Corporation Defined:

The Corporation Code of the Philippines defines corporation as:

“an artificial being created by operation of law, having the right of

succession, and the powers, attributes and properties expressly authorized
by law and incident to the its existence.”

A corporation comes into existence when a group of persons, not less

than five nor more than fifteen members, each with at least one share of
stock, files with the Securities and Exchange Commission its Articles of
Incorporation and its By-Laws.

Articles of Incorporation – gives legal existence to the corporation.

By-laws – internal rules/government on the operations of the corporation.

Characteristics of a Corporation
1. Artificial being – a corporation is not real or natural person but the law
assumes it as a natural person so that it can perform all business
functions which a natural person can do. A corporation can enter into
contracts, own and dispose properties, or sue and be sued. As an
artificial being, it has separate and distinct personality from its
stockholders, officers and employees.

2. Created by operation of law – the corporation cannot come into

existence by mere agreement of the parties as in the case of business
partnerships. A corporation can only be allowed to exist for lawful
purposes.

3. Power of succession – the shares of stock, which is an evidence of

ownership in a corporation, can be transferred from one person to
another. A corporation can continue to exist despite the death,
withdrawal, insolvency or incapacity of the individual members or
stockholders composing it.

4. Powers, Attributes and Properties – a corporation can only exercise

powers that it is expressly authorized to perform in accordance with
the Corporation Code, its Articles, By-Laws and other special laws.

Advantages of a Corporation

1. Limited Liability of Stockholders – stockholders are liable only to the

extent of their subscriptions.
2. Transferability of Shares – a stockholder can sell and transfer his
acquired shares of stock even without the consent of all the
stockholders.
 3. Continuity of Life – a corporation can continue to exist for the duration
of its lifetime, unaffected by the internal changes which may arise
within the corporation such as death, insanity, insolvency of any of its
directors, officers, agents or employees.

4. Greater Source of Funds – the corporation sources it funds from the

public through the issuance of the authorized capital stock. It can also
issue a certificate of indebtedness to the public for additional funds.

Disadvantages of a Corporation

1. Complicated in Formation and Operation – the formal existence of a

corporation starts upon the issuance of its certificate of incorporation
by the Securities and Exchange Commission (SEC). Its operation is
more expensive because it comprises more administrative persons in
managing its affairs such as the Board of Directors, President, Vice
Presidents, Corporate Secretary and Corporate Treasurer.

2. Greater Degree of Government Control and Restriction – Corporations

are required to meet pre-incorporation requirements such as the 25%
actual payment of the 25% required subscription of the total capital
stock, submission of By-Laws and Articles of Incorporation and
approval of the Sec. Further, they are required to submit minutes of
their annual meeting and financial reports to the government. It can
only issue shares of stock and certificate of indebtedness if authorized
by the government.

3. Centralized Management – the management of a corporate business is

vested in the Board of Trustees, the governing and controlling body of
a corporation.

Board of Directors – policy making body of a profit corporation. It is

composed of at least five members but not more than fifteen.

Board of Trustees – policy making body of a non-profit corporation.

4. Weakened Credit Standing – creditors are more interested in

businesses that are backed up by the personal assets of the owners, in
case of business insolvency.

5. Heavier Income Tax – Corporations have heavier income tax rate as

compared to professional partnership or to individual tax payers.

KINDS OF CORPORATIONS

a. General classification
 1. Stock Corporations – corporations that issue shares of stock to
stockholders who are entitled to receive dividends.
2. Non-stock Corporations – these corporations do not issue shares of
stock because they are created for civic, charitable or religious
purposes. They composed of members.

b. Other Classifications:
1. Nationality
a. Domestic Corporation – organized under the Philippine Laws.
b. Foreign Corporation – organized under the laws of other
countries.
c. Multi-National Corporation – a domestic or foreign corporation
which extends its corporate business to other territories or
countries.

