Part II – INCORPORATION AND ORGANIZATION

OF PRIVATE CORPORATIONS
“The Corporation Code
of the Philippines”
(B.P. Blg. 68) (1980)

Amended by Republic Act

No. 11232 - “The Revised
Corporation Code of the
Philippines” (2019)
Title I – General Provisions and
Definitions and Classifications
Sec. 1. Title of the Code. – This Code shall be
known as “The Corporation Code of the
Philippines”. (a)

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 incident to its existence. (2)
DEFINITION

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
incident to its existence.
ATTRIBUTES: (ACRP)

A. It is an artificial being;
B. It is created by operation of law;
C. It has the right of succession; and
D. It has only the powers, attributes and
properties expressly authorized by law
or incident to its existence.
A. Artificial being/Artificial personality –

 a legal or juridical person with a personality

separate and apart from its stockholders
(stock corporations) or individual members
(non-stock corporations);

 Legal or juridical person – created by law;

 Thus, in reality, it is not a person, but the law
treats it as though it is a person;
Consequences of Separate Personality of a
Corporation:

1. Liability for debt/ownership of credit –

 General rule: a corporation is not liable for

the debts of its stockholders and vice versa;
2. Right to bring actions –
 Corporation may incur obligations and bring
civil and criminal actions in its own name in
the same manner as a natural person;

 But a corporation has no personality to bring

an action for and in behalf of its stockholders
or members to recover property they own in
their personal capacities.
3. Right to acquire and possess property –
 In law, property conveyed to or acquired by
the corporation is property of the corporation
itself (as a distinct legal entity) and not by its
stockholders or members;

 As such, said property cannot be sold by the

stockholders or members without express
authorization by the corporation – through its
board of directors or trustees.
4. Liability for contracts –
 Contracts entered into by the corporation in
its name (through or by its appointed officers
and agents) are contracts of the corporation
and of its stockholders or members;

 A corporation is not liable for the personal

debts or obligations of its stockholder even if
he is a president.
5. Tax exemption/liability –
 Tax exemption granted to a corporation cannot
be extended to include the dividends it paid to its
stockholders if such dividends are not exempted
from tax;

 Tax liability of a corporation cannot be enforced

against its stockholders and vice versa.
6. Changes in individual membership –
 Corporation remains unchanged and
unaffected in its identity by changes in its
individual membership;

 A corporation has continuous existence – it

would exist even if all the stockholders die.
7. Liability under exceptional circumstances –
 Personal or solidary liability may be incurred by
corporate agents acting in behalf of the
corporation – as when:

 Director/trustee or officer acted maliciously or

in bad faith or with gross negligence; or has
used the separate personality of a corporation
to defraud third persons;
INSTANCES WHEN FICTION OF CORPORATE
ENTITY MAY BE DISREGARDED:
 “Disregarded” – also means “piercing the veil
of corporate entity”;

 Where the fiction of corporate entity is being

used as a cloak or cover for fraud or illegality;

 Effect: Individuals composing the corporation

will be treated as identical with the
corporation;
1. Where a corporation functions for the benefit of
a single person who controls the corporate
funds and is the sole owner thereof;

2. Where the corporation is a mere instrumentality

of the individual stockholders;

3. Where a domestic or Philippine corporation is

controlled by aliens;

4. Where the corporation is organized by an

insolvent debtor to defraud his creditors;
5. Where a subsidiary company is created by a
parent company merely as an instrumentality,
conduit or agency of the latter, especially if the
stockholders or officers of the two (2)
corporations are substantially the same;

6. Where a corporation is formed by a person for

the purpose of evading his individual contract;

7. Where a corporation is dissolved and its asses

are transferred to another corporation to avoid
financial liability;
B. Creation of law or by operation of law –

 Corporations cannot come into existence by mere

agreement of the parties as in the case of a
partnership;

 Private corporations in the Philippines are created

pursuant to Batas Pambansa Blg. 68 – “Corporation
Code of the Philippines”, as amended by Republic
Act No. 11232 – “The Revised Corporation Code of
the Philippines”;
C. Right of succession –
 Continuous existence irrespective of the
death, withdrawal, insolvency, or incapacity
of individual stockholders or members;

 But corporation is not immortal – the life of

the corporation is not to exceed 50 years
from the date of incorporation (this period
can be shortened or extended).
D. Powers, attributes and properties –
 Corporation can exercise only such powers as
are granted by law of its creation (as stated
on the articles of incorporation);

 Powers may be expressed or implied (which

can be incidental or essential to corporation’s
existence;
 TESTS/METHODS OF DETERMINING THE NATIONALITY OF
A CORPORATION (SEC Opinion No. 02-12, 2-02-2012):

• 1. Place of incorporation test – determined by the

state of incorporation, regardless of the nationality
of the stockholders;

• > this is regarded as the principal test;

• > Sec. 123, Corporation Code – a corporation is

deemed to be a foreign corporation if is was
“formed, organized or existing under any laws
other than those of the Philippines.
• 3. Control test – the nationality of the
corporation is determined by the nationality
of its controlling stockholders or members;

• > If 60% of its capital is owned by Filipino

citizens, the corporation is automatically
considered a Filipino national;
• 4. Grandfather rule – nationality is attributed to
the percentage of equity in the corporation
used in nationalized or partly nationalized area;
• > applies when a corporation is owned by
another corporation with foreign stockholdings;

• > Under this rule, the nationality is determined by

breaking down the equity structure of the
component corporation(s).
• Assignment: - How to compute this rule?
• The grandfather rule provides that the nationality of the
stockholders is material or critical in determining the
nationality of a corporation or its compliance with our laws
on permissible foreign investments.

