You are on page 1of 7


Corporation an artificial being created by operation of law having

the rights of succession and the power, attributes and properties expressly authorized by law or incident to its existence.

Characteristics of a Corporation
1. Separate legal entity A corporation is an artificial being with a personality separate from that of its individual owners. 2. Created by operation of law A corporation is generally created by operation of law. The mere agreement of the parties cannot give rise to a corporation. 3. Rights of succession A corporation continues to exist notwithstanding the withdrawal, death, insolvency or incapacity of the individual owners. Changes in the ownership structure do not dissolve a corporation. 4. Powers, attributes, properties expressly authorized by law Being a creation of law, a corporation can only exercise powers provided by law and powers which are incidental to its existence. 5. Ownership divided into shares Proprietorship in a corporation is divided into units known as shares of stocks. 6. Board of Directors (BOD) Management of the business is vested in a board of directors elected by the stockholders. The BOD is the governing body or decision-making body of the corporation.

Comparison between Partnership and Corporation

Partnership Formed by 2 persons. Starts with agreement among partners; may be formed orally. Unlimited liability Limited life Transfer of equity of a partner needs the consent of other partners. Corporation Formed by 5 persons Starts with the issuance of a certificate of incorporation issued by SEC Limited liability Unlimited life Shares can be transferred from one shareholder to another without getting the consent of the

other shareholders. Partner is an agent of the partnership. Shareholders do not act as agents of the corporation.

Advantages of a Corporation
1. The corporations power of succession enables it to enjoy a continuous existence. 2. The continuity of corporate existence enables it to obtain a strong credit line. 3. Bigger source of capital may be raised because many individuals invest funds in the corporation. 4. Shareholders enjoy limited liability. Their liability to corporate debts extends only to their investment in the corporation. 5. Shares of stocks may be transferred without the consent of the other shareholders.

Disadvantages of a Corporation
1. It is not easy to form because of complicated legal and documentary requirements. 2. The limited liability of the shareholders weakens or limits its credit capacity. 3. It is subject to more governmental requirements. 4. There is possibility of abuse of power by the Board of Directors. 5. It is subject to more taxes.

Types of Corporation
1. Public a corporation formed to render government service 2. Private a corporation formed for a private purpose, aim or benefit. 3. Quasi-public a private corporation which is given a franchise to perform functions of a public character.

4. Domestic a corporation that is organized under Philippine laws. 5. Foreign - a corporation that is organized under the laws of other countries. 6. Stock a corporation in which the capital is divided into shares of stock and is authorized to distribute dividends to the holders of such shares. A stock certificate is a physical evidence of the shares of stock. Stock corporations are generally profitoriented. 7. Non-stock - a corporation in which capital comes from fees or contributions given by individuals. No part of its income is distributed as dividends and any profit shall be used to further the purpose(s) of the corporation. Non-stock corporations are generally non-profit in nature. 8. Open a corporation whose ownership is widely held by many investors. 9. Closely held or family a corporation in which 50% or more of its stock is owned by five persons or less.

Components of a Corporation
1. Incorporators persons who originally formed the corporation and whose names appear in the Articles of Incorporation. They must be 5 but not more than 15 natural persons. They should not artificial persons. 2. Stockholders or shareholders owners of a stock corporation. 3. Members persons who gave fees or contributions 3

to a non-stock corporation. 4. Corporators persons who compose the corporation whether as stockholders or members. 5. Promoters persons who undertake the necessary steps and procedures to organize the corporation. 6. Subscribers persons who agreed to buy shares of stock but will pay at a later date. 7. Underwriters persons who undertake to sell the shares of stocks to the general public.

Organizing a Corporation
The process of organizing a corporation consists of three stages: 1. Promotion makes preliminary arrangements and solicits subscription to raise sufficient capital for the business. The following are the pre-incorporation requirements: o At least 25% of the authorized share capital must be subscribed. o At least 25% of total subscriptions must be paid. 2. Incorporation formalizes organization of the corporation by filing with SEC the necessary documentary requirements such as articles of incorporation and treasurers affidavit attesting compliance to the pre-incorporation requirements. Upon approval, SEC issues a certificate of incorporation, the date of which is considered as the date of registration or incorporation. 3. Commencement of the business the business should start its business within two years from the date of incorporation.

Costs incurred in connection with the formation of the corporation are recorded as expense. Examples of organization costs are filing fees, cost of printing stock certificates, promoters commission and legal fees. The following account titles may be used in recording organization costs: Pre-operating Costs Pre-operating Expenses Organization Expense Organization Costs

Articles of Incorporation
The Articles of Incorporation enumerates the powers and limitations conferred upon the corporation by the government. It includes the following information: 1. 2. 3. 4. 5. 6. 7. 8. 9. The name of the corporation; The purpose or purposes for which the corporation is formed; The place of the principal office of the corporation; The term of existence of the corporation, not exceeding 50 years; The names, nationalities and addresses of the incorporators; The names of the directors who will serve until their successors are duly elected and qualified in accordance with the by-laws; The authorized share capital , the classes of shares to be issued and the number of each class of share indicating the par value if there is any; The amount of subscription to the share capital , the names of the subscribers and the number of shares subscribed by each; The total amount paid on the subscriptions and the amount paid by each subscriber on his subscription.

The by-laws of a corporation contain provisions for the internal administration of the corporation. The by-laws should be filed within one month from the date of issuance of the certificate of incorporation. The by-laws normally include the following: 1. The date, place and manner of calling the annual shareholders meeting; 5

2. The manner of conducting meetings; 3. The circumstances which may permit the calling of special meetings of the shareholders; 4. The manner of voting and the use of proxies; 5. The manner of electing the directors; 6. The term of office of the directors; 7. The authority and duties of the directors; 8. The manner of selecting the corporate officers; 9. The procedures for amending the articles of incorporation and by-laws.

Corporate Books and Records

The corporation generally maintains the following books of accounts and records: 1. 2. 3. 4. Journals and Ledgers; Minute books for meetings of shareholders; Minute books for meetings of Board of Directors; Stock and Transfer Book - contains records of all stocks, names of stockholders, amount paid and unpaid, any sale or transfer of stock.

Kinds of Shares 1. Par Value a share of stock that is given a definite or fixed value in the articles of incorporation. 2. No Par Value a share of stock that has no fixed value; it may not be issued for less than P5. 3. Common or Ordinary shares the basic issue of shares. The common or ordinary share entitles the holder to the following basic rights: a. b. c. d. Right to vote in shareholders meeting; Right to share in corporate profits (dividends); Right to share in corporate assets upon liquidation; Right to purchase additional shares of stocks in the event that the corporation increases its share capital (preemptive right).

4. Preferred or Preference share - entitles the holder to some specific preferences over the common or ordinary share such as a. Preference as to payment of dividends; b. Preference as to distribution of assets upon liquidation.

Terms Peculiar to a Corporation 1. Authorized shares refers to the maximum number of shares which a corporation may issue (as set forth in the Articles of Incorporation). 2. Issued shares shares which are issued to shareholders which at present may or may not be in the hands of the shareholder. 3. Unissued shares shares which have never been issued and are available for issuance. 4. Outstanding shares shares of stocks issued to shareholders or subscribers whether fully or partially paid except for treasury shares. 5. Treasury shares - shares which have been issued and fully paid for but subsequently reacquired by the issuing corporation. 6. Subscribed shares shares which investors have contracted to acquire. March 2013