Accounting 3 & 4
Module 6 Corporate Organization and Formation
Prepared by: Prof. Amelia M. Arganda
Overview
Module 6 contains the definition of corporation, its powers, advantages and disadvantages, its
distinctions from and similarities to partnership. The module also contains the types of corporation
which includes a one-person corporation and its characteristics as stated in the Revised Corporation
Code, the steps in organizing a corporation, books and records kept by a corporation, and the
stockholders’ rights.
Learning Outcomes
At the end of the course the student will be able to:
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Give and explain the definition of corporation
Explain the distinctions and similarities of corporation and partnership
Identify the advantages and disadvantages of a corporation
Identify and explain each type of a corporation
Explain the steps and the requirements for each step in organizing a corporation
Enumerate and explain the books and records kept by a corporation
Identify the persons who composed a corporation
Enumerate and explain the s
Definition of Corporation
Section 2 of the Revised Corporation Code of the Philippines states that “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 incidental to its existence”.
The above definition shows the following characteristics of a corporation:
A corporation is an artificial being. A corporation has a personality distinct and separate from its
stockholders. It can incur liabilities and own assets in its own name. It can enter into contracts, can sue
and be sued, and can exercise powers and rights expressly authorized by law.
A corporation is created by operation of law. It cannot be established by mere agreement of parties like
in the case of partnership. For it to come into existence, authority has to be granted by the state,
particularly the Securities and Exchange Commission.
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A corporation has the right of succession. A corporation is a business entity in which ownership is
represented by shares of stocks. The owner of these shares are called stockholders. The stocks can be
transferred fully from one stockholder to another stockholder or to any person not previously a
stockholder.
A corporation has the powers, attributes, properties expressly authorized by law or incidental to its
existence. A corporation may exercise only those powers which are granted by law and those which are
incidental or essential to its existence. For example, a corporation engaged in agriculture has the right to
purchase and own agricultural lands because such is necessary to pursue the objectives to which it is
created.
Distinctions Between Partnership and Corporation
Partnership
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Created by mere agreement of partners.
Maybe organized by only two persons.
Commences to acquire juridical personality from the execution of partnership contract.
May exercise any power authorized by the partners as long as it is not contrary to law,
morals, good customs, public order or public policy.
Capital raising ability is limited by the number of partners.
General partners have unlimited liability. They are personally liable to the debts of the firm
owed to third parties.
The consent of other partners is sought if an interest is shared with others.
Since there are several causes of dissolving a partnership such as death or insolvency of a
partner, etc. very likely it has a shorter life.
There is mutual agency. The partners can bind the partnership to any contract within the
scope of its business.
May be dissolved at any time by the will of any or all of the partners.
Corporation
1. Created by operation of law.
2. May be organized by any person, partnership, association or corporation, singly or jointly
with others but not more than fifteen (15).
3. Begins to have corporate existence and juridical personality from the date of issuance of the
certificate of incorporation by the Securities and Exchange Commission.
4. Can exercise only the powers expressly granted by law or incidental to its existence.
5. Capital raising ability is limited by the profitableness in which funds of stockholders are
employed.
6. Creditors of the corporation cannot claim the personal assets of the stockholders.
Stockholders are liable only to the extent of their subscribed shares.
7. Shares of stocks can be transferred without the of other stockholders.
8. Has perpetual existence unless its articles of incorporation provides otherwise.
9. There is no mutual agency. A stockholder has no power to bind the corporation to contracts.
His right is limited to vote in the stockholder’s meetings. The power to do business and
manage its affairs is vested in the board of directors.
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10. Can only be dissolved with the consent of the state.
Similarities Between Partnership and Corporation
1. Both are organized for lawful purpose/s.
2. Both have juridical personalities separate and distinct from those of the individuals composing
them.
3. Both act through agents.
4. Both distribute profits to those who contribute capital.
5. Both are taxable.
Advantages of Corporation
1. Greater amount of capital. It is easy for a corporation to raise and assemble capital from the
combined investments of many stockholders.
2. Limited liability. Creditors of a corporation have a claim against the assets of the corporation
but not against the personal property of its stockholders.
3. Transferability of stock. A stockholder can transfer and dispose of his shares of stock at will
without the consent of other stockholders or of the corporation itself.
