CHAPTER CORPORATE FORMATION CORPORATION This chapter begins our study of a business organized as corporation. First, we define a corporation, discuss its attributes and characteristics, and enumerate the advantages and disadvantages, similarities to that of a partnership, classifications, corporate powers, and its components. Next, we focus attention on corporate formation, steps in incorporation, articles of incorporation — its format and contents, corporate by-laws, books and records of a corporation, elements of shareholders’ equity, and definition of stock terms. CORPORATION DEFINED The Revised Corporation Code of the Philippines provides that a “corporation is 2n artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence.” The above d lefinition reveals the following attributes of a corporation: 1 'tis an artificial being; Itis created by operation of law; Ithas the right of succession; andPARTNERSHIP AND CORPORATION ACCOUNTING _ 4. It has only the powers, attributes, and properties expressly authorized by law or incidental to its existence. ration is an Artificial Being . een a corporation has a legal or juridical personality separate and distinct from its individual members or shareholders who are merged in the corporate body, It is not in fact and in reality a person but the law treats it as though it were a person by process of fiction. The shareholders or members compose the corporation but they are not the corporation. Corporation is Created by Operation of Law In contrast to a partnership, a corporation cannot come into existence by mere agreement of parties. It requires special authority or grant from the state. This Power is exercised by the state through the legislative department either by a special incorporation law, which directly creates the corporation, or by means of a general incorporation law. Corporation has the Right of Succession In a corporation, shares of stock can easily be transferred without affecting its economic or legal status. It has a capacity of continuous existence irrespective of the death, withdrawal, insolvency, or incapacity of the individual members or shareholders and regardless of the transfer of their interest or shares of stock. Section 11 of the Revised Corporation Code states that a Corporation shall have perpetual existence unless its articles of incorporation provides otherwise. Corporation has Powers, Attributes, and Properties Being a mere creation of law, a corporation may exercise only such powers granted by the law of its existence. An express Brant, however, is not necessary. All powers which may be implied from those expressly provided by law and those which are incidental or essential to the corporation’s exi h istence may also be exercised. 252CO ——< | CHAPTER 6I CORPORATE FORMATION CHARACTERISTICS OF 4 CORPORATION In addition to the four attributes discussed, oth it Ha i » Other characteristics may | peoee ® corporation from other forms of busine organizations, Some of 1, Limited liability of shareholders. 2, Close regulation by the government. 3, Delegated management. Limited Liability of Shareholders In a corporation, shareholders ars liability to corporate creditors is case of liquidation. e like limited partners in a Partnership. Their Only up to the extent of their subscriptions in Close Regulation by the Government The government, through the Securit task of monitoring the corporate activi are: (1) submission of audited reports through proper government agencies. s and Exchange Commission, assume the ities. Examples of government regulations to the SEC, (2) visitorial power of the state Delegated Management Management of a corporation is delegated to the board of directors/board of trustees elected by the shareholders or members from among themselves. SIMILARITIES BETWEEN A PARTNERSHIP AND A CORPORATION Partnerships and corporations have some things in common. Some of these are as follows: } i 1. Like a Partnership, a corporation has a juridical personality separate and distinct from that of the individuals sreewe ef dens i i oration can act only f ie a paeeng: “s corparation is an organization composed of an aggregate of individuals. 263Ql PARTNERSHIP AND CORPORATION ACCOUNTING ws ADVANTAGES OF A CORPORATION Corporations have some advantages over other business organizations. Some of these are as follows: It has continuity of existence. Its credit is strengthened by its continuity of existence. Its managementis centralized in the board of directors or board of trustees, |. The shareholders have limited liability. The shares of stock can be transferred without the consent of Other shareholders. Rune DISADVANTAGES OF A CORPORATION Like in any type of business organizations, there are also disadvantages, These are as follows: The corporation is relatively complicated in formation and management, It entails relatively high cost of formation and operation. Its credit is weakened by the limited liability of shareholders, There is greater degree of governmental control and supervision. The shareholders or members have little voice in the conduct of the business. yeenep CLASSIFICATION OF CORPORATION Corporations may be classified into the following: Public Corporations Private Corporations Quasi-Public Corporations Ecclesiastical Corporations Corporations by Prescriptions Domestic Corporations Foreign Corporations Open Corporations . Close Corporations 10. One Person Corporations/OPC 11, Others WPOnnuewne 254y | CHAPTER 6 | CORPORATE FORMATION public Corporations ‘These are corporations created by the government as a portion of the state intended for public purposes connected with the