CORPORATIONS: BASIC CONSIDERATIONS DEFINITION OF CORPORATION

A corporation is an artificial being created by operations of law, having the right of succession
and the powers, attributes and properties expressly authorized by law or incident to its
existence (The Corporation Code of the Philippines, Sec. 2).

ATTRIBUTES OF A CORPORATION
1. A corporation is an artificial being with a personality separate and apart from its individual
shareholders or members.

2. It is created by operation of law. It cannot come into existence by mere agreement of the
parties as in the case of business partnerships. Corporations require special authority or grant
from the State, either by a special incorporation law that directly creates the corporation or by
means of a general corporation law (i.e., The Corporation Code of the Philippines).

3. It employs the right of succession. A corporation has the capacity of continued existence
subject to the period stated in the Articles of Incorporation. The death, withdrawal, insolvency
or incapacity of the individual shareholders or members will not dissolve the the corporation.
The transfer of ownership of shares or stock does not dissolve the corporation.

4. It has the powers, attributes and properties expressly authorized by law or incident to its
existence.

ADVANTAGES OF A CORPORATION
1. The corporation has the legal capacity to act as a legal entity.
2. Shareholders have limited liability.
3. It has continuity of existence.
4. Shares of stock can be transferred without the consent of the other shareholders.
5. Its management is centralized in the board of directors.
6. Shareholders are not general agents of the business.
7. Greater ability to acquire funds.

DISADVANTAGES OF CORPORATION
1. A corporation is relatively complicated in formation and management.
● 2. There is greater degree of government control and supervision. kis3. It requires a
relatively high cost of formation and operations.
4. It is subject to heavier taxation than other forms of business organizations.
5. Minority shareholders are subservient to the wishes of the majority.
6. In large corporations, management and control have been separated from ownership.
7. Transferability of shares permits the uniting of incompatible and conflicting elements in one
venture.
CLASSES OF CORPORATIONS Section 3 of the Corporation Code classified private corporations
into:
1. Stocks corporation. Corporations which have share capital divided into shares and are
authorized to distribute to the holders of such shares dividends or allotments of the surplus
profit on the basis of the shares held.

2. Non-stock corporation. A non-stock corporation is one where no part of its income is

distributable as dividends to its members, trustees, or officers. Any profit that a non- stock
corporation may obtain as an incident to its operation shall, whenever necessary or proper, be
used for the furtherance of the purpose or purposes for which the corporation was organized
(The Corporation Code of the Philippines, Sec. 87).
Non-stock corporations, may be formed or organized for charitable, religious, educational,
professional, cultural, recreational, fraternal, literary, social, civic service, or similar purposes
(Sec. 88).

OTHER CLASSIFICATIONS OF CORPORATIONS

1. According to number of persons:
a. Corporation aggregate. A corporation consisting of more than one corporator.
b. Corporation sole or a special form of corporation usually associated with the clergy. It is a
corporation which consists of only one member or corporator and his successors such as a
bishop.
c. One-Person Corporation. OPC is a corporation with a single stockholder, who can only be a
natural person (who must be of legal age).

2. According to nationality:
a. Domestic corporation. A corporation organized under Philippine laws.
b. Foreign corporation. A corporation organized under foreign laws.

3. According to whether for public or private purpose:

a. Public corporation. A corporation formed or organized for the government of a portion of the
state (e.g. provinces, cities, municipalities or barangays).
b. Private corporation. A corporation created for private aim, benefit or purpose.

4. According to whether for charitable purpose or not:

a. Ecclesiastical corporation. Those organized for religious purposes.
b. Eleemosynary corporation. Those established for public charity.
c. Civil corporation. Those established for business or profit.

5. According to their legal right to corporate existence:

a. De jure corporation. A corporation existing in fact or law. It is organized in strict conformity
with the law.
b. De facto corporation. A corporation existing in fact but not in law.
6. According to degree of public participation with regard to share ownership:
a. Close corporation. A corporation whose share ownership is limited to selected persons or
members of a family not exceeding 20 persons.
b. Open corporation. A corporation where the share is available for subscription or purchase by
any person.
c. Publicly-held corporation. A corporation with a class of equity securities listed on an
exchange or with assets in excess of P50,000,000 and having 200 or more holders, or at least
200 of which are holding at least 100 shares of a class of its equity securities [SRC Rule 3-1M,
Amended IRR of the Securities Regulations Code (R.A. 8799)].

