Chapter 5

Corporation – Nature and Formation

1. As to how created

2. Number of incorporators or partners

3. How managed

4. As to powers

5. Extent of liability of stockholders or partners

6. Transferability of ownership or interest

7. Duration

8. Effects of withdrawal, resignation, or death of a stockholder or partner

Classes of Private Corporation

• Stock corporationCorporations with 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 thus held.

• Non-stock corporationAre corporations organized for non-

profit purposes, do not issue stocks and are then composed of members

Components of a Corporation

• Incorporators those mentioned in the articles of

incorporation as originally forming and composing the corporation and signatories thereof.

• Corporatorsthose who compose the corporation as a:

– StockholdersOr shareholders are owners of a share or

shares in a stock corporation

– MembersCorporators of non-stock corporation

– SubscribersPersons who have agreed to take and

pay for original, unissued shares of a corporation formed or to be formed. (all incorporators are subscribers, but a subscriber need not be an incorporator)

– PromotersAre persons who bring about or cause

to bring about the formation and organization of a corporation.

– UnderwritersEntities who undertake to sell stocks

to the general public

Other Classification of a Corp.• According to number of persons

1. Corporation aggregate2. Corporation sole or a special form of

corporation usually associated with the clergy

• According to nationality1. Domestic corporation2. Foreign corporation

• According to public or private purpose

1. Public corporation2. Private corporation3. Quasi-public

• According to degree of public participation with regards to stock ownership

1. Close corporation – ownership limited to selected persons or members of a family not exceeding 20 persons

2. Open corporation- the stock is available for subscription or purchase by any person

• According to whether for charitable purpose or not

1. Ecclesiastical corporation2. Eleemosynary corporation – those

established for public charity3. Civil corporation – those established for

business or profit

• According to their legal right to corporate existence

1. De jure corporation – a corporation existing in fact and in law. It is organized in strict conformity with the law

2. De facto corporation – a corporation existing in fact but not in law

• According to their relation to another corporation

1. Parent or holding corporation 2. Subsidiary corporation

Contents of The Articles ofIncorporation

1. Name of the incorporators2. Specific purpose or purposes for which the

corporation is being incorporated.3. Place of principal office address4. Term of existence5. Names, nationality & residences of the

incorporators6. Number of directors or trustees (>5, <15)7. Names, nationalities, residences of persons

who shall act as directors or trustees8. Authorized capital stock in Php, number of

shares, par value, names and nationality of the original subscribers and amount subscribed and paid.

9. For non-stock, amount of capital, names and nationalities of contributors and the amount contributed by each.

10. Other matters not inconsistent with law

Classes of Shares in General

• Par value sharesSpecific 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.

• No-par value sharesWithout any value appearing on the face of the

certificate of stock. The corporation law provides that no-par value stocks may not be issued for an amount less than five pesos. Shares issued without par value are deemed fully paid.

• Voting sharesThose issued with the right to vote.

• Non-voting sharesThose issued without the right to vote/

• Common sharesThese shares entitles the holder to an equal pro-rata division

of profits without any preference.

• Preferred sharesThese shares entitles the holder to certain advantages or

benefits over the holders of the common stock.

• Promotion sharesThese are 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.

• Treasury stocka stock that has been issued by the corporation as fully paid

and later reacquired but not retired.

• Convertible stockA stock which is convertible or changeable from one class to

another class.

Minimum Subscription and Paid-in Capital

At least 25% of the authorized capital stock as stated in the articles of incorporation must be subscribed*

At least 25% of the total subscription must be paid upon subscription, the balance to be paid on the date fixed in the contract of subscription without a need of a call. In the absence of the date, upon call for payment by the board of directors.

Paid in capital should never be less than 5,000 pesos.

* Subscibed shares represent shares which the investors have contracted to acquire.

Illustration:

Assume that the authorized capital stock is P2,000,000 divided into 20,000 shares with par value of P100 per share.

The subscribed capital stock must be P500,000 which is 25% of the authorized capital stock of P2,000,000.

The paid-in capital should be P25,000 which is 25% of the subscribed capital stock of P500,000.

Assume that the authorized capital stock is P60,000, divided into 6,000 P10 per shares.

The subscribed capital stock is 25% of P60,000 = P15,000

The paid-in capital 25% of P15,000 = P3,750, but incorporators must pay P5,000 as the minimum required by law.

In case of no-par value shares, the 25% requirement will be based on the authorized number of shares.

If the authorized capital is 2,000 no-par shares, then at least 500 no-par value shares must be subscribed.

Organizing a Corporation

Steps:

1. Promotionthe process of bringing together the

incorporators or the persons interested in the business; of procuring subscriptions or capital for the corporation; and setting in motion the machinery that leads to the incorporation of the corporation.

2. Incorporationa. Verification for the records of 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.

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 assets and liabilities, certificate of bank deposit, and certificates as to the name of the corporation.

e. Payment of the filing and publication feesf. Issuance by the SEC of the certificates of

incorporation.

3. Formal organization and commencement of business operation

a. Adoption of by-laws and the election of the board of directors and of the administrative officers.

b. Taking such other steps necessary to enable the corporation to transact the legitimate business or accomplish the purpose for which it was created.

c. If the corporation does not formally organize and commence the transaction of its business within 2 years from the date of incorporation, the corporation shall cease or deemed dissolved.

d. If the corporation commenced its business but consequently becomes continuously inoperative for a period of at least 5 years, the same shall be a ground for suspension or revocation of its certificate of incorporation.