intro to cor

1. BASIC
CONSIDERATIONS
LESSON 5

2. TOPICS
1. Definition
2. Attributes of a
Corporation
3. Advantages of a
Corporation
4. Disadvantages of a
Corporation
5. Classes of
Corporations
6. Other Classifications
of Corporations
7. Steps in the Creation
of a Corporation
8. Articles of
Incorporation
9. By-Laws
10. Rights of a
Shareholder
11. Components of a
Corporation
12. Classes of Shares in
General
13. Minimum
Subscription and Paid-In
Capital
14. Basic Corporate
Organizational Structure
15. Corporate Books and
Records
LEARNING OUTCOMES
At the end of the lesson, you should be able to:
1. discuss the attributes of a corporation;
2. enumerate the advantages and disadvantages of a
corporation;
3. discuss the classes of corporation;
4. enumerate the other classifications of corporation;
5. enumerate the steps in the creation of a corporation;
6. explain the articles of incorporation;
7. discuss the components of a corporation;
8. discuss the classes of shares in general;
9. determine the minimum subscriptions and paid-in capital;
10. discuss the basic corporate organizational structure; and
11. discuss the corporate books and records

3. TOPIC 1: 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 (The Corporation Code of the
Philippines, Sec. 2).

4. TOPIC 2: ATTRIBUTES OF A CORPORATION
1. A corporation is an artificial being with a personality separate and apart
from its individual shareholders or members.
2. It is created by operation of law. It cannot come to existence by mere
agreement of the parties as in the case of business partnerships.
Corporations require special authority or grant from the State, either by a
special incorporation law that directly creates the corporation or by means of
a general corporation law (i.e., The Corporation Code of the Philippines).

5. 3. It enjoys the right of succession. A corporation has the capacity of
continued existence regardless of the death, withdrawal, insolvency or
incapacity of the individual shareholders or members. The transfer of
ownership of shares of stock does not dissolve the corporation.
4. It has the powers, attributes and properties expressly authorized by
law or incident to its existence. For example, an investment by a
transportation company in an insurance corporation designed to reduce
insurance costs, may be interpreted as an act which is reasonably
requisite and necessary to carry out the business of land transportation. It
is because insurance costs form part of the legitimate expenses of a
transportation operator.

6. TOPIC 3: ADVANTAGES OF A CORPORATION
1. The corporation has the legal capacity to act as a legal entity.
2. Shareholders have limited liability.
3. It has continuity of existence.
4. Shares of stock can be transferred without the consent of the other
shareholders.
5. Its management is centralized in the board of directors.
6. Shareholders are not general agents of the business.
7. Greater ability to acquire funds.

7. TOPIC 4: DISADVANTAGES OF A CORPORATION
1. A corporation is relatively complicated in formation and management.
2. There is greater degree of government control and supervision.
3. It requires a relatively high cost of formation and operation.
4. It is subject to heavier taxation than other forms of business
organizations.
5. Minority shareholders are subservient tot he wishes of the majority.
6. In large corporations, management and control have been separated
from ownership.
7. Transfer ability of shares permits the uniting of incompatible and
conflicting elements in one venture.

8. TOPIC 5: CLASSES OF CORPORATIONS
Section 3 of the Corporation Code classified private corporations into:
1. Stock corporation. Corporations which have share capital divided into shares and
are authorized to distribute to the holders of such shares dividends or allotments
of the surplus profits on the basis of the shares held.
2. Non-stock corporation. A non-stock corporation is one where no part of its
income is distributable as dividends to its members, trustees or officers. Any
profit that a non-stock corporation may obtain as an incident to its operation
shall, whenever necessary or proper, be used for the furtherance of the purpose
or purposes for which the corporation was organized (The Corporation Code of
the Philippines, Sec. 87). Non-stock corporations may be formed or organized for
charitable, religious, educational, professional, cultural, recreational, fraternal,
literary, scientific, social civic service, or similar purposes (Sec. 88).

9. TOPIC 6: OTHER CLASSIFICATIONS OF CORPORATIONS
1. According to number of persons:
a. Corporation aggregate. A corporation consisting of more than one corporator.
b. Corporation sole or a special form of corporation usually associated with the
clergy. It is a corporation which consists of only one member or corporator and his
successors such as bishop.
2. According to nationality:
a. Domestic corporation. A corporation organized under Philippine laws.
b. Foreign corporation. A corporation organized under foreign laws.
3. According to whether for public or private purpose:
a. Public corporation. A corporation formed or organized for the government of a public portion of
state (e.g., provinces, cities, municipalities and barangays).
b. b. Private corporation. A corporation created for private aim, benefit or purpose.

