Lesson 1

BASIC CORPORATE CONCEPTS

Corporation
Section 2 of the Philippine Corporation Code 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 or incident to its existence.
CHARACTERISTICS OF A CORPORATION

Business form

How owners are

called

1.

Single
proprietorship
Partnership
Corporation

Proprietor

How their claims against

assets of business are
called
Owners equity

Partners
Stockholders or
Shareholders

Partners equity
Stockholders equity or
Shareholders equity

2.

3.

4.

It is a juridical person
With its juridical personality granted by law, it can
perform acts of a natural person. For example, a
corporation can sue and be sued, acquire property
in its own name, enter into a contract, etc
It is created by operation of law
This means that a corporation cannot come into
existence by mere agreement only like a business
partnership
It has the right of succession
The element of continuity exists in a corporation. It
can exist for a period stated in the articles of
incorporation which should not exceed 50 years.
The term of corporate existence can be extended
upon amendment of the articles of incorporation and
such amendment is approved by the Securities and
Exchange Commission (SEC).
It has the powers, attributes, and properties
expressly authorized by law or incident to its
existence
A corporation is a creation of law, and as such it can
only perform acts as expressly authorized by the
Corporation Code, its Articles, By-Laws and other
special laws.

Who can organize a private corporation?

The SEC was established on 26 Oct 1936 by virtue of

the Commonwealth Act No. 83 or the Securities Act. Its
establishment was prompted by the need to safeguard public
interest in view of local stock market boom at that time. Operations
began on 11 Nov 1936 under the leadership of Commissioner
Ricardo Nepomuceno. Its major functions included registration of
securities, analysis of every registered security, evaluation of the
financial condition and operations of applicants for security issue,
screening of applications for broker's or dealer's license and
supervision of stock and bond brokers as well as the stock
exchanges. The agency was abolished during the Japanese
occupation and was replaced with the Philippine Executive
Commission. It was reactivated in 1947 With the restoration of the
Commonwealth Government. Due to the changes in the business
environment under Pres. Ferdinand Marcos, the agency was
reorganized on 29 Sept 1975 as a collegial body with 3
commissioners and was given quasi-judicial powers under PD902A. In 1981, the Commission was expanded to include two (2)
additional commissioners and two (2) departments, one for
prosecution and enforcement and the other for supervision and
monitoring. Then on 01 December 2000, the SEC was reorganized
as mandated by R. A. 8799 also known as the Securities
Regulation Code.
Under Section 5 of the Securities Regulation Code,
Rep. Act. 8799, the Commission shall have, among others,
jurisdiction and supervision over all corporations,
partnerships or associations who are the grantees of primary
franchises and/or a license or permit issued by the Government;

ADVANTAGES OF A CORPORATION

1.

Limited liability of stockholders

2.

Easy transferability of shares

3.

Continuity of existence

4.

Greater source of funds

5.

Management by board of directors

6.

Shareholders are not general agents of the

business

Only NATURAL persons can organize a corporation

Five but not more than 15 natural persons can organize
a private corporation
Those forming a corporation are called incorporators
Each incorporator must at least OWN ONE share of
stock
Majority of the incorporators are residents of the
Philippines

Stockholders are liable to corporate creditors up

to the extent of his subscription only
Shares can be transferred to others without the
consent of other stockholders
Life can be as long as 50 years and renewable
More owners, greater source of funds
The members of the board could be people with
expertise as they were chosen from among
several stockholders
The acts of the shareholders do not bind the
corporation.

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DISADVANTAGES OF A CORPORATION

1.

2.

3.

4.

Not easy to form and manage

Incorporators must comply with preincorporation requirements as mandated by
law.
Greater degree of government control and
supervision
Aside from complying with the preincorporation requirements, the corporation is
closely monitored to check that it performs only
what has been authorized for it to perform
Heavier taxation
Compared to other forms of business
organization, a corporation is levied a heavier
tax on income
Weakened credit capability
Creditors extend credit much easily to debtors
who can support loans with personal assets in
case of business insolvency.
CLASSES OF CORPORATION

Section 3 of the Corporation Code classified private

corporations into:
1.

2.

STOCK CORPORATION
Capitalization is in the form of shares of stock
to be
sold to subscribers known as
shareholders who are entitled to receive
dividends as their form of income from this
subscription.
NON-STOCK CORPORATION
Corporations under this type do not issue
shares. These are created for civic, charitable,
or religious purposes. The people composing
this type or corporation are called members.
OTHER CLASSES OF CORPORATION

1.

