Accounting 3 & 4
A corporation has the right of succession. A corporation is
Module 6
Corporate Organization and Formation
Overview
Module 6 contains the definition of corporation, its
powers, advantages and disadvantages, its distinctions
from and similarities to partnership. The module also
contains the types of corporation which includes a one-
person corporation and its characteristics as stated in
the Revised Corporation Code, the steps in organizing a
corporation, books and records kept by a corporation,
and the stockholders’ rights.
Learning Outcomes
At the end of the course the student will be able to:
1. Give and explain the definition of corporation
2. Explain the distinctions and similarities of corporation
and partnership
3. Identify the advantages and disadvantages of a
corporation
4. Identify and explain each type of a corporation
5. Explain the steps and the
requirements for each step in organizing
a corporation 6. Enumerate and explain
the books and records kept by a
corporation
7. Identify the persons who composed a corporation
8. Enumerate and explain the stockholders’ rights
Definition of Corporation
Section 2 of the Revised Corporation Code of the
Philippines states that “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 incidental to its
existence”.
The above definition shows the following characteristics of a
corporation:
A corporation is an artificial being. A corporation has a
personality distinct and separate from its stockholders. It
can incur liabilities and own assets in its own name. It can
enter into contracts, can sue and be sued, and can
exercise powers and rights expressly authorized by law.
A corporation is created by operation of law. It cannot be
established by mere agreement of parties like in the case
of partnership. For it to come into existence, authority has
to be granted by the state, particularly the Securities and
Exchange Commission.
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a business entity in which ownership is represented by
shares of stocks. The owner of these shares are called
stockholders. The stocks can be transferred fully from
one stockholder to another stockholder or to any person
not previously a stockholder.
A corporation has the powers, attributes, properties
expressly authorized by law or incidental to its existence. A
corporation may exercise only those powers which are
granted by law and those which are incidental or essential
to its existence. For example, a corporation engaged in
agriculture has the right to purchase and own agricultural
lands because such is necessary to pursue the objectives to
which it is created.
Distinctions Between Partnership and Corporation
Partnership
1. Created by mere agreement of partners.
2. Maybe organized by only two persons.
3. Commences to acquire juridical personality from the
execution of partnership contract.
4. May exercise any power authorized by the partners
as long as it is not contrary to law, morals, good
customs, public order or public policy.
5. Capital raising ability is limited by the number of
partners.
6. General partners have unlimited liability. They are
personally liable to the debts of the firm owed to third
parties.
7. The consent of other partners is sought if an interest is
shared with others.
8. Since there are several causes of dissolving a
partnership such as death or insolvency of a partner, etc.
very likely it has a shorter life.
9. There is mutual agency. The partners can bind the
partnership to any contract within the scope of its
business.
10. May be dissolved at any time by the will of any or all of
the partners.
Corporation
1. Created by operation of law.
2. May be organized by any person, partnership,
association or corporation, singly or jointly with others
but not more than fifteen (15).
3. Begins to have corporate existence and juridical
personality from the date of issuance of the certificate of
incorporation by the Securities and Exchange Commission.
4. Can exercise only the powers expressly granted by
law or incidental to its existence.
5. Capital raising ability is limited by the profitableness
in which funds of stockholders are employed.
6. Creditors of the corporation cannot claim the
personal assets of the stockholders. Stockholders
are liable only to the extent of their subscribed
shares.
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7. Shares of stocks can be transferred without the consent of
other stockholders.
8. Has perpetual existence unless its articles of incorporation
provides otherwise.
9. There is no mutual agency. A stockholder has no power to
bind the corporation to contracts. His right is limited to vote
in the stockholder’s meetings. The power to do business and
manage its affairs is vested in the board of directors.
10. Can only be dissolved with the consent of the state.
Similarities Between Partnership and Corporation
1. Both are organized for lawful purpose/s.
2. Both have juridical personalities separate and distinct
from those of the individuals composing them.
3. Both act through agents.
4. Both distribute profits to those who contribute capital.
5. Both are taxable.
Advantages of Corporation
1. Greater amount of capital. It is easy for a corporation to
raise and assemble capital from the combined investments
of many stockholders.
2. Limited liability. Creditors of a corporation have a claim
against the assets of the corporation but not against the
personal property of its stockholders.
3. Transferability of stock. A stockholder can transfer and
dispose of his shares of stock at will without the consent
