CHAPTER 6

INTRODUCTION TO CORPORATION

LEARNING OBJECTIVES:

At the end of the unit, the students should be able to:

1. Define corporation and related terms
2. Discuss the characteristics of corporation
3. Enumerate the advantages and disadvantages of a corporate form of business
4. Differentiate the various classes of corporation
5. Identify the various kinds of shares of stocks.

WHY ARE CORPORATIONS FORMED?

The need to expand business operations brought about by the industrial revolution
required increasingly large amounts of money. These large amounts of money needed for
the construction of large factories and the purchase of machineries and equipment required
contributions from many individuals which the sole proprietor or partners may not be able
to raise. The inadequacy of both the sole proprietorship and partnership to raise the needed
large amount of capital resulted to the development of the corporate form of organization.

Many businesses in the Philippines are organized as corporations since the

ownership interests are by readily transferable shares of stocks. Shares of a corporation
can be traded freely without interrupting the business operations of the corporation. A
shareholder may sell his interest in the business, retire from the company, or die without
causing any stoppage in the company’s business activities. Due to these attributes, a
corporate form of business becomes an enduring type of business.

By incorporating, the enterprise is communicating efforts for stability or

permanence to clients and vendors. Corporate form of business is not easily dissolved. The
word “incorporated” or “corporation” attached to a business name, helps a company
attracts investors easier than a partnership or a sole proprietorship.

The many advantages of corporate form of organization, which outweigh their

disadvantages, led to the increasing formation of corporations in the country.

THE REVISED CORPORATION CODE OF THE PHILIPPINES

Republic Act No. 11232, otherwise known as “The Revised Corporation Code of
the Philippines was approved last February 20, 2019. It repealed the Batas Pambansa
Blg. 68, or the “The Corporation Code of the Philippines”.

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 Section 2 of the New Code defined corporation as 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.

CHARACTERISTICS OF A CORPORATION

1. Separate legal entity

A corporation is a legal or juridical person with a personality separate and apart
from its individual members or shareholders who, as natural persons, are merged in the
corporate body. It is not in fact and in reality a person, however, the law treats it as
though it is a person. Thus, under its corporate name, it may take or acquire properties,
enter into contracts and sue or be sued.

2. Created by operation of law

The corporation cannot come into existence by mere agreement of the parties. It is
created by existing legal principles. In the Philippines, Republic Act No. 11232,
otherwise known as “The Revised Corporation Code of the Philippines governs the
creation and operation of corporations except for those corporations that are created by
special laws or charters.

3. Continuing lifespan or perpetual existence

A corporation has the capacity of continuous existence irrespective of the death,
withdrawal, insolvency or incapacity of the individual members or stockholders, and
regardless of the transfer of their interest or shares of stock.

Section 11 of the New Code states that a corporation shall have perpetual existence
unless its articles of incorporation provides otherwise.

4. Powers, attributes and properties authorized by law

A corporation, being a mere creation by law has only the powers, attributes and
properties expressly authorized by law or incident to its existence. Powers essential to
the existence of the corporation may also be exercised.

5. Transferability of ownership.
A shareholder or investor may sell his ownership shares without the consent of the
other shareholders. A shareholder may sell either a portion of his interest or all of his
interest to individuals or other entities without getting approval for such transfer from
other shareholders. The individuals or companies that purchased such shares will
become owners of the corporation.

6. Limited liability
If ever the corporation incurs losses and ultimately fails, shareholders may lose
their investments. They will not be liable to pay for the debts of the corporation beyond

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 their investments. The maximum loss that shareholders may incur will only be to the
amount of their investments to the corporation.

ADVANTAGES OF A CORPORATION

1. The corporation has a continuous existence.

2. Transfer of ownership or share of stocks can be transacted without the consent of
the other shareholders.
3. Owners of a corporation have limited liability.
4. Financing is easier to obtain.
5. A corporation is well adapted to large-scale business that requires large investment
of capital.
6. It has the advantage of efficiency and flexibility in its management because of its
ability to hire the best in managerial talent. Its management is centralized in the
board of directors.
7. The shareholders are not general agents of the business.

DISADVANTAGES OF THE CORPORATION

1. The corporation is relatively complicated and costly to organize.

2. Its credit is weakened by the limited liability of the shareholders.
3. It is subject to a greater degree of governmental control and supervision than the
sole proprietorship and partnership.
4. The shareholders’ voting rights have become theoretical particularly in large
corporations because of the use of proxies and widespread ownership.
5. The power struggle in a corporation between the majority and minority
shareholders would usually results to the overruling of the minority in
policymaking and other important management matters.