7. According to their relation to another corporation:

a. Parent or holding corporation. A corporation that is related to another corporation that it has
the power to either directly or indirectly elect the majority of the directors of a subsidiary
corporation.
b. Subsidiary corporation. A corporation controlled by another corporation known as a parent
corporation.

STEPS IN THE CREATION OF A CORPORATION There are three steps in the creation and
organization of a corporation, namely:
1. Promotion. It is the process of bringing together the incorporators or the persons interested
in the business, of procuring subscriptions or capital for the corporation and of setting in
motion the machinery that leads to the incorporation of the corporation itself.

2. Incorporation. This step includes the following:

a. Verification from the records of the Securities and Exchange Commission (SEC) that the
proposed corporate name is not the same or similar to an existing corporation. The corporate
name shall contain the word "Corporation", or "Incorporated", or the abbreviations "Corp." or
"Inc.", respectively. The corporate name of a foundation shall use the word "Foundation". A
term that describes the business of a corporation in its name should refer to its primary
purpose (SEC Memorandum Circular 5, Series of 2008).
b. Drafting and execution of the articles of incorporation (AI) by the incorporators. The person
elected as temporary treasurer should execute an affidavit regarding the share capital
subscribed and paid up. The treasurer should also submit a sworn statement of assets and
liabilities of the corporation.
c. Deposit by the treasurer of the cash paid for the shares subscribed in the bank in the name of
the treasurer in trust for and to the credit of the corporation. The bank is required to issue a
certificate of deposit.
d. Filing the articles of incorporation (AI) with the SEC together with the treasurer's affidavit,
statement of financial position, certificate of bank deposit, and certificate as to the name of the
corporation.
e. Payment of the filing fees; for the AI, equivalent to 1/5 of 1% of the authorized capital stock
of the proposed corporation but not less than P1,000; for the by-laws, P510; for SEC Form F-
100, P2,000; and a legal research fee which is 1% of the filing fee for the AI.
f. Endorsement from other government agencies if the proposed corporation will engage in an
industry regulated by the government, other requirements for corporations with foreign equity
and additional requirements based on the kind of payment of subscriptions; and
g. Issuance by the SEC of the certificate of incorporation.

3. Formal organization and commencement of business operations. Formal organization

requires the adoption of by-laws and the election of the board of directors and of the
administrative officers. It also includes the taking of such other steps as are necessary to enable
the corporation to transact the legitimate business or accomplish the purpose for which it was
created. Section 22 of the Corporation Code states that if a corporation does not formally
organize and commence the transaction of its business within two (2) years from the date of its
incorporation, its corporate powers shall cease and the corporation shall be deemed dissolved.
However, if the corporation has commenced business but subsequently becomes continuously
inoperative for a period of at least five (5) years, the same shall be a ground for suspension or
revocation of its certificate of incorporation.

ARTICLES OF INCORPORATION
In the Philippines, the general law which governs the creation of private corporations is the
Corporation Code of the Philippines. Section 14 provides that 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 the incorporators, containing
substantially the following matters except as otherwise prescribed by this Code or by special
laws:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is formed;
3. The principal place of business which must be within the Philippines;
4. The term of existence;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five (5) nor 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 elected and qualified.
8. If it is a stock corporation:
a. Amount of authorized share capital in pesos;
b. Number of shares into which it is divided;
c. In case the shares are par value shares: The par value of each share, Names,
nationalities and residences of the original subscribers, The amount subscribed and paid
by each subscriber on his subscription.
d. In case of no par value, the articles need only state such fact, and the number of
shares into which said share capital is divided.
9. If it is a non-stock corporation, the amount of its capital, the names, nationalities and
residences of the contributors and the amount contributed.
BY-LAWS
There are the rules of action adopted by the corporation for its internal government and for the
government of its officers, shareholders or members. The by-laws shall be adopted within one
month from the issuance of the certificate of incorporation by the Securities and Exchange
Commission. Failure to file a code of by-laws shall render the corporation liable for the
revocation of its registration. A private corporation may provide in its by-laws for:
1. The time, place and manner of calling and conducting regular or special meetings of the
directors or trustees;
2. The time and manner of calling and conducting regular or special meetings of the
shareholders or members;
3. The required quorum in meetings of shareholders or members and the manner of voting
therein;
4. The form for proxies of shareholders and members and manner of voting them;
5. The qualifications, duties and compensation of directors or trustees, officers and employees;
6. The time for holding the annual election of directors or trustees and the mode of manner of
giving notice thereof;
7. The manner of election or appointment and the term of office of all officers other than
directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient transaction of its
corporate business and affairs.