4. Continues existence. The Revised Corporation Code gives a corporation a perpetual
existence unless its articles of incorporation provides otherwise. ama
5. Legal unit. The corporation has a legal capacity to act as a legal unit.
6. Centralized management. The management of a corporation is centralized In the board of
directors.
7. Standard creation. Creation, organization, management and dissolution of corporations are
governed under the Revised Corporation Code of the Philippines.
Disadvantages of Corporation
1. Subject to governmental control and supervision. Corporations come to existence by
fulfilling the requirements of corporation laws. Because of this, corporations are subject to
more governmental control.
2. Heavy taxation. Corporations are subject to high rate of taxation based on their income. If
part of this income is distributed to stockholders in the form of dividends, the dividends org
considered personal income of the stockholders.
3. It is more costly to organize than the organization of a partnership.
4. Complicated formation. Corporation is relatively complicated in formation and organization.
5. The stockholder has no right in the conduct of the business.
Powers of Corporation
The Revised Corporation Code of the Philippines provides the following powers and capacity of
Corporation:
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To sue and be sued in its corporate name;
To have perpetual existence unless the certificate of incorporation provides otherwise;
To adopt and use a corporate seal;
To amend its articles of incorporation in accordance with the provision of the Code;
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5. To adopt bylaws, not contrary to law, morals, or public policy, and amend the same in
accordance with the Code;
6. In case of stock corporation, to issue or sell stocks to subscribers and to sell treasury stocks;
In case of nonstock corporation, to admit members to the corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, with real or
personal property including securities and bonds of other corporations.
8. To enter into partnership, joint venture, merger and consolidations, or any other commercial
agreement with natural and juridical persons;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purposes as
stated in its articles of incorporation.
Types of Corporation
As to Purpose
Public Corporation. Those which are formed for political or governmental purposes such as
municipalities and cities. ama
Private Corporation. Those which are formed for private purposes.
Quasi-public Corporations. Those engaged in rendering public services such as bus, electric,
water, telephone, etc. companies.
As to Holdings
Stock Corporation. Private corporations the ownership of which is divided into shares of stocks.
Nonstock Corporation. Private corporations whose funds come from the fees of its members.
As to Law of Creation
Domestic Corporation. Those created under the Philippine laws.
Foreign Corporations. Those which are formed under foreign laws.
As to Membership
Close Corporation. One in which the shares of stock are owned by members of immediate
family.
Open Corporation. One in which all the members or corporators have the right to vote in the
election of directors and other officers.
Special Corporations
Corporations created by special laws or charter and are governed by the provisions of the
special law or charter creating them or applicable to them.
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Educational Corporations. Incorporated schools, colleges, or other institutions of learning
governed by the Board of Trustees which consists of five (5) to fifteen (15) trustee members.
This could be stock or nonstock corporation.
Religious Corporations. Corporations formed for religious purposes.
Corporation Sole. Incorporated by one (1) person who maybe the chief archbishop, bishop,
priest, minister, rabbi, other presiding elder of such religious denomination, sect, or church.
Religious Societies. Religious organization of a religious denomination, sect, or church
incorporated for the administration of its affairs, properties, or estate.
One Person Corporation. A corporation with single stockholder. Only natural person, trust, or
estate may form a One Person Corporation. The following may not form One Person
Corporation: banks and quasi banks, preneed trust, insurance, public and publicly listed
companies, non-chartered government-owned and controlled corporation, natural person who
is licensed to exercise a profession for the purpose of exercising such profession.
Characteristics of a One Person Corporation
1. It is not required to have a minimum authorized capital stock.
2. It must submit its articles of incorporation. However, it is not required to submit its
corporate bylaws. ama
3. Letters “OPC” is shown either below or at the end of its corporate name.
4. The single stockholder is the sole director and president of the One Person Corporation.
Organization of a Corporation
A formal process is undertaken when a corporation is brought into being. Generally, these
steps consist of: (1) planning and promoting; (2) incorporation; (3) commencement of the business
operation.
Planning and Promoting
In planning stage, the objectives of forming a corporation is usually specified. Some are
formed to carry a new business while others are formed to take and develop the activities of one
or more predecessor companies.
Promotion includes the selection of a place wherein the business is to be legally located,
determination of capital structure, choosing the methods of raising funds, drafting the by-laws,
etc.