CLASSES OF CORPORATIONS
A. Corporations formed and organized under the New Corporation Code maybe:

1. Stock corporations – corporations that have capital stock divided into shares and
are authorized to distribute to the holder of such shares dividends or allotments of
the surplus profits on the basis of shares held. Owners of stock corporations are
called stockholders or shareholders. SM Primeholdings, Inc., Philippine Long
Distance Telephone Company (PLDT), JG Summit Holdings, Inc. Ayala Land,
Manila Electric Company, San Miguel Corporation and Nestle are stock
corporations.

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 2. Non-stock corporations – private corporations which do not issue stocks but
capital comes from fees paid by the individuals composing it. They are created not
for profit but for public good and welfare. The owners of the non-stock corporation
are called members. Section 86 of the New Code states that a nonstock
corporation is one where no part of its income is distributable as dividends to its
members, trustees or officers. Any profit from its operations shall be used for the
furtherance of the purpose or purposes for which the corporation was organized.

Central Philippine University and Filamer Christian University are non-stock

corporations.

B. Other classifications of corporations

1. As to whether they are for religious purpose or not.

a. Ecclesiastical corporation - a corporation organized for religious purposes.
Jaro Evangelical Church (JEC) is an ecclesiastical corporation.
b. Lay corporation - a corporation organized for a purpose other than for
religion
i. Eleemosynary corporation - a corporation organized for charitable
purpose.
ii. Civil corporation - a corporation organized for business or profit.

2. As to Law of Creation
a. Domestic corporation – one which is organized under the Philippine laws.
Jollibee, Mabuhay Satellite Corporation (MSC) and Queenbank, Inc. are
domestic corporations
b. Foreign corporation – one formed, organized or existing under laws other than
those of the Philippines and whose laws allow Filipino citizens and corporations
to do business in its own country or State (Section 140). Levi Strauss Corp,
Citizen, and Nokia, Inc. are foreign corporations.

3. As to whether they are open to the public or not.

a. Close corporation - a corporation which is limited to selected persons or
members of family. According to Section 95 of the New Code, the number of
shareholders shall not exceed 20.
b. Open corporation - a corporation which is open to any person who would like
to be a shareholder or member thereto. Examples of open corporations are those
corporations which shares of stocks are traded through brokers authorized by the
Philippine Stock Exchange. Investors may purchase shares of open corporations
from J.P. Morgan Securities Philippines, Inc. Regina Capital Development
Corporation (RCDC), BPI Securities Corporation, First Metro Securities
Brokerage Corporation and other brokers to become shareholders of a
corporation.

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4. As to their legal right to corporate existence.
a. De jure corporation - a corporation which exists both in fact and in law. It exists
in fact because it is operating as a corporation. It exists in law because it has
complied with the legal requirements
b. De facto corporation - a corporation which exists in fact but not in law.

5. As to their relation to another corporation

a. Parent or holding corporation - a corporation which is so related to another
corporation that it has the power either, directly or indirectly to, elect the
majority of the directors of such corporation. Philippine Long Distance
Telephone Company (PLDT) is a parent corporation. Its subsidiaries include
Smart and its subsidiaries, and Digitel Mobile Philippines, Inc. (DMPI),
commercially known as Sun Cellular, and ePLDT.
b. Subsidiary corporation - a corporation which is so related to another corporation
that the majority of the directors can be elected either directly or indirectly, by
such corporation. ABS-CBN is a subsidiary of Lopez Holdings, Corp.

6. As to purpose
a. Public corporation is a corporation formed or organized for the government of
a portion of the state. In the Philippines, the public corporations are the
provinces, cities, municipalities and barangays.
b. Private corporations is formed for some private purposes, benefit,
aim or end. Private corporations include:
i. Stock corporation
ii. Non- stock corporation
iii. Quasi-public corporations – private corporations performing public
functions. Ex. PLDT and MERALCO

Many corporations which are organized in one state or country extend their
corporate business in other territories or countries. They have become multi-
national corporations.