administration of the government. private Corporations These are corporations formed for some private purposes benefit, aim, or end. Their direct object is to promote private interest and for the advantage of their ‘own shareholders or members. The Revised Corporation Code classifies private corporations into: a, Stock Corporations — those that have a capital stock divided into shares and are authorized to distribute to the holders of such shares dividends on the basis of shares held. b. Non-stock corporations — those corporations other than stock corporations. They do not issue shares of stocks and no part of its income is distributable as dividends to its members, trustees, or officers. Quasi-Public Corporations These are private corporations that have accepted from the state the grant of a franchise or contract involving the performance of public duties. Examples of these corporations are those organized for profit but affected with public interest such as electric, water, telecommunications and transportation companies. Ecclesiastical Corporations These are corporations organized for the furtherance of religion and for Perpetuating the rights of the church. Corporations by Prescription 4 : Those which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power and which by fiction of law is 8iven the status of a corporation. 255PARTNERSHIP AND CORPORATION ACCOUNTING Domestic Corporations Those corporations organized and obtained their charter under the Philippine laws. Foreign Corporations Those corporations incorporated in foreign countries; any other country except the Philippines are considered foreign in the Philippines. Open Corporations Those corporations whose shares of stock are traded in the stock market available for purchase by the general public. Close Corporations Section 95 of the Revised Corporation Code of the Philippines defines close corporations as corporations "whose articles of incorporation provides that: (a) all the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (b) all the issued stocks of all classes shall be subject to ‘one or more specified restrictions on transfer permitted by this title; and (c) the corporation shall not list in any stock exchange or make any public offering of its stocks of any class. Notwithstanding of the foregoing, a corporation shall not be deemed close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. One Person Corporations Section 116 of the New Corporation Law states that “A one person corporation is a corporation with a single stockholder. Provided, that only a natural person, trust, or an estate may form a One Person Corporation.| HAPTER 6 | CORPORATE FORMATION POWERS OF CORPORATIONS section 35 of the Revised Corporation Cox corporation incorporated under this Cod; 1 . To have perpetual existence unless the certificat \de of the Philippines states that “every le has the power and capacity: To sue and be sued in its Corporate name; otherwise; tte of incorporation provides . To adopt and use corporate seal; . To amend its articles of incorporation in accordance with the provisions of the New Corporation Code; . To adopt by-laws not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; In case of stock corporations, to issue or sell stocks to subscribersand to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal. property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may. reasonably and necessarily require, subject to the limitations prescribed by law and the constitution; joint venture, merger consolidation, or any To enter into a partnership, ons; other commercial agreement with natural and juridical pers To make reasonable donations, including those for the pu lic welfare ooh hospital, charitable, cultural, scientific, civic, or similar purposes. provid , that no foreign corporation, shal give donations in aid of any politcal party or candidate or for purposes of partisan political activity: 257oN PARTNERSHIP AND CORPORATION ACCOUNTING 10. To establish pension, retirement, and other plans for the benefit 4 directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carr... its purpose or purposes as stated in the articles of incorporation.” COMPONENTS OF A CORPORATION The law enumerates four classes of persons composing the corporation. The, are as follows: 1. Corporators - those who compose the corporation, whether ax shareholders or members, or both 2. Incorporators - those corporators mentioned in the articles of incorporation as originally forming and composing the corporation and who executed and signed the articles of incorporation. 3. Shareholders ~ the owners of shares of stack in a corporation. 4. Members ~ corporators of non-stock corporation. RIGHTS OF SHAREHOLDERS Shareholders of a corporation have some basic rights. Some of these are: 1. The right to have a certificate or other evidence of his status a? shareholder issued to him. 2. The right to vote at meetings of the corporation’s shareholders. 3. The right to receive his proportionate share in the profits of the corporat’ upon declaration of dividends. 