DON HONORIO VENTURA STATE UNIVERSITY

COLLEGE OF BUSINESS STUDIES

Bacolor, Pampanga

CHAPTER 2- CORPORATION
According to Section 1 of the Corporation Code of the Philippines

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.

According to RR 5-2021 under RA No. 11534 or the Corporate Recovery and Tax Incentives for
Enterprise Act (CREATE)

It defined CORPORATION as “shall include one person corporations, partnerships, no matter how
created or organized, joint stock companies, joint accounts, association, or insurance companies but does
not include general professional partnerships and joint ventures or consortiums formed for the purpose of
undertaking construction projects or engaging in petroleum, coal geothermal and other energy operations
pursuant to an operating consortium agreement under a service contract with the government.

CHARACTERISTICS OF A CORPORATION

1. Separate Legal Entity- Artificial Being- A Corporation is an artificial being with a personality that is
separate from that of its individual owners. Thus, it may, under its corporate name, take, hold, or convey
property to the extent allowed by law, enter into contracts and sue or be sued.

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. Right of Succession- A Corporation has the right of succession, irrespective with the causes of
dissolution; a corporation can continue its existence up to the period of time stated in the articles of
incorporation but not to exceed fifty years.

4. Power, attributes, properties authorized by law- Being a mere creation of law, a corporation can
only exercise powers provided by law and those powers which are incidental to its existence.

5. Ownership divided into shares- Shareholders have their respective shares in a corporation.

6. Board of Directors- Board of Directors elected by the shareholders. The board of directors is the
governing body or decision making body of the corporation. The Corporation Law provides that the
number of directors be not less than five but not more than fifteen.

ADVANTAGES OF A CORPORATION

1. Greater amount of capital- it is easy for a corporation to raise and assemble capital from the
combined investments of many shareholders.

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 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

2. Limited Liability- Creditors of a corporation have a claim against the assets of the corporation but not
against the personal property of its owners. A shareholder never loses beyond the amount of his
investment.

3. Transferability of shares of stock- A shareholder can transfer and dispose shares of stock at will
without the consent of other shareholders or of the corporation itself.

4. Continous Existence- the life of a corporation can be extended.

5. Legal Unit- The Corporation has a legal capacity to act as a legal unit.

6. Centralized Management- The management of a corporation is centralized in the board of directors.

7. Standard Creation- Creation, organization, management and dissolution of corporations are governed
under one general incorporation law.

TYPES OF A CORPORATION

1. Public Corporations- Those formed for political or governmental purposes such as municipalities and
cities.

2. Private Corporations- A corporation that is organized for private purposes ( e.g Coca-Cola, San
Miguel Corporation.

3. Stock Corporations- A corporation in which the capital is divided into shares of stock and is
authorized to distribute corporate earnings to holders on the basis of shares held. The owners of stock
corporations are called shareholders.

4. Non- Stock Corporations- A corporation in which capital comes from fees paid by individuals
composing it. The owners of a non- stock corporation are called members.

5. Quasi- Public Corporations- Those engaged in rendering public services such as bus, electric, water,
and telephone companies.

6. Government owned or Controlled Corporations- those which are organized by the government or
those in which the government is a majority stockholder.

7. Domestic Corporations- Those corporations incorporated under Philippine Laws

8. Foreign Corporations- Those corporations formed, organized or existing under any laws other than
those of the Philippines.

9. Ecclesiastical Corporation- Is one which is organized for religious purposes.

10. Eleemosynary Corporation- is one established for charitable purposes.

11. Open Corporation- Corporation whose ownership is widely held by many investors, usually a
private stock corporation.

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 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

12. Close Corporation or Family Corporation- Is one, which is limited to selected individuals or
members of the family.

CORPORATE INCOME TAX RATES UNDER RR 5-2021

Types of Corporation Rate Effectivity

Domestic Corporation 25% July 1, 2020

For corporations with net taxable 20% July 1, 2020

income not exceeding
(5,000,000) and Total assets not
exceeding One Hundred Million
(100,000,000), excluding the
land on which the particular
business entity’s office, plant and
equipment are situated

Resident Foreign Corporation 25% July 1, 2020

Non- Resident Foreign 25% Jan 1, 2021

Corporation

COMPONENTS OF A CORPORATION

1. Incorporators- They are the persons who originally formed the corporation and whose names appear
in the Articles of Incorporation.