7. One Person Corporation - The New Code states that a One Person
Corporation is a corporation with a single stockholder. Provided, that only a
natural person, trust or an estate may form a One Person Corporation. A One
Person Corporation shall indicate the letters “OPC” either below or at the end of
its corporate name. The One Person Corporation is not required to submits and
file corporate bylaws.

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COMPONENTS OF A CORPORATION

1. Corporators - Section 5 of the Revised Corporation Code of the Philippines states

that corporators are those who compose the corporation, whether as stockholders
shareholders in a stock corporation or as members in a nonstock corporation.

2. Incorporators –The New Code states that “incorporators are those stockholders or
members mentioned in the articles of incorporation as originally forming and
composing the corporation and who are signatories thereof”.

All incorporators are corporators but a corporator is not necessarily an incorporator.

Each incorporator of a stock corporation must own or be a subscriber to at least

one (1) share of the capital stock (Section 10 of the Revised Corporation Code)

3. Stockholders or shareholders –They are owners of the shares of stocks in a stock

corporation either by subscription or by direct purchase or by transfer of stock from
another shareholder

4. Members – They are corporators of a non-stock corporation

PERSONS WHO PLAY IMPORTANT ROLES IN THE FORMATION AND

ORGANIZATION OF A CORPORATION

1. Promoters - are persons who bring about or cause to bring about the formation and
organization of a corporation. They undertake the steps towards the launching of a
business enterprise.

2. Subscribers - are persons who agreed to take and pay for original, unissued shares
of a corporation.

3. Underwriters - are usually investment bankers who have agreed, alone or with
others, to buy at stated terms an entire or a substantial part of an issue of securities;
or guaranteed the sale of an issue by agreement to buy from the issuing corporation
any unsold portion at a stated price; or agreed to use his best efforts to market all or
part of an issue; or offer for sale stocks he has purchased from a controlling
shareholder.

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INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

The Revised Corporation Code of the Philippines provides that any person,
partnership, association or corporation, singly or jointly with others but not more
than fifteen (15) in number, may organize a corporation for any lawful purpose or
purposes.

Natural person who are licensed to practice a profession, and partnerships or

associations organized for the purpose of practicing a profession shall not be allowed to
organize as a corporation unless otherwise provided under special laws. Incorporators
who are natural persons must be of legal age.

The Code also states that a corporation may be formed by a single stockholder. This
corporation is the” One Person Corporation”. Only a natural person, trust or an estate
may form a One Person Corporation (Title III).

INCORPORATION

Incorporation is the process of formalizing the organization of the corporation.

It includes:
a. Drafting and execution of the Articles of Incorporation
b. Filing of Articles of Incorporation
c. Payment of the filing and publication fees.
d. Issuance by the SEC of the certificate of incorporation.

COMMENCEMENT OF OPERATION

The Corporation commences to have a juridical personality and legal existence

from the time the Certificate of Incorporation is issued.

Section 21 of the New Code provides that if a corporation does not formally
organize and commence its business within five (5) years from the date of its incorporation,
its certificate of incorporation shall be deemed revoked as of the day following the end of
the five (5) year period.

If a corporation has commenced its business but subsequently becomes inoperative

for a period of at least five (5) consecutive years, the Commission may, after due notice
and hearing, place the corporation under delinquent status. A period of (2) years is given
for the corporation to resume operations and comply with all the requirements that the
Commission prescribes.

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MANAGEMENT OF A CORPORATION

Sec 22 of the New Codes states that the board of directors or trustees shall
exercise the corporate powers, conduct all business and control all properties of the
corporation.

The Board of Directors is the managing body of a stock corporation while the
Board of Trustees is the managing body of a nonstock corporation.

ARTICLES OF INCORPORATION

Section 13 of the New Code states that all corporation shall file with the Commission
articles of incorporation. The articles of incorporation contain the following information:
1. The name of the corporation
2. Purpose or purposes
3. Principal place of business
4. Term of existence if the corporation has not elected perpetual existence
5. Names, nationalities and residence addresses of the incorporators
6. Number of directors or trustees, which shall not be more than 15
7. Names, nationalities and residence addresses of the persons who act as directors or
trustees until the first regular directors or trustees are elected and qualified
8. If it be a stock corporation, the amount of its authorized capital stock, number of
shares into which it is divided, the par value of each, names, nationalities, and
residence addresses of the original subscribers, amount subscribed and paid by each
on the subscription, and a statement that some or all of the shares are without par
value, if applicable.
9. If it is a non-stock corporation, the amount of its capital, the names, nationalities,
and residence addresses of the contributors and the amount contributed by each.
10. Other matters consistent with law and which the incorporators may deem necessary
and convenient

A copy of the articles filed, together with the certificate of incorporation returned
to the corporation, becomes its corporate charter.