4, The right to share in the distribution of assets upon liquidation of *™ corporation 258 pee gg| CHAPTER 6 | CORPORATE FORMATION The right to buy additional shares of Stock in case of new issues in order to maintain his proportionate interest in th 7 ce emptive right. e corporation. This is called pre- CORPORATE FORMATION OR INCORPORATION the formation of a corporation requires a lot of work. As a tule, private corporations a not come into existence except upon compliance with the law regulating its incorporation. The right to form a corporation requires a grant of primary franchise by the state. Since it is merely a Brant, the state can impose restrictions and conditions upon which corporations may exist. section 10 of the Revised Corporation Code states that “any person, partnership, association, or corporation, singly or jointly with others but not more than fifteen (15) in number may organize a corporation for any lawful purpose or purposes. Provided, that natural persons who are licensed to practice a profession, and partnerships or associations organized for the purpose of practicing a profession, shall not be allowed to organize as a corporation unless otherwise provided under special laws. Incorporators who are natural persons must be of legal age. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of capital stock of the corporation.” STEPS IN INCORPORATION Formally organizing a corporation is called incorporation. Incorporation involves the following steps: 1. Verification from the Securities and Exchange Commission to make sure that the name to be adopted by the corporation is distinguishable from that already reserved or registered for the use of another corporation or such name is already protected by law. 2. Drafting and execution of the articles in incorporation by the incorporators. Stock corporations shall not be required to have a minimum capital stock, except as otherwise provided by special law. 259PARTNERSHIP AND CORPORATION ACCOUNTING _ 3. Filing of the articles of incorporation with the Securities and Exchange Commission and, in case the corporation is governed by special laws, favorable recommendation of the appropriate government agency. 4. Payment of the filing and publication fees. 5. The issuance by the Securities and Exchange Commission of the certificate of incorporation if all the papers filed after verification and examination are found in order. ARTICLES OF INCORPORATION Section 13 of the Revised Corporation Code of the Philippines also states that “all corporations organized under this Code shall file with the Securities and Exchange Commission articles of incorporations in any of the official languages, duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being formed. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes; 3. The place where the principal office of the corporation is to be located, which must be within the Philippines; 4. The term for which the corporation is to exist, if the corporation has not elected perpetual existence; 5, The names, nationalities, and residences of the incorporators; The number of directors, which shall not be more than fifteen (15) or the number of trustees which may be more than fifteen (15); 260| CHAPTERS | CORPORATE FORMATION eae eS |, Thenames, nationalities, and residence address of Persons who shall act as trustees until the fi i directors or trustees { 'e first regular directors or tr elected and qualified in accordance with this Code: Tepe ifit is a stock Corporation, the amount of its authorized capital stock, the number of shares into which it is divided, and in case the shares are par value shares, the par value of each, the names, nationalities and residence addresses of the original subscribers, and the 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; 9, If it be a noh-stock corporation, the amount of its capital, the names, nationalities, and residence addresses of the contributors and the amount contributed by each; and 10. Such other matters as are consistent with law and which the incorporators may deem necessary and convenient.” ARTICLES OF INCORPORATION: FORMAT Section 13 of the Revised Corporation Code also states that “All corporations shall file with the Commission articles of incorporation in any of the official ‘anguages, duly signed and acknowledge or authenticated, in such form and following matters, except as otherwise prescribed by this Code or by special law. Section 14 also states — Unless otherwise prescribed by special law, the articles Sfincorporation of all domestic corporations shall comply substantially with the ‘cllowing form: ARTICLES OF INCORPORATION OF (Name of Corporation) 261 ‘Tanner as may be allowed by the Commission, containing substantially the ,PARTNERSHIP AND CORPORATION ACCOUNTING The undersigned incorporators, all of legal age, have voluntarily agreed to form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines and certify the following First: That the name of said corporation shall be or Corporation or OPC”; ee Inc, Second: That the purpose or purposes for which such corporation js incorporated are (if there is more than one purpose, indicate primary and secondary purposes); Third: That the principal office of the corporation is located in the City/Municipality of _ Province of __ Philippines; Fourth: That the corporation shall have perpetual existence or a term of years from the date of issuance of the certificate of incorporation; Fifth: That the names, nationalities and residences of the incorporators of the corporation are as follows: Name Nationality Residence Sixth: That the number of directors or trustees of the corporation shall be ; and the names, nationalities and residences of the first directors or trustees of the corporation are as follows: Name Nationality Residence | 262| cAPTER 6 | CORPORATE FORMATION = TO =o.) See ate | el seventh: That the authorized capital « tock of th . © corporation is = ( P08 sive into shares with the value (P___ pesos per share incase all the shares are without Par value): That the capital stock of the corporation is shares without value. (IN case some shares have par value and some are without par value): that the capital