10. 4. According to whether for charitable purpose or not:
a. Ecclesiastical corporation. Those organized for religious purposes.
b. Eleemosynary corporation. Those established for public charity.
c. Civil corporation. Those established for business or profit.
5. According to their legal right to corporate existence:
a. De jure corporation. A corporation existing in fact and in law. It is organized in strict conformity with the law.
b. De facto corporation. A corporation existing in fact but not in law.
6. According to degree of public participation with regard to share ownership:
a. Close corporation. A corporation whose share ownership is limited to selected persons or members of a
family not exceeding 20 persons.
b. Open corporation. A corporation where the share is available for subscription or purchase by any person.
7. Access to their relation to another corporation:
a. Parent or holding corporation. A corporation that is related to another corporation that it has the power
to either directly or indirectly elect the majority of the directors of a subsidiary corporation.
b. Subsidiary corporation. A corporation controlled by another corporation known as a parent corporation

11. TOPIC 7: STEPS IN THE CREATION OF A CORPORATION
There are three steps in the creation and organization of a corporation, namely:
1. Promotion. It is process of bringing together the incorporators or the persons
interested in the business, of procuring subscriptions or capital for the
corporation and of setting in motion the machinery that leads to the
incorporation of the corporation itself.
2. Incorporation. This step includes the following:
a. Verification from the records of the Securities and Exchange Commission (SEC)
that the proposed corporate name is not the same or similar to an existing
corporation.
b. Drafting and execution of the articles of incorporation by the incorporators.
The person elected as temporary treasurer should execute the affidavit
regarding the share capital subscribed and paid up. The treasurer should also
submit a sworn statement of assets and liabilities of the corporation.

12. c. Deposit by the treasurer of the cash paid for the shares subscribed
in the bank in the name of the treasurer in trust for and to the credit
of the corporation. The bank is required to issue a certificate of
deposit.
d. Filing of the articles of incorporation with the SEC together with
treasurer's affidavit, statement of financial position, certificate of
bank deposit, and certificate as to the name of the corporation;
e. Payment of the filling and publication fees; and
f. Issuance by the SEC of the certificate of incorporation.

13. 3. Formal organization and commencement of business operations.
Formal organization requires the adoption of by-laws and the election of
the board of directors and of the administrative officers. It also includes
the taking of such other steps as are necessary to enable the corporation
to transact the legitimate business or accomplish the purpose for which it
was created. Section 22 of the Corporation Code states that if corporation
does not formally organize and commence the transaction of its business
within two (2) years from the date of its incorporation, its corporate
powers shall cease and the corporation shall be deemed dissolved.
However, if a corporation has commenced business but subsequently
becomes continuously inoperative for a period of at least five (5) years,
the same shall be a ground for the suspension or revocation of its
certificate of incorporation.

14. TOPIC 8: ARTICLES OF INCORPORATION
In the Philippines, the general law which governs the creation of private
corporations is the Corporation Code of the Philippines. Section 14 provides that all
corporations organized under this Code shall file with Securities and Exchange
Commission articles of incorporation 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 formed;
3. The principal place of business which must be within the Philippines;
4. The term of existence;
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);

15. 7. The names, nationalities and residences of the persons who shall act as directors
or trustees until the first regular directors or trustees are elected and qualified.
8. If it be a stock corporation;
a. Amount of authorized share capital in pesos,
b. Number of shares into which it is divided,
c. In case the shares are par value shares:
• the par value of each share,
• names, nationalities and residences of the original subscribers,
• the amount subscribed and paid by each subscriber on his subscription.
d. In case of no par value, the articles need only state such fact, and the number of shares into
which said share capital is divided.
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

16. TOPIC 9: BY-LAWS
These are the rules of action adopted by corporation for its internal government and
for the government of its officers, shareholders or members. The by-laws shall be
adopted within one month from the issuance of the certificate of incorporation by
the Securities and Exchange Commission. Failure to file a code of by-laws shall
render the corporation liable for the revocation of its registration. A private
corporation may provide in its by-laws for:
1. The time, place and manner of calling and conducting regular or special meetings
of the directors or trustees;
2. The time and manner of calling and conducting regular or special meetings of the
shareholders or members;
3. The required quorum in meetings of shareholders or members and the manner of
voting therein;

17. 4. The form for proxies of shareholders and members and manner of voting them;
5. The qualifications, duties and compensation of directors or trustees, officers and
employees;
6. The time for holding the annual election of directors or trustees and the mode or
manner of giving notice thereof;
7. The manner of election or appointment and the term of office of all officers other
than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient transaction
of its corporate business and affairs