Criteria
• Under this rule, the stocks owned by or registered in the
name of foreigners are sorted out and added to determine
if they meet the allowable maximum percentage of foreign
ownership in nationalized businesses;
• Example: 30% for advertising companies; 25% for recruitment
agencies; and 60% for financing companies.
• Article XII, Section 10 of the 1987 Constitution:

• The Congress shall, upon recommendation of the

economic and planning agency, when the
national interest dictates, reserve to citizens of the
Philippines or to corporations or associations at
least sixty per centum of whose capital is owned
by such citizens, or such higher percentage as
Congress may prescribe, certain areas of
investments.
• Republic Act No. 7042 (“Foreign Investments Act of
1991”) – reserves certain areas of economic
activities to Filipinos - known as:

• 1. “fully nationalised” activities – no foreign

ownership is allowed; and

• 2. “partially-nationalised” activities – foreign

ownership allowed but subject to limitations on
capital ownership.
SIMILARITIES BETWEEN A PARTNERSHIP
AND A CORPORATION: (JACDOS)
1. Juridical personality separate and distinct
from the individuals composing it;
2. Act only through its agents;
3. Composed of an aggregate of individuals;
4. Distribute profits to those who contribute to
capital;
5. May be organized only when there is a law
authorizing it; and
6. Subject to income tax.
DISTINCTION BETWEEN A PARTNERSHIP (P)
AND A CORPORATION (C):
1. Manner of Creation –
 P – By mere agreement of the parties;
 C – By law or operation of law;

2. Number of Parties –
 P – By a minimum of two (2) persons;
 C – Requires at least five (5) incorporators;
3. Commencement of Juridical Personality –
 P – Generally, from the moment of execution of
the contract;
 C – From the date of the issuance of the certificate
of incorporation of the Securities and Exchange
Commission (SEC);

4. Powers –
 P – May exercise powers authorized by partners
provided the same are not contrary to law,
morals, good customs, public policy or public
order;
 C – Can exercise only the powers expressly granted
by law or incident to its existence;
5. Management –
 P – When it is not agreed upon, each partner
is an agent of the partnership;
 C – It is vested in the board of directors or
trustees;

6. Right of Succession –
 P – No right of succession;
 C – Possesses right of succession;
7. Extent of Liability to Third Persons –
 P – Partners (except limited partners) are liable
personally and subsidiarily for partnership debts to
third persons;
 C – Stockholders are liable only to the extent of their
investments as represented by the shares
subscribed by them;

8. Transferability of interest –
 P – A partner cannot transfer interest so as to make a
partner without the consent of all other existing
partners;
 C – A stockholder has the right to transfer his shares
without the prior consent of other stockholders;
9. Term of existence –
 P – May be established for any period of time
stipulated by the partners;
 C – May not be formed for a term in excess of 50
years extendible to not more than 50 years;

10. Firm name –

 P – A limited partnership is required to add the
word ‘Ltd.’ to its name;
 C – A corporation may adopt a firm name
provided it is not identical or deceptively similar
to any registered firm name or contrary to
existing laws;
11. Dissolution –
 P – May be dissolved at any time by the will
of any or all partners;
 C – May only be dissolved with the consent of
the state;

12. Governing Laws –

 P – Civil Code;
 C – Corporation Code;
ADVANTAGES OF A CORPORATE FORM OF
BUSINESS ORGANIZATIONS:
1. The capacity to hold property, to
contract, to sue and be sued as a legal
unit or distinct entity;

2. Exemption of shareholders from individual

liability;

3. Continuity of existence in spite of death or

changes of members.
4. Transferability of shares;

5. Centralized management under a board of

directors; and

6. Standardized methods of organization,

management and finance for the protection
of shareholders and creditors under statutory
regulations.
DISADVANTAGES OF A CORPORATE FORM OF
BUSINESS ORGANIZATIONS:
1. The limited liability of the stockholders
serves to limit the credit available to the
corporation;

2. The transferability of shares permits the

uniting of incompatible and conflicting
interests in one enterprise;

3. The minority stockholders are usually

subservient to the wishes of the majority.
4. In big corporations, the stockholders’ voting
rights have become largely theoretical
because of widespread ownership,
lukewarmness and disinterest in management,
inertia, and inaccessible meeting places;

5. In large corporations, management and

control has been separated from ownership;
6. By and large corporations are subject to
governmental restrictions, controls, and report
requirements not imposed on other forms of
business organizations;

7. Corporate sphere of activity is limited in the

transaction of its business to the state of the
organization; and

8. The corporate form involves “double taxation”

on corporation income.