Corporation – Nature and Formation Chapter 5 Corporation – Nature and Formation

Corporation vs Partnership As to how created Number of incorporators or partners How managed As to powers Extent of liability of stockholders or partners Transferability of ownership or interest Duration Effects of withdrawal, resignation, or death of a stockholder or partner

Classes of Private Corporation Stock corporation Corporations 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 corporation Are 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. Corporators those who compose the corporation as a: Stockholders Or shareholders are owners of a share or shares in a stock corporation Members Corporators of non-stock corporation

Subscribers Promoters Underwriters Persons 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) Promoters Are persons who bring about or cause to bring about the formation and organization of a corporation. Underwriters Entities who undertake to sell stocks to the general public

Other Classification of a Corp. According to number of persons Corporation aggregate Corporation sole or a special form of corporation usually associated with the clergy According to nationality Domestic corporation Foreign corporation According to public or private purpose Public corporation Private corporation Quasi-public

According to whether for charitable purpose or not According to degree of public participation with regards to stock ownership Close corporation – ownership limited to selected persons or members of a family not exceeding 20 persons Open corporation- the stock is available for subscription or purchase by any person According to whether for charitable purpose or not Ecclesiastical corporation Eleemosynary corporation – those established for public charity Civil corporation – those established for business or profit

According to their legal right to corporate existence De jure corporation – a corporation existing in fact and in law. It is organized in strict conformity with the law De facto corporation – a corporation existing in fact but not in law According to their relation to another corporation Parent or holding corporation Subsidiary corporation

Contents of The Articles of Incorporation Name of the incorporators Specific purpose or purposes for which the corporation is being incorporated. Place of principal office address Term of existence Names, nationality & residences of the incorporators Number of directors or trustees (>5, <15) Names, nationalities, residences of persons who shall act as directors or trustees Authorized capital stock in Php, number of shares, par value, names and nationality of the original subscribers and amount subscribed and paid. For non-stock, amount of capital, names and nationalities of contributors and the amount contributed by each. Other matters not inconsistent with law

Classes of Shares in General Par value shares Specific 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 shares Without 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 shares Those issued with the right to vote. Non-voting shares Those issued without the right to vote/

Common shares Preferred shares Promotion shares Treasury stock These shares entitles the holder to an equal pro-rata division of profits without any preference. Preferred shares These shares entitles the holder to certain advantages or benefits over the holders of the common stock. Promotion shares These 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 stock a stock that has been issued by the corporation as fully paid and later reacquired but not retired. Convertible stock A 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: Promotion the 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.

Incorporation Verification for the records of SEC that the proposed corporate name is not the same or similar to an existing corporation Drafting and execution of the articles of incorporation by the incorporators. 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. 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. Payment of the filing and publication fees Issuance by the SEC of the certificates of incorporation.

Formal organization and commencement of business operation Adoption of by-laws and the election of the board of directors and of the administrative officers. Taking such other steps necessary to enable the corporation to transact the legitimate business or accomplish the purpose for which it was created. 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. 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.