Organization and

Formation of a Corporation
INTEGRATED SCHOOL | Senior High School
Learning Objectives
1. Define a corporation and identify its characteristics.
2. Identify and discuss the advantages and disadvantages
of a corporate form of organization.
3. Identify and discuss the various classes of corporation.
4. Identify the components of a corporation and the steps
in organizing it.
5. Identify the different types of records that are
maintained by a corporation.
Learning Objectives (Cont’d)
6. Identify and differentiate the two-classes of share
capital (capital stock) that may be issued by a
corporation.
7. Identify the measurement bases in the issuance of
share capital (capital stock) in exchange for various
considerations.
8. Record transactions relating to issuance of share
capital using memorandum entry method and the
journal entry method.
Definition of a Corporation
• 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 incident to its existence. (Sec. 2, BP 68)
Characteristics of a Corporation
1. Separate legal entity – artificial being
2. Created by operation of law
3. Right of succession
4. Powers, attributes, properties authorized by law
5. Ownership divided into shares
6. Board of directors
Advantages of a Corporation
1. The corporation enjoys continuous existence because of
its power of succession.
2. The corporation has the ability to obtain strong credit
line because of continuity of existence.
3. Large scale business undertakings are made possible
because many individuals can invest their funds in the
enterprise.
4. The liability of its investors or shareholders is limited
to the extent of their investment in the corporation.
Advantages of a Corporation (Cont’d)
5. The transfer of shares can be effected without the need
for prior consent of other shareholders.
6. Its smooth operation is guaranteed because of
centralized management.
Disadvantages of a Corporation
1. It is not easy to organize because of complicated legal
requirements and high costs in its organization.
2. The limited liability of its shareholders may weaken its
credit capacity.
3. It is subject to rigid government control.
4. It is subject to more taxes.
5. Its centralized management restricts a more active
participation by shareholders in the conduct of
corporate affairs.
Classes of Corporation
• Generally, profit-oriented corporations are open, private
and stock corporations. Nonprofit corporations are
public and private nonstock corporations.
Classes of Corporation (Cont’d)
1. As to membership
a. Stock corporation – capital divided into shares;
authorized to distribute corporate earnings to
holders on the basis of shares held; owners –
stockholders or shareholders
b. Nonstock corporation – a private corporation in
which capital comes from fees paid by individual
composing it; owners - members
Classes of Corporation (Cont’d)
2. As to purpose
a. Public corporation – govern a portion of the state
b. Private corporation – private benefit, aim or end
c. Quasi-public corporation – private corporation which
is given a franchise to perform functions of a public
character; e.g. public utility corporations
Classes of Corporation (Cont’d)
3. As to compliance of law
a. De jure corporation – law and fact; complied with all
the legal requirements; actually operates as a
corporation
b. De facto corporation – only in fact but not in law;
noncompliance with certain legal requirements
Classes of Corporation (Cont’d)
4. As to law of creation
a. Domestic corporation – organized under the
Philippine law
b. Foreign corporation – organized under the laws of
other countries
Classes of Corporation (Cont’d)
5. As to extent of membership
a. Open corporation – widely held by many investors,
usually a private stock corporation
b. Closely-held corporation or family corporation – 50%
or more of its stock is owned by five (5) persons or
less
Classes of Corporation (Cont’d)
• Other types of corporation include parent or holding
corporations, subsidiary corporations, ecclesiastical
corporations and lay corporations which are themselves
classified into other groups
Components of a Corporation
1. Incorporators – persons who originally formed the
corporation and whose name appear in the Articles of
Incorporation; must be natural persons
2. Corporators – persons who compose the corporation
whether shareholders or members
3. Stockholders or shareholders – corporators of a stock
corporation
4. Members – corporators of a nonstock corporation
Components of a Corporation (Cont’d)
5. Promoters – undertake to (a) form a company based on
a given project, (b) set it going, and (c) take the
necessary steps to accomplish the purpose for which
the corporation is organized
6. Subscribers – agreed to take original, unissued but will
pay at a later date; they may eventually become
shareholders the moment the full payment of their
subscriptions is made
7. Underwriters – those who undertake to dispose of the
shares to general public
Organizing a Corporation
PROMOTION
preliminary arrangements to set
up a tentative working
organization
INCORPORATION
formalizing the corporation: (1)
drafting of articles of
incorporation (2) filing of the
articles of incorporation (3)
approval
COMMENCEMENT
business should start its
operations within two (2) years
from the date of incorporation
Organizing a Corporation (Cont’d)
• Costs incurred during incorporation, such as filing fees,
cost of printing stock certificates, promoters’
commission and legal fees, are known as organization
costs or pre-operating costs
• Charged to expense in the period incurred
Articles of Incorporation
1. Name of the corporation
2. Purpose or purposes for which the corporation is
formed
3. Place of principal office of the corporation
4. Terms of existence of the corporation, not exceeding
fifty (50) years
5. Names, nationalities and addresses of the
incorporators
Articles of Incorporation (Cont’d)