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 Articles of Incorporation
of

______________________
Name of Corporation

The undersigned incorporators, all of legal age have this day voluntarily agreed to
form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines
and certify the following:

First: That the name of the said corporation shall be “ ______________ , Inc., or
Corporation or OPC”

Second: That the purpose or purposes for which such corporation is incorporated are: (if
there is more than one purpose, indicate primary and secondary purposes);

Third: That the principal office of the corporation, is located in the City/Municipality
of________ , Province of ________ , Philippines;
Fourth: That the corporation shall have perpetual existence or a term of __________years
from the date of issuance of the certificate of incorporation;

Fifth: That the names, nationalities and residence addresses of the incorporators of the
corporation are as follows:

Name Nationality Residence

____________________ _____________________ ___________________
____________________ _____________________ ___________________
____________________ _____________________ ___________________
____________________ _____________________ ___________________
____________________ _____________________ ___________________

Sixth That the number of directors or trustees of the corporation shall be _____; and the
names, nationalities, and residences of the first directors or trustees of the corporation are
as follows:
Name Nationality Residence
____________________ _____________________ ___________________
____________________ _____________________ ___________________
____________________ _____________________ ___________________
____________________ _____________________ ___________________
____________________ _____________________ ___________________

Seventh: That the authorized capital stock of the corporations is ____PESOS (P _____),
divided into ___ shares with the par value of ____ PESOS (P____) pesos per share.

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(In case all the shares are without par value): That the capital stock of the corporation is
___ shares without par value

(In case some shares have par value and some are without par value): That the capital stock
of said corporation consists of ___ shares, of which ___ shares have a par value __ PESOS
(P ___) pesos each, and of which ___ shares are without par value;

Eighth: That the number of shares of the authorized capital stock above-stated has been
subscribed as follows

Name of Nationality No. of Shares Amount Amount Paid

Subscriber Subscribed Subscribed

(Modify Nos. 8 and 9 if shares are with no-par value. In case the corporation is non-stock,
Nos. 7 and 8 of the above articles may be modified accordingly, and it is sufficient if the
articles state the amount of capital or money contributed or donated by specified persons,
stating the names, nationalities and residence addresses of the contributors or donors and
the respective amount given by each).

Ninth: That ____ has been elected by the subscribers as Treasurer of the Corporation to
act as such until his successor is duly elected and qualified in accordance with the bylaws,
and that as Treasurer, authority has been given to receive in the name and for the benefit
of the corporation, all subscriptions, contributions or donations paid or given by the
subscribers or member, who certifies the information set forth in the seventh and eight
clauses above, and that the paid-up portion of the subscription in cash and/or property for
the benefit and credit of the corporation has been duly received.

Tenth: That the incorporators undertake to change the name of the corporation immediately
upon receipt of notice from the Commission that another corporation, partnership or person
has acquired a prior right to the use of such name, that the name has been declared not
distinguishable from a name already registered or reserved for the use of another
corporation, or that it is contrary to law, public morals, good customs or public policy.

Eleventh: (Corporation which will engage in any business or activity reserved for Filipino
citizens shall provide the following):

“No transfer of stock or interest which will reduce the ownership of Filipino citizens
to less than the required percentage of the capital stock as provided by required existing
laws shall be allowed or permitted to be recorded in the proper books of the corporation
and this restriction shall be indicated in all the stocks certificates issued by the corporation.”
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IN WITNESS WHEROF, we have hereunto signed these Articles of Incorporation, this
____ day of ___ 20__, in the City/Municipality of _______, Province of _____ Republic
of the Philippines.
________________________________ ______________________________
________________________________ ______________________________
________________________________ ______________________________
_______________________________ ______________________________

Names and signatures of the Incorporators

________________________________ ______________________________

(Name and signature of Treasurer)

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STOCK CERTIFICATE OR SHARE CERTIFICATE

A stock certificate or share certificate is the instrument or document that evidences

the ownership of a share of stock. Section 63 of the New Code states that no certificate of
stock shall be issued to as subscriber until the full amount of his subscription together with
interest and expenses (in case of delinquent shares), if any is due, has been paid. Below
is an example of a stock certificate.