18. TOPIC 10: RIGHTS OF A SHAREHOLDER
The following are some of the rights of a shareholders:
1. Right to be issued certificate of stock or other evidence of share ownership and to transfer
such shares.
2. Right to attend and vote in person or by proxy at shareholders' meetings.
3. Right to elect and remove directors
4. Right to adopt, amend or repeal the by-laws.
5. Right to purchase a portion of any new shares issued to maintain the same percentage of stock
ownership. This right is known as the pre-emptive right. However, this right is not absolute and
may be denied.
6. Right to receive dividends when declared.
7. Right to inspect corporate books and records, and to receive financial reports of the
corporation's operations.
8. Right to participate in the distribution of corporate assets upon dissolution.

19. TOPIC 11: COMPONENTS OF A CORPORATION
• 1. Corporators are those who compose a corporation whether as shareholders or
members, at any time. This term includes incorporators, shareholders or members
(Sec. 5). Note: A corporation or a partnership can be corporator, but cannot be an
incorporators. A partnership can be a corporator in a corporation but a corporation
cannot become a general partner in a partnership.
• 2. Incorporators are shareholders or members mentioned in the articles of
incorporation as originally forming and composing the corporation and are
signatories to said articles of incorporation (Sec. 5). They must be natural persons
(i.e. human beings) as distinguished from artificial beings (e.g., a corporation or a
partnership). The Code specifies that five or more persons, not exceeding fifteen,
may form a private corporation provided that they are of legal age, owners or
subscribers to at least one share of capital stock and that the majority are residents
of the Philippines. Note: All incorporators (if they continue to be shareholders) are
corporators of a corporation, but not all corporators are incorporators.

20. 3. Shareholders or stockholders are corporators in a stock (Sec.
5). Shareholders may be natural or juridical persons.
4. Members are corporators of a non-stock corporation (Sec. 5).
5. Subscribers are persons who have agreed to take and pay for
original, unissued shares of a corporation formed or to be
formed. Note: All incorporators are subscribers but a subscriber
need not be an incorporator. 6. Promoters are persons who bring
about or cause to bring about the formation and organization of a
corporation.

21. 7. Underwriters are usually investment bankers who have-
* agreed, alone or with others, to buy at stated terms an entire or
a substantial part of an issue of securities; or
* guaranteed the sale of an issue by agreement to buy from the
issuing corporation any unsold portion at a stated price; or
* agreed to use his best efforts to market all or part of an issue; or
* offered for sale shares he has purchased from a controlling
stockholder.

22. TOPIC 12: CLASSES OF SHARES IN GENERAL
1. Par value shares. One in which a specific amount is fixed in the articles of
incorporation and appearing on the certificate of stock. The par value is the
minimum issue price of the shares. Section 6 of the Code states that preference
(or preferred) shares of stock may be issued only as par value shares.
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 or by the board of directors or the
shareholders. Thus, the issue price may vary from time to time as it is usually
fixed based on the book value of the corporation's shares.
3. However, the minimum stated value of a no par value share is five pesos (P5.00)
per share (Sec. 6). In addition, shares issued without par value are deemed fully
paid. Banks, trust companies, insurance companies, public utilities, and building
and loan associations are not permitted to issue no-par value shares of stock.

23. 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. Promotion shares. Those issued to promoters as compensation in promoting the
incorporation of a corporation, or for services rendered in launching or promoting
the welfare of the corporation.
9. Treasury shares. A stock that has been issued by the corporation as fully paid and
later reacquired but not retired.
10. Convertible shares. A stock which is convertible or changeable from one class to
another class.

24. TOPIC 13: MINIMUM SUBSCRIPTION AND PAID-IN
CAPITAL
At the time of incorporation, at least twenty-five (25%) percent of the authorized capital
stock (or share capital) as stated in the articles of incorporation must be subscribed and at
least twentyfive (25%) percent of the total subscription must be paid upon subscription,
the balance to be payable on a date or dates fixed in the contract of subscription without
need of a call, or in the absence of a fixed date or dates, upon call for payment by the
Board of Directors. In no case shall the paid in capital be less than five thousand (5,000)
pesos (The Corporation Code of the Philippines, Sec. 13). 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. Observe that the New Corporation Code
used the term "total" subscription as the basis for the application of the second 25%. It is
not necessary that each and every subscriber shall pay twenty-five percent of his
subscription. It is enough that twenty-five percent of the total subscription is paid