2. Corporators- They are the persons who compose the corporation whether as shareholders or members.

3. Shareholders- they are the corporators of a stock corporation.

4. Members- They are the corporators of a non-stock corporation

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 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

CORPORATE STRUCTURE

SHAREHOLDERS

BOARD OF DIRECTORS

PRESIDENT

VICE- PRESIDENTS

The Corporators are the owners of the corporation. They are called Shareholders in a stock corporation.
They have ultimate control over the corporation and have a right to elect the board of directors. The
corporators are called members in a non- stock corporation and have a right to elect the board of trustees.
The founders of a corporation are called incorporators. And these are the original shareholders
mentioned in the articles of incorporation.

The Board of Directors is responsible for the overall supervision of the firm. They have the final
authority on policy making and control of corporate activities. They evaluate management performance
and act on legal matters as well.

The day to day operation of the corporation is delegated to the officers who are appointed by the Board of
Directors. The President (usually called the Chief Executive Officer (CEO) and other officers are
responsible for implementing the policies set up and the plans drawn by the board of directors.

Next to President are various officers called Vice- Presidents with specific areas of responsibility such as
production, finance, marketing, and human resources.

The election of the professional management team or the administrative officers is entrusted to the board.
This team nay include the President, Executive Vice- President, Vice Presidents in charge of Sales,
Manufacturing, Accounting, Finance, Administration and other key areas; Secretary, Treasurer,
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 shareholder’s meeting during which the shareholders elect their
directors and make other decisions.

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 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

Section 25 of the Corporation Code of the Philippines, states that the President of a Corporation must be a
director of the Corporation, but he cannot act as a President and Secretary or as a President and Treasurer
at the same time.

The Corporate Secretary must be a resident and a citizen of the Philippines. He need not be a Director
unless required by he Corporate by Laws.

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 may be authorized

ORGANIZING A CORPORATION

The process of organizing a corporation generally consists of three stages:

1. Promotion- Includes the selection of a place where in the business is to be legally located,
determination of capital structure, choosing the methods of raising funds, drafting the constitution and
bylaws etc.

2. Incorporation- The process of formalizing the organization of the corporation. This stage includes:

a.) Drafting of the articles of incorporation which must be duly executed and acknowledged before a
notary public.

b.) Filing of the articles of incorporation with the Securities and Exchange Commission (SEC) together
with the statement showing that at least 25% of the total authorized share capital (also known as
authorized capital stock) has been subscribed and that at least 25% of the total subscriptions have been
paid.

c.) After the required fees have been paid and upon approval of the articles of incorporation, the SEC
issues a certificate of incorporation, the date of which being considered as the date of registration or
incorporation.

3. Commencement of the business- The business should start its operations within two years from the
date of incorporation. Failure to do so will automatically dissolve the corporation without the need for a
hearing.

ARTICLES OF INCORPORATION

The Articles of incorporation contains the rights and restrictions conferred by the government upon the
corporation. The following information is usually included in the articles of incorporation.

1. The name of the corporation The Articles of incorporation contains the rights and restrictions conferred
2. by the government upon the corporation. The following information is usually included in the articles
of incorporation.

3. The place of the principal of the corporation

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 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

4. The term of existence of the corporation not exceeding fifty years

5. The names, nationalities, and addresses of the incorporators;

6. The names of the directors who will serve until their successors are duly elected and qualified in
accordance with the by laws

7. The authorized share capital (authorized capital stock), the classes of share capital (stocks) to be issued
and the number of shares in terms of each class indicating the par value per share , if there is any.

8. The amount of subscriptions to the share capital (capital stock), the names of the subscribers and the
number of shares subscribed by each

9. The total amount paid on the subscriptions to the share capital (capital stock) and the amount paid by
each subscriber on his subscription.