2. Purpose
a. Government Corporations – corporations that are formed by the
government either for governmental functions or proprietary
functions.
1. Public corporations – these corporations are created for the
governance of the State territory. E.g. LGUs
2. Government Owned and Controlled Corporations – these
corporations are primarily intended for profits but owned or
controlled by the State.

b. Privately Owned Corporation

1. Civil Corporation – a corporation established for profit.
2. Wasting Asset Corporation – its purpose is to extract natural
resources. E.g. mining, oil or gas
3. Eleemosynary Corporation – a corporation established for
charitable purposes.
4. Ecclesiastical Corporation – it is established for religious
purposes.

c. Quasi-public Corporations – privately financed and managed

corporations for public purposes.

3. Legal Right
a. De Jure Corporation – a duly registered corporation for having
complied with all the requirements of the law for its legal
existence.
b. De Facto Corporation – a corporation that fails to comply
completely with the requirements of the law.

4. Number of persons
 a. Sole Corporation – owned and registered by only one corporator
or member and his successors, who are members of religious
denomination.
b. Aggregate Corporation – a corporation comprised of more than
one corporator or member.

5. Extent of Membership
a. Open Corporation – stocks of this corporation is open to the
public for subscription.
b. Close Corporation – owned and managed by a family or close
relatives not exceeding 20 persons.

6. Relation to other Corporation –

a. Parent or Holding Corporation – a corporation that acquires
significant influence over another corporation.
b. Subsidiary Corporation – it is controlled by the parent or holding
corporation.

COMPONENTS OF A CORPORATION

Section 5 of the Corporation Code of the Philippines, a corporation may

comprise of:
a) Incorporators – founders of a corporation whose names appear in the
Article of Incorporation. The primary function is to organize the
corporation. Artificial persons like a partnership or a corporation
cannot be an incorporator. Incorporators consist at least five but not
more than fifteen natural persons, of legal age, owners or subscribers
of at least one share of capital stock and majority of whom are
residents and citizens of the Philippines.

b) Corporators – these compose the total number of persons in the

corporation after its formation. They are the incorporators,
stockholders and/or members.

c) Stockholders or Shareholders – are owners of shares in a corporation

which has a capital stocks.

d) Members – are corporators of a corporation which has no capital stock.

e) Subscriber – one who has agreed to take shares of stock from the
corporation under a subscription agreement on the original issue of
such stock but not yet fully paid.
Other important persons related to Corporation
a. Promoter – one who undertakes the wish of the incorporators to form a
corporation and to obtain for the rights, instrumentalities and capital
by which it is to carry out the purposes, set forth in its charter, and to
establish it as fully able to do its business.
b. Underwriter – one who, under the agreement with the corporation, is
responsible to sell original corporate shares to the public and in the
event the public will not take them, the underwriter will be the one to
buy them.

Rights of Stockholders
1. The right to vote in an annual stockholders meeting
2. The right to share in corporation profit
3. The right to share in the distribution of asset upon corporate
liquidation
4. The pre-emptive right

Officers of a Corporation
1. Directors or Trustees in the Board of the corporation
2. President
3. Corporate Secretary
4. Corporate Treasurer
5. Others as stated in the by-laws

Qualifications of a Corporate Officers

1. The President must be a director
2. The treasurer may or may not be a director
3. The Secretary of the Board of directors may or may not be a director
but must be a resident and citizen of the Philippines
4. Any two or more positions may be held concurrently by the same
person, except for that no one shall act as president or secretary or as
president and treasurer at the same time.