stock of said corporation Consists of shares of which shares are of the par value of (P ) pesos each, and of which shares are without par value. Eighth: That the number of shares of the authorized capital stock above stated has been subscribed as follows: Name of No. of shares Amount Amount Subscriber Nationality Subscribed Subscribed Paid Ninth: That has been elected by the subscribers as Treasurer of the Corporation to act as such until his successor is duly elected and qualified in accordance with the by- laws, and that as Treasurer, authority has been given to receive in the name and for the benefit of the corporation, al subscriptions contributions or donations paid or given by the subscribers or members, who certifies the information set forth in the seventh and eight Clauses above, and that the paid-up portion of the subscription in cash and/or broperty for the benefit and credit of the corporation has been duly received Tenth: That the incorporators undertake to ch~ age the name ead ‘orporation immediately upon receipt of notice from the come ie "other corporation, partnership or person has acquired a prior rh a of such name, that the name has been declared not distinguishable from 263__ PARTNERSHIP AND CORPORATION ACCOUNTING t it is contr already registered for the use of another corporation, oF that i rary to law, public morals, good customs or public policy. Eleventh: (Corporations which will engage in any business or activity reserved for Filipino citizens shall Carrara eietthip of Fins “No transfer of stock or interest w! Ht silat ts less than the required percentage of the capital bay as Oe by tasting laws shall be allowed or permitted to be recorded in the prope rls of the corporation and this restriction shall be indicated in all the stock certificates issued by the corporation.” signed these Articles of in the City/Municipality of Republic of the Philippines. In witness. whereof, we have hereunto Incorporation, this _ day of ,20_, , Province of (Names and signatures of the incorporators) (Name and signature of the treasurer) BY-LAWS By-laws may be defined as the rules of action adopted by the corporation for its internal government and for the government of its officers and of its shareholders or members. This supplements the articles of incorporation. Section 46 of the New Corporation Code suggests the following matters to be included in the by-laws of a corporation: 1. The time, place and manner of calling and conducting regular or special meetings of directors or trustees; 264CHAPTER 6 | CORPORATE FORMATION | the time and manner of calng and cond, tin : af shareholders or members, ‘ing regular or special meetings The required quorum in meetings of shareh ol manner of voting therein; Iders or members and the . The time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof: 8. The manner of elections or appointment and the term of office of all officers other than directors or trustees; 5. The penalties for violation of the by- laws; 10. In the case of stock corporations, the manner of issuing certificates; and 4. Such other matters that may be necessary for the proper or convenient transaction of its corporate business and affairs for the promotion of good Governance and anti-graft and corruption measures.PARTNERSHIP AND CORPORATION ACCOUNTING BOOKS AND RECORDS OF CORPORATION The Revised Corporation Code requires every corporation to keep ang preserve the following books and records at its principal office: ety, 1. Minutes book ~ this book contains the minutes of meetings of gi, trustees and shareholders or members. ecto, 2. Stock and transfer book — this book is arecord of the names of g installments paid and unpaid by shareholders and dates of p; transfer of stock and dates thereof, by whom and to whom m: hareholde, ayment, 4 ade, 3, Subscription book ~ this book contains printed (blank) subscription fon, 4. Shareholders ledger ~ a subsidiary fr the capita stock sued reporting iy number of shares issued to each shareholder. 5. Subscribers’ ledger - a subsidiary for the subscriptions receivable accoun reporting the individual subscription of subscribers. 6. Stock certificate book — a book of printed blank certificates of stock. 7. Book of accounts - a record of all business transactions. This includes journals and ledgers. ORGANIZATION COSTS Organization cost represents costs incurred in organizing a corporation. These costs include: 1. Legal fees in connection with the incorporation; 2. Incorporation fees paid to the state; 3. Promotional or underwriters’ fees; 4. Cost of printing stock certificates, cost of corporation books, seal, etc. 5. Other cost incurred in the organization stage of the corporation. Organization costs is treated as an outright expense in the year it was incurred: 266| HATER 6 | CORPORATE FORMATION KHOLDERS’ EQUITY OR SHAREHOLDER’S EQUITY ieee ee Called shareholders’ equity. This represents ve residual i of owners in the net assets of a corporation measured by excess of assets over liabilities, : if e elements usually constituting shareholders’ equity are: Capital stock or share capital subscribed capital stock or subscribed share capital Additional paid in capital or share premium Retained earnings or accumulated earnings Revaluation increment in property or revaluation surplus Treasury stock or treasury shares are Capital are capital is the portion of paid in capital representing the total par value or ed value of the shares issued or the total consideration received in case of .o-par no stated value shares. bscribed Share Capital Subscribed share capital is the portion of authorized share capital that has been subscribed but not yet fully paid and therefore still unissued. Share Premium Share premium includes: 1. Premium on capital stock — excess of the subscription price over the par AW value of the stock subscribed and issued. This applies to par value shares only. 2 Paid in capital in excess over stated value - the amount paid by shareholders in excess of stated value of the shares subscribed and issued. This applies to no par value shares with stated value. = this is sometimes called “donated capital” 3. Paid in capital from donations xy way of donations from the shareholders or 'trepresents capital received by Other parties. 