NO. 100020 SHARES 1000

This certifies that RUBY RIECH is the owner of One thousand shares of
the Share Capital of CARE CORPORATION transferable only on the books of the
Corporation by the holder hereof in person or by Attorney upon surrender of this
Certificate properly endorsed.

In Witness whereof, the said Corporation has caused this Certificate to be

signed by its duly authorized officers and its Corporate Seal to be hereunto affixed
this 4th day of November, 2013.

___________________ ______________________
Secretary Chairman, Board of Trustees

SHARES P 100 EACH

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BY LAWS

When the certificate of incorporation is issued, the corporation comes into

existence. Then, the corporation needs to take actions to accomplish its purpose. The
corporation must have the executive officers charged with the tasks of managing the
business as well as the rules to govern the internal affairs of the corporation. It must have
the means to accomplish its purpose.

By-laws are the rules of actions adopted by the corporation for its internal
government and for the government of its officers and of its stockholders or members.

A private corporation may provide the following in its bylaws (Sec 46):
1. The time, place and manner of calling and conducting regular or special meetings
of the directors or trustees.
2. The time and manner of calling and conducting regular or special meetings and
mode of notifying the stockholders or members.
3. The required quorum in meetings of stockholders or members and the manner of
voting there in.
4. The modes by which a stockholder, member, director or trustee may attend
meetings and cast their votes
5. The form of proxies of stockholders and members and manner of voting them.
6. The directors’ or trustees’ qualifications, duties and responsibilities, the guidelines
for setting the compensation of directors or trustees and officers, and the maximum
number of other board representations that an independent director or trustee may
have which shall, in no case, be more than the number prescribed by the
Commission.
7. The time for holding the annual election of directors or trustees and the mode of
giving notice thereof.
8. The manner of election or appointment and the term of office of all officers other
than directors or trustees.
9. The penalties for violation of the by-laws.
10. In the case of stock corporation, the manner of issuing stock certificates.
11. Such other matters as may be necessary for the proper or convenient transaction of
its corporate affairs for the promotion of good governance and anti-graft and
corruption measures

RIGHTS OF THE SHAREHOLDERS

1. Right to vote at shareholders’ meeting

2. Right to share in the profits by receiving dividends as declared by the Board of
Directors
3. Right to the net corporate assets after liquidation
4. Right of pre-emption in the issuance of new shares
5. Right to inspect the books of the corporation and subsidiary corporation
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 6. Right to request financial statements and reports
7. Right to sue the corporation
8. Right to sell or otherwise dispose of his share of capital stock
9. Right to adopt and amend by-laws
10. Right to elect and remove directors.

PRE-EMPTIVE RIGHT

Section 38 of the Revised Corporation Code provides that all stockholders of a

stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of
shares of any class, in proportion to their respective holdings, unless such right is denied
by the Articles of Incorporation or an amendment thereto. So, whenever the capital stock
of a corporation is increased and new shares of stocks are issued, the new issue must be
offered first to the existing stockholders before they are offered to the general public to
preserve their proportionate influence and interest in the corporation and the relative value
of their holdings.

Illustration: RR Corporation has authorized share capital of P 5,000,000 divided into 5,000
shares with par value of P 1,000. Subsequently, the share capital is increased to
P7,500,000 (to 2,500 more shares). Ruby Lee owns 500 shares (10%). Upon the increase
of the authorized share capital, Ruby Lee must be given the right to subscribe to 250 new
shares before they are offered to the public so that she can maintain her proportionate
interest.

Before After the increase

Authorized share capital P 5,000,000 P 7,500,000
Authorized shares 5,000 shares 7,500 shares
No of shares held by Ruby Lee 500 500 + 250 = 750
Interest of Ruby Lee 500 500 + 250
______ = 10% __________ = 10%

5,000 5,000 + 2,500

MINIMUM CAPITAL STOCK NOT REQUIRED OF STOCK CORPORATIONS

(Sec 12).

Stock corporations shall not be required to have a minimum capital stock, except
as otherwise specifically provided by special law. However, the 25% subscription and
25% paid up capital rule is required in case of increase of the authorized capital stock. The
25% minimum paid up capital requirements earned does not apply to subsequent
subscription of the unsubscribed shares of the corporation.