6. Names of the directors who will serve until their
successors are duly elected and qualified in accordance
with the by-laws
7. Authorized share capital (authorized capital stock), the
classes of share capital (stocks) to be issued, and the
number of shares and terms of each class indicating
the par value per share, if any
8. Amount of subscriptions to the share capital (capital
stock), the names of subscribers and the number of
shares subscribed by each
Articles of Incorporation (Cont’d)
9. Total amount paid on the subscriptions to the share
capital (capital stock) and the amount paid by each
subscriber on his subscription
By Laws
• Supplements the articles of incorporation
• Contains provisions for the internal administration of
the corporation
• Normally include the following:
1. The date, place and manner of calling the annual
shareholders’ (stockholders’) meeting
2. Manner of conducting the meeting
3. Circumstances which may permit the calling of
special meetings of the shareholders
By Laws (Cont’d)
4. Manner of voting and the use of proxies
5. Manner of electing the directors and the number of
directors
6. Terms of office of the directors
7. Authority and duties of directors
8. Manner of selecting the corporate officers
9. Authority and responsibilities of the officers
10.Procedure for amending the articles of incorporation
11.Procedure for amending the by-laws
Corporate Records
• Record of business transactions (journals, ledger,
voucher and other supporting documents)
• Minutes of the meetings of directors
• Minutes of all meetings of shareholders (stockholders)
• Stock transfer book
• Shareholders’ (stockholders’) journal
• Shareholders’ (stockholders’) ledger
• Subscribers’ ledger
• Optional and supplementary records
Share Capital
• Also known as capital stock
• Amount fixed by the corporate charter to be subscribed
and paid in or secured to be paid in by the shareholders
of a corporation either in money, or in property, labor or
services upon the organization of the corporation or
afterwards; and upon which it is to conduct its
operations
Classes of Share Capital
• Two classes:
1. ordinary share capital (common stock) – entitles the
holder to an equal or pro-rata division of profits
without any preference or advantage over any class
of shares
2. preference share capital (preferred stock) – entitles
the holder to enjoy priority as to distribution of
dividends and distribution of assets upon corporate
liquidation
• When single class, it is ordinary share capital
Basic Rights of Shareholders
• Unless otherwise stated in the contract, all
shareholders have the same basic rights:
1. Share in the distribution of corporate profits
2. Share in the distribution of assets upon corporate
liquidation
3. Vote in shareholders’ meeting
4. Maintain ownership interest in the corporation
through purchase of additional shares when a new
share capital is issued (preemptive right)
Illustrative Problem A
The Joyful Company was organized on January 1, 2014
with authorized share capital as follows:
• 10,000 shares of 10% preference share capital with a
par value of P100 per share
• 200,000 shares of ordinary share capital with a par
value of P10 per share
Illustrative Problem B
The Happy Corporation was organized on January 1, 2014
and is authorized to issue 100,000 shares of P10 par value
ordinary shares. Subsequently 25,000 shares were sold.
Illustrative Problem C
The Happy Corporation issued 10,000 shares of its P10
par ordinary share capital in exchange for land.
Illustrative Problem D
The Happy Corporation issued 1,000 shares of P10 par
ordinary share capital in payment for the services of the
lawyer rendered during incorporation.
Illustrative Problem E
On June 3, 2014, the Happy Corporation received
subscription for 5,000 shares of its P10 par value ordinary
share capital at P15. A down payment of 25% was received
and the balance was paid in full on July 4, 2014.
Illustrative Problem F
The Happy Corporation was organized on January 1, 2014
and is authorized to issue 100,000 shares of P10 stated
value ordinary share capital. Subsequently, 25,000 shares
were sold.
Illustrative Problem G
The Happy Corporation issued 10,000 shares of its P10
stated value ordinary share capital in exchange for land.
Illustrative Problem H
The Happy Corporation issued 1,000 shares of P10 stated
value ordinary share capital in payment for the services of
the lawyer rendered during incorporation.
Illustrative Problem I
On June 3, 2014, the Happy Corporation received
subscription for 5,000 shares of its P10 stated value
ordinary share capital at P15. A down payment of 25%
was received and the balance was paid in full on July 4,
2014.
Illustrative Problem K
The Happy Corporation issued 10,000 shares of its
ordinary share capital in exchange for land.
Illustrative Problem L
The Happy Corporation issued 1,000 shares of its ordinary
share capital in payment for the services of the lawyer
rendered during the year.
Illustrative Problem M
On June 3, 2014, the Happy Corporation received
subscription for 5,000 shares of its no-par, no stated value
ordinary share capital at P15. A downpayment of 25% was
received and the balance was paid in full on July 4, 2014.
Illustrative Problem N
On June 15, 2014, the Happy Corporation received
subscription for 2,000 shares of its P10 par value ordinary
share capital at P15. A downpayment of 60% was received.
The final payment was due on August 15, 2014, although
several notices were sent to the subscriber, no payment has
been received. On August 31, the subscription was declared
delinquent and was offered for sale in a public auction. On
September 6, expenses of P500 were incurred in connection
with the delinquency sale. On September 21, payment was
received from the highest bidder and shares were issued –
1,500 to the highest bidder and 500 to the defaulting
subscriber.