RIGHTS OF A SHAREHOLDER
The following are some of the rights of a shareholder:
1. Right to be issued certificate of stock or other evidence of share ownership and to transfer
such shares.
2. Right to attend and vote in person or by proxy at shareholders' meetings.
3. Right to elect and remove directors.
4. Right to adopt, amend or repeal the by-laws.
5. Right to purchase a portion of any new shares issued to maintain the same percentage of
stock ownership. This right is known as the pre-emptive right. However, this right is not
absolute and may be denied.
6. Right to receive dividends when declared.
7. Right to inspect corporate books and records, and to receive financial reports of the
corporation's operations.
8. Right to participate in the distribution of corporate assets upon dissolution.

COMPONENTS OF A CORPORATION
1. Corporatorsare those who compose a corporation whether as shareholders or members, at
any time. This terms includes incorporators, shareholders or members (Sec. 5). Note: a
corporation or a partnership can be corporator, but cannot be an incorporator. A partnership
can be a corporator in a corporation but a corporation cannot be a general partner in a
partnership.
2. Incorporators are shareholders or members mentioned in the articles of incorporation as
originally forming and composing the corporation and are signatories to said articles of
incorporation (Sec. 5). They must be natural persons (i.e. human beings) as distinguished from
artificial beings (e.g., a corporation or a partnership). An incorporator will always retain his
status as such though no longer having an interest in the corporation. The Code specifies that
five or more persons, not exceeding fifteen, may form a private corporation provided that they
are of legal age, owners or subscribers to at least one share of capital stock and that the
majority are residents of the Philippines. Note: All incorporators (if they continue to be
shareholders) are corporators of a corporation, but not all corporators are incorporators.

3. Shareholders or stockholders are corporators in a stock corporation (Sec. 5). Shareholders

may be natural or juridical persons.

4. Members are corporators of a non-stock corporation (Sec. 5).

5. Subscribers are persons who have agreed to take and pay for original, unissued shares of a
corporation formed or to be formed. Note: All incorporators are subscribers bit a subscriber
need not be an incorporator.

6. Promoters are persons who bring about or cause to bring about the formation and
organization of a corporation.

7. Underwriters are usually investment bankers who have Agreed, alone or with others, to buy
at stated terms an entire or a substantial part of an issue of securities; or Guaranteed the sale
of an issue by agreement to buy from the issuing corporation any unsold portion at a stated
price; or Agreed to use his best efforts to market all or part of an issue; or Offered for sale
shares he has purchased from a controlling shareholder. 8. Independent director is a person
who apart from his fees and shareholdings is independent of management and free from any
business or other relationship which could, or could reasonably be perceived to, materially
interfere with his exercise of independent judgment in carrying out the responsibilities of a
director. A publicly-held corporation, as earlier defined, shall have at least two independent
directors or at least 20% of the members of the board, whichever is the lesser (Sec. 38 of the
SRC). This is being done to protect the interest of the shareholders and investors. The election
of the independent director is done during the annual stockholders meeting by the
stockholders themselves.

CLASSES OF SHARES IN GENERAL

1. Par value shares. One in which a specific amount is fixed in the articles of incorporation and
appearing on the certificate of stock. The par value is the minimum issue price of the shares.
Section 6 of the Code states that preference (or preferred) shares of stock may be issued only
as par value shares.
2. Non-par value shares. One without any value appearing on the face of the certificate of
stock. A no-par value share may have a stated value which may be fixed in the articles of
incorporation or by the board of directors or the stockholders. Thus, the issue price may vary
from time to time as it is usually fixed based on the book value of the corporation's shares.
3. However, the minimum stated value of a no-par value share is five pesos (P5.00) per share
(Sec. 6). In addition, shares issued without par value are deemed fully paid. Banks, trust
companies, insurance companies, public utilities, and building and loan associations are not
permitted to issue no-par value shares of stock.
4. Voting shares. Those issued with the right to vote.
5. Non-voting shares. Those issued without the right to vote.
6. Ordinary shares. These shares entitle the holder to an equal pro-rata division of profits
without any preference.
7. Preference shares. These shares entitle the holder to certain advantages or benefits over the
holders of ordinary shares.
8. Promotion shares. Those issued to promoters as compensation in promoting the
incorporation of a corporation, or for services rendered in launching or promoting the welfare
of the corporation.
9. Treasury shares. A stock that has been issued by the corporation as fully paid and later
reacquired but not retired.
10. Convertible shares. A stock which is convertible or changeable from one class to another
class.