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CORPORATE BOOKS AND RECORDS

Section 73 requires every private corporation, stock or non-stock, to keep books

and records at its principal office. These records include:
1. Articles of incorporation and bylaws of the corporation and all their amendments
2. The current ownership structure and voting rights of the corporation
3. Names and addresses of all members of the board of directors or trustees and the
executive officers
4. A record of all business transactions. Books of accounts such as journals and ledger
represent the records of business transactions.
5. Minutes books which contain the minutes of all meetings of shareholders, members
or of the board of directors or trustees.
6. Stock and transfer book which is the record of all names of the shareholders,
installment paid and unpaid by the stockholders and dates of payments, alienation,
sales or transfer of stocks, the dates thereof, and by and to whom made.
7. Subscription book which is a book of printed blank subscription forms
8. Subscriber’s ledger which is a subsidiary record containing accounts of individual
subscribers. The controlling account pertaining to this is the Subscriber’s
receivable account
9. Shareholders’ ledger which is a subsidiary for the capital stock issued reporting the
number of shares issued to each shareholder.
10. Share certificate book which is a book of printed blank share certificate.

TERMINOLOGIES

The Philippine Accounting Standards (PAS) has adopted terminologies used in the
International Accounting Standards. Some terms related to accounting for corporate
business transactions are:

International Accounting Standard Terms Terms in the Philippines

Equity Stockholders’ Equity
Share capital Capital stock
Subscribed share capital Subscribed capital stock
Preference share capital Preferred shares
Ordinary share capital Common stock
Share premium Additional paid in capital (APIC)
Accumulated profits (losses) Retained earnings (deficit)
Appropriation reserve Retained earnings appropriated
Revaluation reserve Revaluation surplus
Treasury share Treasury shares

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Capital Stock or Share Capital
Capital stock is the amount fixed in the articles of incorporation, to be subscribed
and paid in or secured to be paid in by the shareholders of a corporation, either in money
or property, labor or services, at the organization of the corporation or afterwards and upon
which it is to conduct its operation

The capital stock or share capital limits the maximum amount or number of shares
that may be issued by the corporation without formal amendment of the articles of
incorporation. Share capital remains the same even though the actual value of the shares
as determined by the assets of the corporation is diminished or increased.

The share capital is divided into shares. A share represents the interest or rights of
a shareholder. The share certificate is an evidence of the ownership of shares.

The account share capital is the portion of the paid in capital representing the total
par or stated value of the shares issued.

Authorized Capital Stock or Authorized Share Capital

It is synonymous with share capital. The account authorized share capital
represents the total par or stated value of the shares to be issued. It is used under the journal
entry method of accounting for the authorization of share capital.

Subscribed Capital Stock or Subscribed Share Capital

It is the portion of the amount of the authorized share capital that has been
subscribed but not fully paid. Thus, it is still unissued.

The Subscription receivable account (representing the amount not collectible

currently) is deducted from the Subscribed share capital.

Outstanding Capital Stock or Outstanding Share Capital

It is the portion of the share capital which is issued and on the hands of the
stockholders. The Revised Corporation Code Sec. 173 defines outstanding capital stock as
the total shares of stock issued under binding subscription contracts to subscribers or
stockholders, whether or partially paid, except treasury shares.

Paid-up capital
It is the portion of the subscription or outstanding share capital that is paid.

Contributed or Paid-in Capital

Contributed capital represents amount invested or contributed by owners. This

category is composed of a) share capital and b) share premium.

Share capital represents the contribution equal to the par or stated value of the
shares purchased by owners or the total contribution by owners, in case of no-par shares.
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Share premium
Share premium represents contribution in excess of the par or stated value of the
share capital. This may arise from various share capital transactions and other transactions
with shareholders such as: issuance of share capital in excess of par or stated value, resale
of treasury shares at more than cost, distribution of stock dividends, issuance of detachable
stock purchase warrants, changes in par value (stock recapitalization), donation of assets
to the corporation, and transactions resulting to corporate readjustment or quasi-
reorganization

Unissued share capital

It is the portion of the share capital that is not issued to stockholders. If the total
authorized share capital is P 1,000,000 (P 10 par, 100,000 shares) and P 600,000 of which
has been issued to shareholders (P 10 par, 60,000 shares), the unissued share capital is
P 400,000 (P 10 par, 40,000 shares).

