notice thereof
g. The manner of election or appointment and term of office of all officers
other than directors or trustees
h. The penalties of violation of by-laws
i. In case of stock corporation, the manner of issuing stock certificate
j. Such other manners as may be necessary for the proper or convenient
transaction of its corporate business and affairs

Books and Records of a Corporation –

a. Minutes book – contains Board of Directors and shareholders’ minutes of
meetings.
b. Stock and transfer book – records all original and subsequent issuance,
alienation, sales or transfer of corporate stocks. It contains the name of
shareholders, installments paid and unpaid by shareholders and dates of
payment, any transfer of share capital and dates thereof, by whom and to
whom made.
c. Books of accounts – refers to the journals and ledgers of the corporation
wherein the corporate business transactions are recorded.
d. Subscription book – contains printed blank subscriptions.
e. Shareholders’ ledger – records the number of share capital issued to
individual shareholder.
f. Subscribers’ ledger – contains the subscribed share capital and
subscriptions receivable account of the shareholders.
g. Share certificate book – contains the printed blank share certificates that
are to be issued to the shareholders.
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7.7 Classes of Capital Stock

Share capital represents the shareholders’ ownership interest in a corporation.

Once a person owns at least one share in a corporation, he/ she becomes a
shareholder and part owner of the corporation with a corresponding value of his
acquired shareholding.

Major Classes of Share Capital:

1. Ordinary share – represents the basic interest of ownership in a corporation.

When a corporation issues only one class of stock, the stock must be an ordinary
share. It is called as ordinary because a shareholder receives the same privilege
and rights with other shareholders. Moreover, the shareholder assumes greater
risk but generally exercise greater control in the corporation and may receive
greater reward in the form of dividends and capital appreciation. An ordinary
shareholder has the right to vote and be voted upon as a Board of Director.
2. Preference share – is accorded by the corporate by-laws a preference with
respect to dividends and/ or assets over ordinary shares. The preference
dividends have a fixed dividend percentage based on its par value. Accordingly,
the law provides that preference shares may be issued only with a stated par
value. A preference share is given first priority over ordinary shares with
respect to dividend distribution, and during the corporation liquidation with
regards to claims over the residual assets of the corporation. However, a
preference shareholder has no voting rights in the corporation. Thus, he/she
cannot be voted into office as members of the Board of Directors.

Classifications of Preference Share Capital:

a. Cumulative preference shares – the right of preferred shareholders to
receive dividends in arrears (undeclared dividends in previous years) is
protected and given priority before any payment of dividend is made to
ordinary shareholders.
b. Noncumulative preference shares – the right of preferred shareholders to
receive dividend in arrears is lost. He/ she is only entitled to receive the
current year’s declared dividends.
c. Participating preference shares – the preferred shareholders have the right
to receive additional dividend after the dividend for both ordinary and
preferred shares are paid. (For ordinary shares, apply current year rule. For
preference share, include dividend in arrears if cumulative.)
d. Nonparticipating preference shares – the preferred shareholders are not
entitled to receive additional dividends. They are entitled only to receive
dividends that are declared during the current year. Excess dividends are all
distributed to ordinary shareholders.
e. Convertible preference shares – the preferred shareholders are given the
option to convert the preference share into ordinary shares or some other
securities of the investee corporation.
f. Redeemable or callable preference shares – the issued preference shares
can be brought back (call or redeem) by the issuing corporation with a
specific call or redemption price.

Other Classifications of Share Capital:

1. Founder share – is given to incorporators with certain privileges on dividends
and voting rights not enjoyed by ordinary corporators.
2. Bonus share – is given as a premium in connection with, or to encourage, the
sale of another class of securities – e.g. equity shares issued to the purchasers of
bonds as an inducement to them to purchase bonds or loan money.
3. Treasury share – has been issued as fully paid to shareholders and subsequently
reacquired by the corporation for its use in to advance and promote.
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4. Promotion share – is usually issued as incentive or payment to those who take

the preliminary steps to the organization of a corporation.
5. Donated share – is given to a corporation by its own shareholders commonly for
resale.
6. Convertible share – may be exchanged by the owner for ordinary share or
another security, usually of the same company, in accordance with the terms of
the issue.
7. Watered share – is issued by a corporation as fully paid-up share capital, when in
fact the whole amount of the par value thereof has not been paid, as a result of
overstatement of the value of consideration received.