Classification,

Formation &
Incorporation

4LM1

Castillo, Angelica Elaine

Montemayor, Anna Carmela

Yacob, Judith Eliscia

Classification of
Corporations
Domestic, Foreign, and Alien
Corporations
– Domestic Corporation: Those which are incorporated
in the same state where they do business.
– Foreign Corporation: Those that are doing business
in states other than the one in which they are
incorporated.
– Alien Corporation: Those that are incorporated
outside the United States
Public Corporation: Formed by the government to meet
some political or governmental purpose

Private Corporation: Created wholly or in part for

private benefit. It may serve a public purpose, as a public
utility does, but they are owned by private persons rather
than by the government.

Non-profit Corporation: Formed without a profit-making

purpose

Close Corporation: One whose shares are held by

members of a family or by relatively few persons.
Classification of Corporations

– Section 3. Classes of corporations. – Corporations

formed or organized under this Code may be stock or
non-stock corporations. Corporations which have
capital stock 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 are stock
corporations. All other corporations are non-stock
corporations. (3a)
 Stock
Definition Corporations which have
capital stock divided into
shares and
are authorized to distribute
to the holders of shares
dividends or allotments of
the surplus profits on the
basis of the shares (§3)
Purpose Primarily to make profits for
its shareholders
Non-Stock
All other private
corporations (§3)
One where no part of its
income is distributable as
dividends to its members,
trustees or officers. (§87)
May be formed or organized
for charitable, religious,
educational, professional,
cultural, fraternal, literary,
scientific, social, civic
service, or similar purposes
like trade, industry,
agricultural and like
chambers, or any
combination thereof. (§88)
Distribution of Profits Profit is distributed to
shareholders
Composition Stockholders
Scope of right to vote Each stockholder votes
according to the proportion of
his shares in the
corporation. No shares may be
deprived of voting rights except
those classified and issued as
"preferred" or "redeemable"
shares, and as otherwise
provided by the Code. (Sec. 6)
Voting by proxy May be denied by the AOI or
the by-laws. (Sec. 89)
Whatever incidental profit
made is not distributed among
its members but is used for
furtherance of its
purpose. AOI or by-laws may
provide for the distribution of
its assets among its members
upon its dissolution. Before
then, no profit may be made by
members.
Members
Each member, regardless of
class, is entitled to one (1) vote
UNLESS such right to vote has
been limited, broadened, or
denied in the AOI or by-
laws. (Sec. 89)
Cannot be denied. (Sec. 58)
Voting by mail
May be authorized by the by- Not possible.
laws, with the approval of and
under the conditions
prescribed by the SEC. (Sec.
89)

Who exercises Board of Directors or Members of the corporation

Corporate Powers §23 Trustees

Governing Board Board of Directors or Board of Trustees, which may

Trustees, consisting of 5-15 consist of more than 15
directors / trustees. trustees unless otherwise
provided by the AOI or by-
laws. (Sec, 92)
Term of directors or Directors / trustees shall hold
trustees office for 1 year and until
their successors are elected
and qualified (Sec. 23).
Election of officers Officers are elected by the
Board of Directors (Sec. 25),
except in close corporations
where the stockholders
themselves may elect the
officers. (Sec. 97)
Board classified in such a way
that the term of office of 1/3
of their number shall expire
every year. Subsequent
elections of trustees
comprising 1/3 of the board
shall be held annually, and
trustees so elected shall have
a term of 3 years. (Sec. 92)
Officers may directly elected
by the members UNLESS the
AOI or by-laws provide
otherwise. (Sec. 92)
Place of meetings Any place within the
Philippines, if provided for by
the by-laws (Sec. 93)
Generally, the meetings must
be held at the principal office
of the corporation, if
practicable. If not, then
anyplace in the city or
municipality where the
principal office of the
corporation is located. (Sec.
51)

Transferability of Transferable. Generally non-transferable

interest or since membership and all
membership rights arising therefrom are
personal. However, the AOI or
by-laws can provide
otherwise. (Sec. 90)
Corporate
Formation
 Corporate Formation

– A process in which the corporations come into existence.