267PARTNERSHIP AND CORPORATION ACCOUNTING _ tes tock transactions OF share premium from Paid in capital from treasury st . s of the reissue price of treasury share transactions - this represents exces treasury shares over its cost 5. Others - these are other sources of additional paid in capital, these will be discussed in your succeeding accounting subjects. Retained Earnings Retained earnings represents the cumulativ of dividend distributions, prior period adjustments, adjustments. A debit balance in this account is called deficit. e balance of periodic earnings, net and other capital Revaluation Surplus Revaluation surplus is the excess of the net appraised value over the historical cost net of accumulated depreciation of property, plant, and equipment assets, if any. Treasury Shares Treasury share is the corporation’s own share that has been fully paid, issued then reacquired but not cancelled. OTHER STOCK TERMS Other stock terms are as follows: 1. Authorized share capital - this refers to the maximum amount or number of shares which may be issued by a corporation. This amount or number of shares is specified in the Articles of Incorporation. Increasing or decreasing the authorized capital stock requires amendment of the Articles of Incorporation. 2. Issued shares - this represents shares which have been fully paid and so the corresponding share certificates have been issued to shareholders. 3. Unissued share capital - this represents part of the authorized capital stock which have not yet been issued. eee,jpoTeR 6 | CORPORATE FORMaTigg \¢ urstanding capital stock ~ this refor, il in their possession. Total outs isthe treasury shares, Sto sh, tanding ares issued to shareholders and shares is the total shares issued snare of stock ~ this represents the interest of right of a shareholder in the corporation. Certificate of stock or share certi evidencing the ownership of a shar ificate ~ the instrum rent or document Of stock. ES OF SHARES OF STOCK snares of stock are classified into: 1. Common share or Ordinary share 2, Preferred share or preference share a, Preferred as to assets b. Preferred as to dividends 1, Cumulative 2 3. Participating 4. Non-participating 1. Par value shares 2. No par value shares a. with stated value b. without stated value Ordinary Share Ordinary share is a class of ownership interest in a corporation which has no ‘vecal preference over any other class of shares. Where there is only one class 'are, Necessarily it is an ordinary share. Peference sh are "reference share is a class of ownership interest that enjoys some privileges the ordinary shares. The privileges depend upon whether these are et “rred as to assets or preferred as to dividends, or both. 269PARTNERSHIP AND CORPORATION ACCOUNTING Preferred as to Assets In the event of liquidation, preferred shares as to assets shall be gi preference over the ordinary shares in the distribution of the assets of corporation. Bive the Preferred as to Dividends This is a kind of share that entitles the holder to receive dividends before any dividends are paid to the holders of ordinary shares. The preference on saiq dividends may be cumulative or non-cumulative and/or participating or non. participating. Cumulative Preferred Shares This is a kind of preference shares that entitle the holder not only the payment of current dividends but also to dividends in arrears. In other words, if the state dividend is not paid in a given year, it shall be added to the dividend that shall be due the following year and the accumulated dividends must be paid to the holder of said preferred shares before any dividends may be paid to the holders of ordinary shares. Non-Cumulative Preferred Shares These shares entitle the holder to the payment of current dividends only in preference to ordinary shareholders. In other words, if dividends are not declared in a given year, the right to the dividends for that particular year is lost. Participating Preferred Shares These are shares which give the holder not only the right to receive the stated dividends at the preferred rate but also to participate with the holders of ordinary shares in the remaining profits prorata after the ordinary shares have been paid the amount of the stated dividend at the same preferred rate. Non-Participating Preferred Shares These shares entitle the holder to receive the stated preferred dividends andno more. The balance if any, is given entirely to the ordinary shares. 270| CHAPTER 6 | CORPORATE FORMATION value Shares parvalue shares are those shares with a value me i per share indicated EEN Se as authorized in the articles of ae ae issued at par value or at a premium, a price above par value. The Co ration aw prohibits initial issuance at a discount or below par valu ie. No Par Value Shares No Pe Pies are oe shares without any value indicated in the face of se an Setlber s e Corporation Law provides that no par value shares ’ a consideratio ei n less than the value of five (P5.00) pesos a7