Incorporation
Incorporation includes the preparation of the articles of incorporation and filing such to the
Securities and Exchange Commission.
To form a corporation, an application has to be filed with the Securities and Exchange
Commission. The application should contain the Articles of Incorporation, a sworn affidavit by the
association’s treasurer that at least twenty five percent (25%) of the entire number of the
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authorized shares are subscribed, and that at least twenty five percent (25%) of the subscription
has been paid up.
After the required fees have been paid and if the application is approved, the SEC issues a
certificate of incorporation.
The incorporators then hold a meeting to elect a board of directors and adopt the by-laws
which will govern the administration of the corporation. The by-laws then, will be submitted to
the SEC within one month from the issuance of the certificate of incorporation. The board of
directors elects the corporate officers.
Commencement of the Business Operation
Following the incorporation, the company is legally ready to do business. However, in some
cases, before the active operation begins, several preparations are made such as raising enough
capital, construction of the necessary facilities, hiring of employees, etc.
Articles of Incorporation
The Articles of Incorporation contains the rights and restrictions conferred by the
government upon the corporation. The following information is usually included in the articles of
Incorporation:
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The name of the corporation;
The nature of the business and the purposes for which it is formed; ama
The location of the principal office of the corporation;
The term of existence;
The names and addresses of its incorporators;
The number of authorized capital stock, amount of par value, if there is any, the classes of
shares to be issued;
The names and addresses of the directors chosen;
The names and addresses of its subscribers and members and the amount and number of
subscriptions;
The total amount paid on the subscriptions and the amount paid by each subscriber;
Other necessary and required data.
Corporate By-Laws
By-laws are rules of action adopted by the corporation to govern the conduct of its affairs.
By-laws include the following matters:
1. The time, place, and manner of calling the stockholders’ meeting;
2. The circumstances which may permit the calling of meetings and rules of conducting such
meetings;
3. The manner and qualifications of voting;
4. The number of directors;
5. The duties and powers of directors
6. The length of office of directors;
7. The manner of appointing corporate officers;
8. The powers and duties of corporate officers;
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9. The compensation and length of office of corporate officers;
10. Rules and regulations to govern the acts of directors and officers.
Corporate Books and Records
1. Minutes Book. This book contains a narrative record of the minutes of official meetings of the
corporation’s board of directors and of its stockholders.
2. Stock and Book. This record contains the names of all stockholders, their paid and unpaid
accounts and the date of payments, sales and transfer of shares and the date of transfer.
3. Stockholder’s Ledger. If the company has a large number of stockholders, a controlling account
entitled Ordinary Share (Common Stock) is carried in the general ledger and a subsidiary
stockholder’s ledger is maintained. Each stockholder’s account shows the number of his shares,
certificate number, acquisition date, and date of sale.
4. Subscriber’s Ledger. This is a subsidiary for the subscription receivable showing the individual
subscription of each subscriber.
5. Subscription Book. This book contains the printed blank subscription.
6. Stock Certificate Book. This book contains the printed blank certificates of shares.
7. Accounting Records. This includes all records necessary for managerial requirements such as
journals, ledgers, and other business records.
Components of a Corporation
1. Corporators. Those who composed the corporation whether stockholders or members. ama
2. Incorporators. Those corporators who originally formed and composed the corporation and
who executed and signed the articles of incorporation.
3. Stockholders or shareholders. Owner of shares of stock in a stock corporation.
4. Members. Corporators of a non-stock corporation.
5. Promoters. Persons who bring about the formation and organization of a corporation by
bringing together interested persons in the enterprise, procuring their subscriptions, thus
bringing in capital to the corporation.
6. Subscribers. Persons who have agreed to take and pay for original unissued shares of a
corporation. They become stockholders upon acceptance of their subscriptions.
Stockholder’s Rights
The stockholder has the following basic rights:
1. The right to vote for directors to represent in the management of the business.
2. The right to share in the profits in the form of dividends declared by the board of directors.
3. The right to share in the distribution of the remaining assets of the business upon its liquidation
after all the creditors have been paid.
4. The preemptive right or the right of the stockholders to subscribe for additional shares when the
corporation decides to increase the amount of outstanding shares.
5. The right to sell their shares.
PREPARED BY: PROF. AMELIA M. ARGANDA
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