– One of the common reason for changing from a sole
proprietorship or a partnership to a corporation is the need
for additional capital to finance expansion.
– The original owners will find that they are able to expand
more rapidly by selling shares in the company.
– The corporation can choose to accept the offer to purchase
stock.
 PROMOTIONAL ACTIVITIES

1. Promoters – Before a corporation becomes a reality,

promoters take the preliminary steps in organizing a
corporation.
 To issue a prospectus (a document required by
federal or state securities that describes the financial
operations of the corporation, thus allowing investors
to make informed decisions.)
 PROMOTIONAL ACTIVITIES

 Secures the corporate charter (a written document filed by the

founders of the corporation detailing the major components of a
company such as its objectives, its structure and its planned
operations.)
 May purchase or lease property with a view to selling or
transferring it to the corporation when the corporation is formed.
 Enter into contracts with attorneys, accountants, architects, or
other professionals whose services will be needed in planning for
the proposed corporation.
 Induces people to purchase stocks in the corporation
 PROMOTIONAL ACTIVITIES

 Can contract potential individual investors, and they can agree to

purchase capital stock in the future corporation.
– This agreement is called subscription agreement.
– Subscribers become shareholders as soon as the corporation
is formed or the corporation accepts the agreement.
– A subscription is irrevocable for a period of 6 months, unless
the agreement provides otherwise or all parties agree to
revocation.
– The preincorporation subscriber can revoke the offer to
purchase before acceptance without liability.
 Liability of a PROMOTER

– He is held personally liable on preincorporation

contracts.
– Promoters are not agents when a corporation has yet
to come in existence.
– If promoter secures the contracting party’s agreement
to hold only the corporation liable on the contract, the
promoter will not be held liable in the event of any
breach of contract.
 Liability of a PROMOTER

– Once the corporation is formed, the promoter remains

personally liable until the corporation assumes the
preincorporation contracts by novation.
– A corporation cannot normally ratify a preincorporation
contract, as no principal was in existence at the time the
contract was made.
Incorporation
Procedures
Incorporation Procedures

– Requirements
– Articles of Incorporation – Internal Organization
– Corporate Name – Registered Office and
– Duration Agent

– Nature and Purpose – Incorporators

– Capital Structure – Certificate of

Incorporation
– First Organizational
Meeting
Articles of Incorporation

– The primary document needed to begin the

incorporation process

– Articles include basic information about the

corporation

– Serves as the primary source of authority for its future

organization and business functions
Corporate Name

– All corporate statutes require the corporate name to

include the word corporation, incorporated, company, or
limited.

– A corporate name is prohibited from being the same as

the name of another corporation
Duration

– A corporation must prescribe a maximum duration

after which the corporation must formally renew its
existence.
Nature and Purpose

– The articles must specify the intended business

activities of the corporation

– There is a trend in corporation to state in their articles

of incorporation that their organization is organized for
“any legal business” to avoid unnecessary future
amendments to the articles of incorporation
Capital Structure

– The articles must outline the number of:

– shares of stick authorized for issuance;
– their valuation;
– the various types or classes of stock authorized for
issuance;
– and other relevant information concerning equity,
capital or credit
Internal Organization

– The articles should describe the internal management

structure of a corporation

– This may also be included in the bylaws adopted after

the corporation is formed
Registered Office and Agent

– The corporation must indicate the location and

address of its registered office.

– The corporation must give the name and address of a

specific person who has been designated as an agent
and who can receive legal document on behalf of the
corporation
Incorporators

– An incorporator is a person who applies on behalf of

the corporation to obtain its corporate charter
Certificate of Incorporation

– This represents a state’s authorization for the

corporation to conduct business.
First Organizational Meeting

– This is provided for in the articles of incorporation but

is held after the charter is actually granted.

– This is where the incorporators elect the first board of

directors and complete the routine business of
incorporation (e.g. Pass bylaws and issue stock)