ACCORDING TO NUMBER OF PERSONS

a.

b.

2.

Sole Corporation
A corporation owned and registered by
only one corporator or member and his
successors, who are members of a
religious denomination
Aggregate Corporation
A corporation comprised of more than
one corporator or member

ACCORDING TO NATIONALITY
a.

b.

Domestic Corporation
Those organized under Philippine
lasw
Foreign Corporation
Those organized under the laws of
other countries

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Sec. 45. Ultra vires acts of corporations.

No corporation under this Code shall possess or exercise any

corporate powers except those conferred by this Code or by
its articles of incorporation and except such as are necessary
or incidental to the exercise of the powers so conferred.

ON TAXATION:
The current tax rate on corporation is 30%
Some Professional partnerships are entitled to tax
exemption
Single proprietorship business does not pay income tax.
It is the proprietor who files and pays income tax which
includes the income derived from his business.

.SAMPLE OF ARTICLES OF INCORPORATION

ARTICLES OF INCORPORATION
OF
__________________________
(Name of Corporation)
KNOW ALL MEN BY THESE PRESENTS:
The undersigned incorporators, all of legal age and a majority of
whom are residents of the Philippines, have this day voluntarily
agreed to form a (stock) (non-stock) corporation under the laws of
the Republic of the Philippines;
AND WE HEREBY CERTIFY:
FIRST: That the name of said corporation
"___________________, INC. or CORPORATION";

shall

be

SECOND: That the purpose or purposes for which such corporation

is 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 term for which said corporation is to exist is
____years from and after the date of issuance of the certificate of
incorporation;
FIFTH: That the names, nationalities and residences of the
incorporators of the _______________ and the names, nationalities
and residences of the first directors or trustees of
the corporation are as follows:
NAME
NATIONALITY
RESIDENCE
__________________
__________________
__________________
__________________
__________________

____________
____________
____________
____________
____________

__________________
__________________
__________________
__________________
__________________

C.

3.

Multi-National Corporation
A domestic or foreign corporation
which extends its corporate business
to other countries

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
______________
____________ ___________________
______________
____________ ___________________
______________
____________ ___________________
______________
____________ ___________________
______________
____________ ___________________
______________
____________ ___________________

ACCORDING TO PURPOSE
a.

Government Corporation
Those formed by the government
either for governmental functions or
proprietary functions
a)

Public corporations
Those
created
for
the
governance of a state territory.
Examples are provinces, cities
b) Government
owned
and
controlled corporations
Those established primarily for
profits but owned or controlled
by the state. Examples are
NAPOCOR, PAGCOR
b.

SEVENTH: That the authorized capital stock of the corporation is

................................................. (P......................) PESOS in lawful
money of the Philippines, divided into ............... shares with the par
value of ...................................(P.......................) Pesos per share.
(In case all the share are without par value):
That the capital stock of the corporation is ........................... shares
without par 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.

Privately owned Corporation

a)

Civil Corporation
Those established for business or
for profit
b) Wasting Asset Corporation
Those whose purpose is to
extract natural resources
c) Eleemosynary Corporation
Those established for charitable
purposes
d) Ecclesiastical Corporation
Those established for religious
purposes
c.

4.

EIGHTH: That at least twenty five (25%) per cent of the authorized
capital stock above stated has been subscribed as follows:
Name of Subscriber Nationality No of Shares Amount Subscribed
_______________ _______ __________ ______ ________
_______________ _______ __________ ______ ________
_______________ _______ __________ ______ ________
_______________ _______ __________ ______ ________
_______________ _______ __________ ______ ________
NINTH: That the above-named subscribers have paid at least
twenty-five (25%) percent of the total subscription as follows:
Name of Subscriber Amount Subscribed Total Paid-In
________________ ______ _________ __________
________________ ______ _________ __________
________________ ______ _________ __________
________________ ______ _________ __________

Quasi-Public Corporation
These are privately financed and
managed corporations for a public
purpose

(Modify Nos. 8 and 9 if shares are with no par value. In case the
corporation is non-stock, Nos. 7, 8 and 9 of the above articles may
be modified accordingly, and it is sufficient if the articles state the
amount of capital or money contributed or donated by
specifiedpersons, stating the names, nationalities and residences of
the contributors or donors and the respective amount given by
each.)

ACCORDING TO LEGAL RIGHT

a.

b.

De jure Corporation
A corporation duly registered for
having complied with all the
requirements of the law for its legal
existence
De Facto Corporation
A corporation that fails to comply
completely with the requirement of
the law

TENTH: 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 bylaws, and that as such Treasurer, he has been authorized to receive
for and in the name and for the benefit of the corporation, all
subscription (or fees) or contributions or donations paid or given by
the subscribers or members.