Legal capital
Is that portion of the paid in capital arising from issuance of capital stock which
cannot be returned to the stockholders in any form during the life time of the corporation.
Capital stock or share capital represents the legal capital. The share capital is considered
as a trust fund for the protection of creditors according to the trust fund doctrine. It is
illegal to return such legal capital during the lifetime of the corporation. The corporation
can pay dividends but limited only to the retained earnings balance except when the
corporation is a wasting asset corporation.

The amount of legal capital is determined as follows:

a. In the case of par value stock, legal capital is the aggregate par value of the shares
issued and subscribed.
b. In the case of no par value stock, legal capital is the total peso amount of
consideration received or receivable on shares issued and subscribed from
shareholders including the excess over the stated value.

Illustration:
1. The Articles of Incorporation of JUST Corporation provides that the authorized share
capital is P2,000,000 divided into 20,000 shares of P100 par value share capital. Ten
thousand shares were subscribed at par and one thousand shares were subscribed at
P 110. A total of P 600,000 was received: P 550,000 from the subscriptions of the
10,000 shares and P 50,000 from the subscriptions of the 1,000 shares.

The legal capital is P1,100,000, which is equal to the aggregate par value of the shares
issued and subscribed.

10,000 shares x P 100 = P 1,000,000

1,000 shares x P 100 = 100,000
Total P 1,100,000
=========
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 The paid up capital is P600,000

2. Assume that the corporation is a no par but with a stated value share.

The legal capital is P 1,110,000 which is equal to the total peso amount of
consideration received or receivable.

10,000 shares x P 100 = P 1,000,000

1,000 shares x P 110 = 110,000
Total P 1,110,000
=========

CLASSIFICATION OF SHARES

Section 6 of the Corporation Code states that the shares of stock of a stock
corporation may be divided into classes or series of shares, or both, any of which classes
or series of shares may have such rights, privileges of restrictions as may be stated in the
articles of incorporation, provided that no share may be deprived of voting rights, except
those classified and issued as preferred or redeemable shares, unless otherwise provided
in the Code.

These classes or series are grouped as follows:

1. Voting and non-voting shares

Voting shares – those entitled to vote in all business matters affecting the corporation
which require the vote of the stockholders.

Non-voting shares as a rule are not allowed to vote except in the following cases:
amendment of the Articles of Incorporation, adoption, amendment, or repeal of by-
laws, sale or mortgage of all or most of corporate property, increase or decrease of
capital stock, investment of corporate funds in other corporation or business, and
dissolution of the corporation.

2. Par value and No-par Value shares

Par value stock is a share that has a fixed or definite value in the articles of
incorporation The amount per share is printed on the stock certificate. The par value
establishes the nominal value per share and is the minimum amount that must be paid
in by each stockholder. Banks, trust companies, insurance companies, public utilities,
and building and loan associations issue only par value shares of stock.

A no-par value share is a share with no par amount printed on the share certificate. A
no par share has an issued or stated value based on the consideration for which it was

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 issued which may be fixed in the articles of incorporation, by the board of directors or
by the holders of a majority of the shares entitled to vote.

The Revised Corporation Code of the Philippines states that the no-par shares shall
not be issued for an amount less than P5.00 per share. It may be issued from time to
time at different prices at an amount no less than P5.00 per share. All proceeds from
the issue or sale of such no-par value shares received by the corporation shall be treated
as capital and shall not be available for distribution as dividends to shareholders.

Kinds of shares Is there a value printed Is there a value Minimum

in the articles of printed in the share original
incorporation? certificate? issuance price
Par value share Yes Yes Par value
No par value share Maybe printed None P 5.00

3. Ordinary Share Capital and Preference Share Capital

In the absence of classification made in the Articles of Incorporation, all shares are
considered ordinary shares, the shareholders of which enjoy the same equal rights
and privileges.

Ordinary share or Common stock is a class of ownership interest in a corporation

which exercises no special preference over any other class of stock. It does not have
a fixed or specific return on investment. Its return on investment depends on the
operations of the corporation. It is usually called the risk stock in that it is the first
to shoulder the losses but benefits the most in case there is big profit. It represents
the residual ownership interest in the corporation.