of other stockholders or of the corporation itself.
4. Continues existence. The Revised Corporation
Code gives a corporation a perpetual existence
unless its articles of incorporation provides
otherwise.
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 the
Revised Corporation Code of the Philippines.
Disadvantages of Corporation
1. Subject to governmental control and supervision.
Corporations come to existence by fulfilling the
requirements of corporation laws. Because of this,
corporations are subject to more governmental control.
2. Heavy taxation. Corporations are subject to high rate
of taxation based on their income. If part of this income
is distributed to stockholders in the form of dividends,
the dividend is considered personal income of the
stockholders.
3. It is more costly to organize than the organization of a
partnership.
4. Complicated formation. Corporation is relatively
complicated in formation and organization. 5. The
stockholder has no right in the conduct of the business.
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Powers of Corporation
The Revised Corporation Code of the Philippines provides
the following powers and capacity of Corporation:
1. To sue and be sued in its corporate name;
2. To have perpetual existence unless the
certificate of incorporation provides otherwise;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in
accordance with the provision of the Code;
5. To adopt bylaws, not contrary to law, morals,
or public policy, and amend the same in
accordance with the Code;
6. In case of stock corporation, to issue or sell stocks to
subscribers and to sell treasury stocks; In case of
nonstock corporation, to admit members to the
corporation;
7. To purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage, with real or personal
property including securities and bonds of other
corporations.
8. To enter into partnership, joint venture, merger and
consolidations, or any other commercial agreement
with natural and juridical persons;
9. To make reasonable donations, including those for the
public welfare or for hospital, charitable, cultural, scientific,
civic, or similar purposes;
10. To establish pension, retirement, and other plans
for the benefit of its directors, trustees, officers and
employees; and
11. To exercise such other powers as may be essential
or necessary to carry out its purposes as stated in its
articles of incorporation.
Types of Corporation
As to Purpose
Public Corporation. Those which are formed for
political or governmental purposes such as
municipalities and cities.
Private Corporation. Those which are formed for private
purposes.
Quasi-public Corporations. Those engaged in rendering
public services such as bus, electric, water, telephone,
etc. companies.
As to Holdings
Stock Corporation. Private corporations the ownership of
which is divided into shares of stocks. Nonstock
Corporation. Private corporations whose funds come from
the fees of its members.
As to Law of Creation
Domestic Corporation. Those created under the Philippine
laws.
Foreign Corporations. Those which are formed under foreign
laws.
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As to Membership
Close Corporation. One in which the shares of stock
are owned by members of immediate family.
Open Corporation. One in which all the members or
corporators have the right to vote in the election of
directors and other officers.
Special Corporations
Corporations created by special laws or charter and
are governed by the provisions of the special law or
charter creating them or applicable to them.
Educational Corporations. Incorporated schools,
colleges, or other institutions of learning governed by
the Board of Trustees which consists of five (5) to fifteen
(15) trustee members. This could be stock or nonstock
corporation.
Religious Corporations. Corporations formed for religious
purposes.
Corporation Sole. Incorporated by one (1) person who
maybe the chief archbishop, bishop, priest, minister, rabbi,
other presiding elder of such religious denomination, sect,
or church. Religious Societies. Religious organization of a
religious denomination, sect, or church incorporated for
the administration of its affairs, properties, or estate.
One Person Corporation. A corporation with single
stockholder. Only natural person, trust, or estate may form
a One Person Corporation. The following may not form One
Person Corporation: banks and quasi banks, preneed trust,
insurance, public and publicly listed companies, non-
chartered government-owned and controlled corporation,
natural person who is licensed to exercise a profession for
the purpose of exercising such profession.
Characteristics of a One Person Corporation
1. It is not required to have a minimum authorized capital
stock.
2. It must submit its articles of incorporation.
However, it is not required to submit its corporate
by laws.
3. Letters “OPC” is shown either below or at the end of its
corporate name.
4. The single stockholder is the sole director and
president of the One Person Corporation.
Organization of a Corporation
formal process is undertaken when a corporation is brought
into being. Generally, these steps consist of: (1) planning
and promoting; (2) incorporation; (3) commencement of the
business operation.
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Planning and Promoting
In planning stage, the objectives of forming a
corporation is usually specified. Some are formed to carry a
new business while others are formed to take and develop
the activities of one or more predecessor companies. It