BY- LAWS

The Corporate by Laws normally include the following:

1. The date, place and manner of calling the annual shareholders meeting

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 and the number of 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 authority and responsibilities of the officers

10. The procedure for amending the articles of incorporation

11. The procedure for amending the by laws

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 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

CLASSES OF SHARES IN GENERAL

1. Par Value Shares- on in which a specific amount is fixed in the articles on incorporation and
appearing on the certificates of stock

2. No 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

3. The Minimum Stated Value of a no par value is five pesos (P 5.00) per share

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. Treasury Shares- a stock has been issued by the corporation as fully paid and later reacquired but not
retired.

MINIMUM SUBSCRIPTION AND PAID IN CAPITAL

At the time of incorporation at least twenty five (25%) percent of the authorized capital stock (share
capital) as stated in the articles of incorporation must be subscribed and at least 25% of the total
subscription must be paid upon subscription.

In no case, shall the paid in capital be less than five thousand pesos (P 5,000).

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.

ACCOUNTING FOR SHARES OF STOCKS

1. Authorization- recording of the maximum number of shares a corporation is authorized to issue as

stated in the articles of incorporation. This is called Authorized Share Capital or Authorized
Capital Stock

2. Sale- when a shareholder buys and pays immediately in full, the shares are considered sold and a
stock certificate is issued. The share are called Share Capital

3. Subscription- a subscriber enters into a contract to buy a number of shares. A down payment is
usually required with the balance payable on a fixed date or upon call by the Board of Directors.
The shares are called Subscribed Share Capital

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 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

4. Collection or Subscription- the subscription may be paid by the shareholders in cash, property,
or in the form of service ( as in the case of a partnership which is incorporated)

5. Issuance of Certificate- once the subscription is collected in full, a certificate is issued.

6. Reacquisition of Shares- the issuing corporation may reacquire ( purchase or redeem) the shares
of stock which were originally issued with the intention of either reselling or retiring these shares
in the near future. These are called Treasury Shares

SHAREHOLDER’S EQUITY

The following is the shareholder’s equity section of a Statement of Financial Position

Shareholder’s Equity

Share Capital

Preference Shares- P 50 par, 1,000 authorized, issued and outstanding P 50,000

Ordinary Shares-P 5 par, 30,000 shares authorized, 20,000 shares issued and

Outstanding 100,000

Share Premium- Ordinary 50,000

Retained Earnings 80,000

TOTAL SHAREHOLDER’S EQUITY P 280,000

RETAINED EARNINGS

It represents the component of the shareholders equity arising from the retention of assets generated from
profit- directed activities of the corporation.

At the end of an accounting period, the income summary account of a corporation is closed to the
Retained Earnings Account.

The Retained Earnings account is credited with the corporation’s profit or debited with the loss. The basic
source of retained earnings is profit.

Distribution to shareholders of cash, property or stocks from unrestricted retained earnings on the basis of
all issued and fully paid shares and all subscribed peer value shares except treasury shares are called
“Dividends”.

Dividend declaration reduce retained earnings

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 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

The declaration and payment of dividends involve three important dates:

DATE OF DECLARATION

On the date of declaration, the board of directors will adopt a resolution declaring that a dividends is to be
paid.

The resolution will specify the amount, type and date of payment of this dividend. It will also set a date of
record.

Cash dividends are declared solely by the board of directors while Share Dividends will necessitate the
concurrence of at least 2/3 of the outstanding shareholders.

Declared dividends are obligations of the firm. Dividends to be paid in cash or property become a liability
on this date.

An entry is made

Debit Retained Earnings xxx

Credit Dividend Liability or shares distributable account.

Paragraph 10 of IFRIC 17 provides that the liability to pay a dividend shall be recognized when the
dividend is appropriately authorized and is no longer at the discretion of the entity, which is the date:

(a) When declaration of dividend by the management or board of directors is approved by the
relevant authority e.g shareholders, if the jurisdiction requires such approval

(b) When the dividend is declared e.g by management or the board of directors if the jurisdiction
does not require further approval

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 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

DATE OF RECORD

A list of shareholders entitled to the declared dividends is prepared at the date of record. If an investor
buys a share of stock after this date, he will not receive the dividend. The share is to be traded ex
dividend. No entry is required on this date.

DATE OF PAYMENT

The corporation settled its liability on this date. An entry is made by

Debiting the Dividend Liability or Shares Distributable Account

Crediting Cash, Property distributed share or share capital

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