Organization and Formation of a
Corporation
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 incident to its existence.
(Section 1, Corporation Code of the
Philippines)
Characteristics of a Corporation
• Separate legal entity – Artificial being. With a
personality that is separate from that of its
individual owners.
• Created by operation of law. The mere agreement
of the parties cannot give rise to a corporation.
• Right if Succession. A corporation can continue its
existence irrespective of the death, withdrawal,
insolvency or incapacity of the individual
members or shareholders.
Characteristics of a Corporation
• Powers, attributes, properties authorized by law.
A corporation can only exercise powers provided
by law and those powers which are incidental to
its existence.
• Ownership divided into shares. Proprietorship in
a corporation is divided into units known as share
capital.
• Board of directors. Management of the business
is vested in a board of directors elected by the
shareholders.
Advantages of a Corporation
• The corporation’s power of succession enables it to enjoy a
continuous existence.
• The continuity of corporate existence enables it to obtain a
strong credit line.
• Large scale business undertakings are made possible
because of many individuals can invest their funds in the
enterprise.
• The liability of the investors is limited to the extent of their
investment in the corporation.
• The transfer of shares can be affected without the need for
prior consent of other shareholders.
• Its smooth operation is guaranteed because of centralized
management.
Disadvantages of a Corporation
• It is not easy to organize because of complicated
legal requirements and high costs in its
organization.
• The limited liability of its shareholders may
weaken its credit capacity.
• It is subject to rigid government control.
• It is subject to more taxes
• Its centralized management restricts a more
active participation by shareholders in the
conduct of corporate affairs.
Classes of Corporation
• As to Membership Holdings
a. Stock Corporation – the capital is divided into
shares of stock and is authorized to distribute
corporate earnings to holders on the basis of
shares held.
b. Non-stock Corporation – the capital comes
from fees paid by individuals composing it.
Classes of Corporation
• As to Purpose
a. Public Corporation – A corporation that is
organized to govern a portion of the state.
b. Private Corporation – A corporation that is
organized for a private benefit, aim or end.
c. Quasi-public Corporation – A private
corporation which is given a franchise to
perform functions of a public character.
Classes of Corporation
• As to Compliance of Law
a. De jure Corporation – a corporation which exists
in both law and fact.
b. De facto Corporation – a corporation which exists
only in fact but not in law.
• As to Law of Creation
a. Domestic Corporation – a corporation that is
organized under Philippine laws.
b. Foreign Corporation – a corporation that is
organized under the laws of other countries.
Classes of Corporation
• As to Extent of Membership
a. Open Corporation – a corporation whose
ownership is widely held by many investors,
usually a private stock corporation
b. Closely-held corporation or family corporation
– a private corporation in which 50% or more
of its stock is owned by five persons or less.
Components of a Corporation
• Incorporators – they are the persons who
originally formed the corporation and whose
names appear in the Articles of Incorporation.
• Corporators – they are the persons who compose
the corporation whether as shareholders or
member.
• Stockholders or shareholders – they are the
corporators of a corporation.
• Members – they are the corporators of a nonstock corporation.
Components of a Corporation
• Promoters – they are the persons who undertake
to form a company based on a given project, set
it going, and take the necessary steps to
accomplish the purpose for which the
corporation is organized.
• Subscribers – they are the persons who have
agreed to take original, unissued shares but will
pay at a later date.
• Underwriters - they are those who undertake to
dispose of the shares to the general public.
Organizing a Corporation
1. Promotion – the incorporators make preliminary
arrangements to set up a tentative working
organization and to solicit subscriptions to raise
sufficient capital for the business.
2. Incorporation – the process of formalizing the
organization which must be duly executed and
acknowledged before a notary public.
3. Commencement of the business – the business
should start its operation within two years from
the date of incorporation
Corporation
• Articles of Incorporation – enumerate the
powers and limitations conferred upon the
corporation by the government.
• By-Laws – supplement the Articles of
Incorporation. It contains provisions for the
internal administration of the corporation.
Corporate Records
• The Corporation generally maintains the
following records to keep track of its various
transactions:
1. Record of all business transactions (journals,
ledgers, vouchers, and other supporting
documents)
2. Minutes of all meetings of directors
3. Minutes of all meetings of shareholders
(stockholders)
Corporate Records
• Stock and transfer book
a. Shareholders journal – chronological and
numerical record of stock certificates issued.
b. Shareholders ledger – alphabetical record of
individual shareholders.
c. Subscribers’ ledger – alphabetical record of
individual subscribers.
• Optional and supplementary records