includes the selection of a place wherein the business is to
be legally located, determination of capital structure,
choosing the methods of raising funds, drafting the by-laws,
etc.
Promoting stage consists of activities which
introduce the newly formed corporation to the public to
invite probable investors.
Incorporation
Incorporation includes the preparation of the articles of
incorporation and filing such to the Securities and
Exchange Commission.
To form a corporation, an application has to be filed
with the Securities and Exchange Commission. The
application should contain the Articles of Incorporation, a
sworn affidavit by the association’s treasurer that at least
twenty five percent (25%) of the entire number of the
authorized shares are subscribed, and that at least twenty
five percent (25%) of the subscription has been paid up.
After the required fees have been paid and if the
application is approved, the SEC issues a certificate of
incorporation.
The incorporators then hold a meeting to elect a
board of directors and adopt the by-laws which will
govern the administration of the corporation. The by-laws
then, will be submitted to the SEC within one month from
the issuance of the certificate of incorporation. The board
of directors elects the corporate officers.
Commencement of the Business Operation
Following the incorporation, the company is legally
ready to do business. However, in some cases, before the
active operation begins, several preparations are made such
as raising enough capital, construction of the necessary
facilities, hiring of employees, etc.
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;
2. The nature of the business and the purposes for which it is
formed;
3. The location of the principal office of the corporation;
4. The term of existence;
5. The names and addresses of its incorporators;
6. The number of authorized capital stock, amount of
par value, if there is any, the classes of shares to be
issued;
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7. The names and addresses of the directors chosen;
8. The names and addresses of its subscribers and
members and the amount and number of
subscriptions;
9. The total amount paid on the subscriptions
and the amount paid by each subscriber;
10. Other necessary and required data.
Corporate By-Laws
By-laws are rules of action adopted by the corporation to
govern the conduct of its affairs. By laws include the
following matters:
1. The time, place, and manner of calling the stockholders’
meeting;
2. The circumstances which may permit the calling of
meetings and rules of conducting such meetings;
3. The manner and qualifications of voting;
4. The number of directors;
5. The duties and powers of directors
6. The length of office of directors;
7. The manner of appointing corporate officers;
8. The powers and duties of corporate officers;
9. The compensation and length of office of corporate
officers;
10. Rules and regulations to govern the acts of directors and
officers.
Corporate Books and Records
1. Minutes Book. This book contains a narrative record of
the minutes of official meetings of the corporation’s
board of directors and of its stockholders.
2. Stock and Transfer Book. This record contains the names
of all stockholders, their paid and unpaid accounts and the
date of payments, sales and transfer of shares and the date
of transfer.
3. Stockholder’s Ledger. If the company has a large number
of stockholders, a controlling account entitled Ordinary
Share (Common Stock) is carried in the general ledger and a
subsidiary stockholder’s ledger is maintained. Each
stockholder’s account shows the number of his shares,
certificate number, acquisition date, and date of sale.
4. Subscriber’s Ledger. This is a subsidiary for the
subscription receivable showing the individual
subscription of each subscriber.
5. Subscription Book. This book contains the printed blank
subscription.
6. Stock Certificate Book. This book contains the printed
blank certificates of shares.
7. Accounting Records. This includes all records
necessary for managerial requirements such as
journals, ledgers, and other business records.
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Components of a Corporation
1. Corporators. Those who composed the corporation
whether stockholders or members.
2. Incorporators. Those corporators who originally formed
and composed the corporation and who executed and
signed the articles of incorporation.
3. Stockholders or shareholders. Owner of
shares of stock in a stock corporation.
4. Members. Corporators of a non-stock
corporation.
5. Promoters. Persons who bring about the formation and
organization of a corporation by bringing together
interested persons in the enterprise, procuring their
subscriptions, thus bringing in capital to the
corporation.
6. Subscribers. Persons who have agreed to take and
pay for original unissued shares of a corporation. They
become stockholders upon acceptance of their
subscriptions.

Stockholder’s Rights

The stockholder has the following basic rights:

1. The right to vote for directors to represent in the

management of the business.

2. The right to share in the profits in the form of dividends

declared by the board of directors.

3. The right to share in the distribution of the remaining

assets of the business upon its liquidation after all the
creditors have been paid.
4. The preemptive right or the right of the stockholders to
subscribe for additional shares when the corporation
decides to increase the amount of outstanding shares.
5. The right to sell their shares.

PREPARED BY: PROF. AMELIA M. ARGANDA