MINIMUM SUBSCRIPTION AND PAID-IN CAPITAL

At the time of incorporation, at least twenty-five (25%) percent of the authorized capital stock
(or share capital) as stated in the articles of incorporation must be subscribed and at least
twenty-five (25%) percent 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 a call, or
in the absence of a fixed date or dates, upon call for payment by the Board of Directors. In no
case shall the paid-in capital be less than five thousand (P5,000) pesos (The Corporation Code of
the Philippines, Sec. 13). In practice, SEC requires higher minimum capital requirements for
particular types of corporations. These requirements are mandatory. The 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 the minimum subscription and paid-in capital requirements have been complied with.
Observe that the New Corporation Code used the term "total" subscription as the basis for the
application of the second 25%. It is not necessary that each and every subscriber shall pay
twenty-five percent of his subscription. It is enough that 25% of the total subscription is paid.
Illustration: Assume that the authorized share capital is P2,000,000 divided into 20,000 shares
with a par value of P100 per share. The subscribed share capital must be P500,000 which is 25%
of the authorized share capital of P2,000,000. The paid-in capital should be P125,000 which is
25% of the subscribed share capital of P500,000. Suppose that the authorized share capital is
P60,000 divided into 6,000 P10 par value shares. Applying the 25%-25% rule, the paid-in capital
will only amount to P3,750. The incorporators must pay P5,000 because this is the minimum
paid-in capital required by law. In case of no-par value shares, the 25% requirement will be
based on the authorized number of shares. If the authorized capital is pegged at 2,000 no-par
value shares, then at least 500 no- par value shares must be subscribed.
BASIC CORPORATE ORGANIZATIONAL STRUCTURE
The ultimate control of the corporation rests with the shareholders. They are the owners of the
corporation. The shareholders elect the top governing body of the corporation, the members of
the board of directors. The board of directors is responsible for the formulation of the overall
policies for the corporation and for the exercise of corporate powers. The board also elects a
chairman of the board. The election of the professional management team or the
administrative officers is entrusted to the board. This team may include the president;
executive vice-president; vice-presidents in charge of sales, manufacturing, accounting, finance,
administration and other key areas; secretary; treasurer; and controller. These officers
implement the policies of the board of directors and actively manage the day-to-day affairs of
the corporation. Annually, a corporation holds the shareholders' meeting during which the
shareholders' elect their directors and make other decisions.
Sec. 25 of the Corporation Code of the Philippines, states that the president of a corporation
must be a director of the corporation, but cannot act as president and secretary or as president
and treasurer at the same time. The president is the only officer required by law to be a
director. The corporate secretary must be a resident and a citizen of the Philippines. He need
not be a director unless required by the corporate by-laws. It is generally the duty of the
secretary to make and keep records and to make proper entries of the votes, resolutions and
proceedings of the shareholders and directors in the management of the corporation. The
corporate treasurer is the proper officer entrusted with the authority to receive and keep the
money of the corporation and to disburse them as he may be authorized. The treasurer may or
may not be a director. There is no prohibition in the law against a shareholder being a director
or officer of two or more corporations. The Corporation Code does not prohibit a corporate
officer from occupying the same position in another corporation organized for the same
purpose. However, such situation may be prohibited by special law, the articles of incorporation
or the corporate by-laws. There is a particular case involving a business tycoon who wanted to
become a San Miguel Corporation director although he was already occupying the same post in
two corporations directly competing with the food and beverage giant. At that time, San Miguel
amended its by-laws to provide for the disqualification of a shareholder from being a director of
the corporation if the former already occupies the same position in a competing firm. The
Supreme Court later upheld the decision of the San Miguel. Thus a corporation is authorized to
prescribe qualifications for its directors (Gokongwei vs. SEC, 89 SCRA 336).

CORPORATE BOOKS AND RECORDS

Every private corporation, stock or non-stock, is required to keep books and records at its
principal office of the following:
1. Minute book. It contains the minutes of the meetings of the directors and stockholders.
2. Stock and transfer book. It is a record of the names of the shareholders, installments paid
and unpaid by the shareholders and dates of payment, any transfer of stock and dates thereof,
by whom and to whom made.
3. Books of accounts. These represent the record of all business transactions. The books of
accounts normally include the journal and the ledger.
4. Subscription book. It is a book of printed blank subscription.
5. Shareholders' ledger. It is a ledger which details the number of shares issued to each
shareholder.
6. Stock certificate. It is a book of printed blank certificates of stock.