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5.

ACCORDING TO EXTENT OF MEMBERSHIP

a.

b.

6.

ELEVENTH: (Corporations which will engage in any business or

activity reserved for Filipino citizens shall provide the following):

Open Corporation
Those whose stocks are open for public
subscription. Generally, stockholders are
not related to each other
Close Corporation
Those owned and managed by a family or
close relatives not exceeding 20 persons.
The stocks of these corporations are not
open for public subscription

"No transfer of stock or interest which shall reduce the ownership of

Filipino citizens to less than the required percentage of the capital
stock as provided by existing laws shall be allowed or permitted to
be recorded in the proper books of the corporation and this
restriction shall be indicated in all stock certificates issued by the
corporation."
IN WITNESS WHEREOF, we have hereunto signed these Articles
of Incorporation, this ................... day of .............................., 19
........... in the City/Municipality of ........................................, Province
of ................................................., Republic of the Philippines.
............................................ .............................................

ACCORDING TO RELATION TO OTHER

CORPORATION
a.

Parent or Holding Corporation

A corporation that acquires significant
influence over another corporation.

b.

Subsidiary Corporation
This corporation is controlled by the
parent or holding corporation

_____________________
_____________________
_____________________
(Names and signatures of the incorporators)
SIGNED IN THE PRESENCE OF
________________________________
(Notarial Acknowledgment)
TREASURER'S AFFIDAVIT

STEPS IN ORGANIZING A CORPORATION

1.

REPUBLIC OF THE PHILIPPINES )

CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF )

PROMOTION

Preliminary steps in organizing a business are

taken like soliciting subscription, obtaining the
required documents for its registration, etc. A
promoter may be hired to do the task, normally
a lawyer.
2.

That I have been elected by the subscribers of the corporation as

Treasurer thereof, to act as such until my successor has been duly
elected and qualified in accordance with the bylaws of the
corporation, and that as such Treasurer, I hereby certify under oath
that at least 25% of the authorized capital stock of the corporation
has been subscribed and at least 25% of the total subscription has
been paid, and received by me, in cash or property, in the amount of
not less than P5,000.00, in accordance with the Corporation Code.

INCORPORATION
This stage includes the following:
a.
b.
c.
d.
e.

3.

I, ...................................., being duly sworn, depose and say:

Registration of corporate name with the

SEC
Drafting and execution of the Articles of
Incorporation
Execution of Sworn Affidavits and Bank
Deposit Certificate
Payment of the filing and publication fees
Issuance by the SEC of the certificate of
Incorporation

________________________
(Signature of Treasurer)
SUBSCRIBED AND SWORN to before me, a Notary Public, for and
in the City/Municipality of .................................. Province of
______________, this ___ day of _______________, 20___; by
............................................ with Res. Cert. No. ..................... issued
at ................. on ......................, 20___.

FORMAL
ORGANIZATION
AND
COMMENCEMENT OF BUSINESS OPERATION
This includes drafting and adoption of bylaws,
election of the board of directors and of the
officers by the board pursuant to the by-laws.
This also includes taking such steps as are
necessary to enable the corporation to transact
the legitimate purpose for which it was
created,.

NOTARY PUBLIC
My commission expires on ..........................., 20 ........
Doc. No. ...............;
Page No. ...............;
Book No. ..............;
Series of 20..... (7a)

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CONTENTS OF THE ARTICLES OF

INCORPORATION

1.
2.
3.
4.
5.
6.
7.

8.

Name of the Corporation

Purpose or purposes for which the corporation
is formed
The place where the principal office of the
corporation is to be established or located,
which must be within the Philippines
The term for which the corporation is to exist
not exceeding 50 years
The names and residences of the
incorporators
The names and addresses of the incorporating
directors who must be not be less than five nor
more than fifteen
The amount of capital stock, its par value, and
number of shares into which it is divided. If the
stock has no par value, the articles need state
only the number of shares but the fact that the
stock is without par shall be stated therein.
The amount of capital stock or the number of
no par shares actually subscribed, including
the names and residences of the subscribers
with an indication of the amount of stock or
number or no par shares subscribed and paid
by each.

BY-LAWS
These are the rules of action adopted by the corporation
for its internal government and for the government of its
officers, shareholders or members.
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 meeting of
shareholders or members and the manner of
voting therein;
4. The form for proxies or 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 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.

MORE CORPORATE CONCEPTS . . .