Classes of Shares of Stocks

1. Common and Preferred
a. Common or Ordinary Shares – owners of which has the power to
vote, to elect a director in the Board and to a pro rata dividends.
b. Preferred Stock – a class of stock which is entitled to a certain
preferences over common such as over dividends and assets of the
corporation in case of liquidation. It has no voting right.
2. Voting and Non-voting Stocks
a. Voting stock is a class of stock which entitles the holder to vote in
the meeting of the corporation.
b. Non-voting stock is a class of stock which is not entitled to vote in
the meeting of the corporation.
 3. Par and No-par Value Stock
a. Par value stock – a class of stock with a par value appearing on the
face of the certificate of stock. It has a nominal value stated in the
stock certificate. Preferred Stock is required by law to have a par
value.
b. No-par value share – a class of stock without any nominal or par
value on the face of the stock certificate. The corporation law
provides that no-par value stocks may not be issued for an amount
less than Php5.00.
4. Other classes of stocks
a. Formative stock – the starting minimum number of stocks to be
subscribed as required by the charter and not necessarily by law.
b. Over-issued or spurious stock – a stock issued in excess of the
authorized capital stock and is therefore void.
c. Treasury stock – stock lawfully issued by the corporation and
subsequently reacquired by the same corporation.
d. Watered stock – a stock which has been issued by the corporation
as fully paid up when in fact it is not because it has been issued as
bonus or otherwise.
e. Bonus stock – stock issued to persons who subscribe for bond of a
corporation under the condition that they shall receive an equal
amount of ordinary shares therewith and the money paid on the
subscription is payment for the bond alone.
f. Promotion stock – a stock issued to those who, in the case of a
mining company, may originally own the mining ground or valuable
rights connected therewith, in consideration of their deeding the
same to the mining company when the company is incorporated.
g. Founder’s stock – a stock issued to the founders or organizers of a
corporation.
h. Shares in Escrow – shares subject to an agreement under which the
shares are deposited by the grantor or his agent with a third person,
to be delivered by the depository to the grantee (buyer) or
subscriber upon the happening of certain conditions.
i. Callable or Redeemable Preferred stock – a class of share that can
be redeemed by the corporation at a specific rate which is usually
higher than par value or original issued price.
j. Convertible Preferred stock – another class of preferred stock which
can be changed or converted to another class of stock (usually
common), at a certain price within specified period of time at an
option of the holder.

Required Minimum Authorized Capital Stock and Minimum Paid-up Capital

 Section 13 of the Corporation Code of the Philippines, does not require
any minimum authorized capital stock as long as the paid up capital is not
less than Php5.00.

Minimum subscription and Minimum Paid-up Capital

As required by law, 25% of the total authorized capital stock should be

subscribed and 25% must be paid-up.

Illustration: ABCDE formed a corporation with an authorized capital stock of

Php 3,000,000.
3,000,000 x 25% = 750,000 – minimum subscribed capital
7 50,000 x 25% = 187,500 – minimum paid up capital

Stock Certificate – evidence of ownership in a corporation. It is issued to an

investor of a corporation who purchases shares of stock and who already
paid his subscription in full.

Who May Form a Corporation – any number of persons not less than five (5)
but not more than fifteen (15) may form a corporation, of legal age and
majority of whom are residents of the Philippines may form a private
corporation. Each of them must own at least one (1) share of the capital
stock of the Corporation.

To form a corporation, the incorporators must file the application with

the Securities and Exchange Commission (SEC). Together with the
application, they must submit their duly notarized Articles of Incorporation.
A temporary treasurer must execute an affidavit as to the amount of capital
that has been subscribed and paid.

Articles of Incorporation
The Articles of Incorporation “enumerate the powers and restrictions
conferred upon the corporation by the government” and also constitute a
contract among the incorporators.
The following must be present:

1. The name of the corporation;

2. The specific purpose /s for which the corporation is being incorporated;
3. The place where the principal office of the corporation is to be located;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five
(5) not more than fifteen (15) persons;
 7. The names, nationalities and residences of the persons who shall act
as directors or trustees until the first regular directors or trustees are
duly elected and qualified in accordance with this Code;
8. If it be a stock corporation, the amount of authorized capital stock in
lawful money of the Philippines, 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, residences, and nationalities of the original
subscribers and the amount of subscribed and paid by each on his
subscriptions and if some or all the shares are without par value, such
fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names,
nationalities and residences of the contributors and the amount
contributed by each; and
10. Such other matters as are not inconsistent with law and which
the incorporators may deem necessary and convenient.

By-Laws – it supplements the articles of incorporation. It usually govern the

internal administration of
the corporation. The following are included in the by-laws:
1. The date, place and manner by which annual meetings are to be
called;
2. The manner of conducting meetings;
3. The manner of voting and the use of proxies;
4. The manner of electing the board of directors;
5. The term of office of the directors;
6. The duties of the directors;
7. The procedures for amending the articles of incorporation; and
8. The procedures for amending the by-laws.