Corporation

- Nature and Formation-

Chapter Outline:

Introduction
Definition of Corporation
Characteristics of Corporation
Distinctions between
Partnership and Corporation
Advantages of a Corporation
Disadvantages of a
Corporation
Classification of a Corporation
Components of a Corporation
Who may form a Corporation?
How to form a Corporation?

Articles of Incorporation
By-Laws
Corporate Name
Corporate Records
Organization Costs
Rights of Stockholders
Share or Stock Cert.
Legal Capital of a Corp.
The Trust Fund Doctrine
Shareholders Equity
Quizzers

Learning Objectives:

1.
2.
3.

4.

After studying this chapter, we should be able to:

Define what corporation is;
Know the nature and formation of a
corporation;
Learn and understand the meaning of legal
capital and the trust fund doctrine of a
corporation;
Learn various terminologies of a corporate
entity.

DEFINITION

A corporation is a legal entity

created by state law to accomplish a
stated purpose.
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.

CHARACTERISTICS

1. Separate Legal Entity

2. Transferable unit of ownership
3. Limited Liability of Shareholders
4. Continuity of Existence
5. Governing Body

Distinctions between partnership

and corporation
Partnership
a. Creation

Mere agreement

At least two(2)
b. Requirements
c. Start of legal entity Execution of the
contract

d. Exercise of powers Authorized by

Corporation
Operation of law
At least five (5)
Issuance of certificate
of incorp. By SEC
Authorized by Law

partners
Can run (Unlimited) Cannot run(Limited)
e. Creditors
f. Interest of partners Non-transmissible Transmissible
Any time by
With the consent of
g. Dissolution
partners will

the state

ADVANTAGES
1.

Greater source of capital

2.

Limited Liability - *

3.

Unlimited Life *

4.

Strong Governing Body

5.

Tax Treatment

6.

Cost of Benefits is deductible *

7.

Additional capital can easily be raised

8.

Ease of transfer of ownership

DISADVANTAGES
1.

Not easy to organize.

2.

Limited credit line.

3.

Abuse of powers is possible

4.

Subject to strict governmental control.

5.

In case of corporations there is double

taxation.

6.

High Costs of operation

CLASSIFICATION
1.

As to Purpose (PPQ)

2.

As to Law of Creation (DF)

3.

As to Membership Holdings (SN)

4.

As to Admission of Shareholders

5.

As to Other Purpose (EL)

(OC)

COMPONENTS OF A CORPORATION
1.
2.
3.

4.
5.

6.
7.

Corporators
Incorporators
Shareholders
Members
Promoters
Board of Directors
Subscribers

WHO MAY FORM A

CORPORATION?
Only

natural persons
not less than five (5) but not more
than fifteen (15)
All of legal age
Majority are residents of the
Philippines
* Incorporators must own or be subscribers to at least
one (1) share capital of the corporation

HOW TO FORM A CORPORATION?

Stages:

1.

Organization Stage

2.

Incorporation Stage *

3.

Commencement Stage

Incorporation Process

Promotion

File Articles of In
corporation

Name Search

State Charter

Subscribers

1st Organizational
Meeting

ARTICLES OF INCORPORATION

1.
2.
3.
4.
5.

Names of initial directors(5)

Corporate management
Definition and/or limitation of powers
Par value of corporate stock (7)
Corporate purpose (2)
(To conduct any lawful business)

ARTICLES OF INCORPORATION
Provisions defining, limiting and regulating powers
of directors / shareholders
7. Par value of authorized shares (7)
8. Imposition of personal liability on shareholders for
the debts of corporation to a specified extent and
upon specified conditions.
9. Release of Directors from liability to corporation or
shareholders except for: *
6.

a. financial benefit received to which director is not entitled.

b. Intentional infliction of harm
c. Liability for unlawful distributions
d. Intentional violation of criminal law

BY-LAWS

1.
2.
3.
4.
5.

refers to the rules and regulations adopted by the

corporation administering its internal government.
As provided for by Section 47 of the Corporation Code
includes among others the following:
time, place and manner of calling and conducting
regular and special meetings
The manner of voting and use of proxies
The manner of electing the BODs
Qualifications, duties and compensation of directors,
trustees, officers and employees.
Procedure of amending Articles of Incorporation and
By- Laws, etc.

CORPORATE NAME

Guidelines to safeguard interest and to avoid

conflict:

1.

Proposed name should not be identical with or

similar to one already registered with SEC.
Suffix - INC. unless it includes the word
corporation as part of its corporate name
Subsidiary= the word (PHIL.) or (PHILIPPINES)
should be affixed to the corporate name, the written
consent of the mother company should likewise be
obtained.
MAHARLIKA or Barangay should not be
used as part of its business name

2.
3.

4.

CORPORATE RECORDS
Minutes Book
2.
Stock and Transfer Book
- Subscribers Ledger
- Shareholders Journal
- Shareholders Ledger
1.

ORGANIZATION COSTS

expenditures incurred while in the

process of organizing a corporation.
These include expenses:
- During promoters meeting
- Attorneys fees
- Filing and publication fee
- Cost of printing stock certificate
- Stock and transfer book

RIGHTS OF SHAREHOLDERS

BASIC RIGHTS:
1.
To vote and attend annual shareholders
meeting
2.
To share in distribution of corporate
profit*
3.
To share in distribution of assets upon
corporate liquidation*
4.
To purchase additional shares in the
event corporation issues additional share
capital. *

SHARE (STOCK) CERTIFICATE

A document that serves as an evidence of
ownership in a stock corporation.
Can only be issued to the individual
Shareholders who have fully paid his
subscription.
Signed by the President or VicePresident of the corp., countersigned by
the Secretary and sealed with the seal of
the corporation.

LEGAL CAPITAL OF A
CORPORATION

Portion of the paid-in capital arising from

the issuance of share capital which must
remain untouched and unimpaired in
protection to corporate creditors and
cannot be returned to shareholders in
any form during the lifetime of the
corporation, except when a liquidation
happens and only after debts have been
paid. **

TRUST FUND DOCTRINE

A

legal principle that prohibits a

private corporation to distribute its
legal capital to the shareholders for
the protection of corporate
creditors during the lifetime of a
corporation. *

SHAREHOLDERS EQUITY

defined as residual interest of

the owners in the assets of the
corporation as a business entity,
measured by the excess of assets
over liabilities.

SHAREHOLDERS EQUITY

COMPONENTS:
1.
Share Capital
2.
Subscribed Share Capital
3.
Subscription Receivable
4.
Share premium or APIC
5.
Revaluation Surplus or Reserve
6.
Accumulated Profits or Losses or Retained
Earnings
7.
Treasury Shares*

THE
END