The issuance of the CERTIFICATE OF INCORPORATION is
the final determination of the corporations right to do
business.
The corporation must formally organize and commence
operations within TWO YEARS from the date of its
incorporation. Otherwise, its corporate powers shall cease.
If a corporation has more than one purpose, the primary
and secondary purpose must be identified

PRE-INCORPORATION SUBSCRIPTION
REQUIREMENT

The Corporation Code provides that the SEC shall not

register any stock corporation unless 25% of its
authorized number of shares of capital stock has
been subscribed, and at least 25% of the subscription
has been paid. However, in no case, shall the paid in
capital be less than P5,000.
Illustration:
Authorized shares
Par value

10,000 shares
P 100.00

25% minimum subscription:

Authorized shares
Multiplied by pre-inc requirement

10,000
.25___

Minimum subscription in shares

Minimum subscription in pesos
25% minimum paid-up capital:
Minimum subscribed shares
Multiplied by par value

2,500 shares
P250,000
2,500 shares
P100___

Total minimum subscription in pesos

Multiplied by minimum requirement

P250,000
.25_____

Minimum paid up capital

P62,500

The BY-LAWS should be adopted within ONE MONTH from the

issuance of the certificate of Incorporation by the SEC. Failure
to file a code of by-laws shall render the corporation liable for
the revocation of its registration.

all about the board of directors . . ..

Every director must own at least ONE share.
Majority of the directors must be residents of the
Philippines.
The board elects the officers of the corporation
A director cannot attend or vote by proxy at board meetings.

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RIGHTS OF A SHAREHOLDER
1.
2.
3.
4.

all about the officers of the

corporation . . ..

To share in the earnings of the corporation

To vote in the election of directors and in the
determination of certain corporate policies
To subscribe for additional stock issues This
is the RIGHT OF PREEMPTION or STOCK
RIGHT
To share in the nets assets of the corporation
upon liquidation.

The president of the corporation must be a director

The treasurer of the corporation may or may not be a
director
The corporate secretary must be a citizen and a
resident of the Philippines
Any two or more positions may be held concurrently
by one person.
A president can not be a treasurer at the same time
A president can not be a secretary at the same time.

COMPONENTS OF CORPORATION
1.
2.

3.

4.

Corporators
Those who compo9se the corporation whether
shareholders or members or both
Incorporators
Those corporators mentioned in the articles of
incorporation as originally forming and composing
the corporation. These are natural persons
Shareholders
These are the owners of shares in the a stock
corporation. Shareholders may be natural or
artificial persons.
Members
Corporators of a nonstock corporation

STOCKHOLDERS

Board of Directors

President

Vice
President

Corporate
Secretary

Corporate
Treasurer

Authorized Capital Stock

Secrectary

This is the amount of capital stock fixed in the articles of

incorporation to be subscribed and paid-in or secured to
be pain in by the stockholders of the corporation, either
in money, property, or services.

All about capital stock . . .

SHARE OF STOCK
This represents the interest or right of the a stockholder
in the corporation.
CERTIFICATE OF STOCK
This is the instrument or document that evidences the
ownership of a share of stock.

The capital stock is divided into shares of stock

evidenced by certificate of stock.
The capital stock may be par value or no-par value stock
except preference shares, which should always have par
value.

As a general rule, a certificate of stock is issued only

when the subscription is fully paid.
PAR VALUE STOCK
Is one with specific value fixed in the articles of
incorporation and appearing on the certificate of stock
NO-PAR VALUE STOCK
Is one without any value appearing on the face of the
certificate of stock.

CLASSES OF CAPITAL STOCK

1.

Ordinary shares
All ordinary shareholders have the same rights
and privileges. Ordinary shares give the
holder thereof the right to vote. Ordinary
shareholders have an unlimited return on
investment.

No par stock has always an issued value or stated

value based on the consideration for which it is issued.
Such consideration may be fixed by:
a.
Articles of incorporation
b. Board of directors
c. Holders of a majority of the shares
entitled to vote

If a corporation issues only one class of stock,

it necessarily is an ordinary share.
Ordinary shares can be issued at par or no
par.
2.

Preference shares
It is called a preference share because it gives
the holder some preferences over the ordinary
shareholders. Preferences pertain to claims
on dividends and nets assets in the event of
liquidation. Preference shares have no right to
vote and are issued only with par value.

The minimum issue price for a no-par stock is P5.

Banks, trust companies, insurance companies, public
utilities, and building and loan associations are NOT
permitted to issue no-par shares of stock.

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