Preference share or Preferred stock is a special class of share that possesses certain
preferential rights that are not found in ordinary shares. It is usually issued with a
par value and the dividend of the preference share is expressed as a percentage of the
par value

Preference shares are offered by the corporation to induce moneyed people to invest
in the corporation by giving them certain preferential rights. The most attractive of
the rights are the first preference in the distribution of dividends and in the
distribution of corporate assets in the event of dissolution

The preferred shareholders have only a limited or fixed return on investment. A

holder of P100 par value, 10% preference share is entitled to an annual dividend if
declared of 10% of 100 or P10. For no-par stock an amount may be declared as
dividend per share like P5/Preference share. A stockholder holding 100 shares of
preference share will receive P500 (100 shares x P5) as dividends.

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 Preferred stockholders are not allowed to vote their shares in corporate business
matters.

4. Promotion shares are issued to promoters or entrepreneurs for services rendered in

the organization, promotion and launching of the corporation.

5. Treasury shares are shares which have been issued by the corporation as fully paid
and later reacquired by the corporation through purchase, redemption, donation, or
other lawful means. These shares may again be disposed for a reasonable price fixed
by the board of directors. (Section 9 of the New Code)

6. Escrow shares are shares of stock subject to an escrow agreement wherein such
stocks are deposited by the seller or his agent with a bank or a third party, and to be
delivered by said bank or third party to the buyer or subscriber only upon the
fulfillment of the stipulated suspensive condition.

7. Founder’s shares of stock are issued to the founders of the corporation which enjoy
certain rights and privileges as stipulated in the Articles of Incorporation and which
are not ordinarily given to owners of other stocks.

11. Callable are usually preferred shares that can be redeemed at a specified price at the
option of the corporation.

CLASSIFICATION OF PREFERENCE SHARES

A. Preferred shares as to dividends – It is a share the holder of which is entitled to

receive dividends on said shares to the extent agreed upon before any dividends are
paid to ordinary shareholders.

1. Cumulative preference share is a share which entitles the holder thereof not
only to the payment of current dividends but also to the dividends in arrears.
The holder of the share is entitled to the receipt of previous years unpaid
dividends before the ordinary shareholders will receive payment.

2. Non-cumulative preference share entitles the holder of the receipt of current

dividends only upon declaration. Unpaid dividends of the previous years are
not considered.

3. Participating preference share is a share which gives the holder thereof not
only the right to receive the stipulated dividends at the preferred rate but also to
participate with the holders of ordinary shares in the remaining profits prorata
after common shares have been paid the amount of the dividends at the
preferred rate.

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 4. Non-participating preference share is a share which entitles the holder thereof
to receive the preferred dividends stipulated but the balance, if any, is given
entirely to ordinary shares.

B. Preferred shares as to asset – It is a share which gives the holder thereof preference
in the distribution of the asset of the corporation in case of liquidation.

C. Other Classification of Preference share

1. Convertible preference share entitles the holder the option to exchange the
stock for some other security of issuing corporation.

2. Callable preference share is one which can be called in for redemption at a

specified price at the option of the corporation. It is presented as part of
shareholders’ equity.

Technically, if the preference share is redeemable at the option of the holder or

if the preference share has a mandatory redemption, it is known as redeemable
preference share. It is presented under the liability section of the statement of
financial position.

ILLUSTRATIVE PROBLEM:

Sunshine Corp. is authorized to issue P1,000,000 ordinary share capital divided into
10,000 shares at P 100 par on January 3, 2020. It issued 7,000 shares at par from January
to May 2020. On December 2, Sunshine Corporation reacquired 100 shares at par.
Determine the total number of a. authorized shares b. issued shares c. treasury shares and
d. outstanding shares.

a. Authorized shares - 10,000 shares

b. Issued shares - 7,000 shares
c. Treasury shares - 100 shares
d. Outstanding shares - 6,900 shares

Issued shares 7,000

Treasury shares ( 100 )
Outstanding shares 6,900
=====

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CAPITAL DISTINGUISHED FROM CAPITAL STOCK (SHARE CAPITAL)

1. Capital is the actual corporate property. It is a concrete thing. Capital

stock is an amount. It is something abstract.
2. Capital fluctuates or varies from day to day as there are profits or losses or
depreciation of corporate assets. A capital stock is an amount fixed in the Articles
of Incorporation and is unaffected by the profits and losses.
3. Capital belongs to the corporation while the capital stock when issued belongs to
the shareholders.

ADVANTAGES OF NO PAR VALUE OVER THE PAR VALUE SHARE

The no–par value share does not pretend to place a definite money value on the
share, and therefore is less likely to mislead investors. There is flexibility of the price of
the shares to meet market prices. There is a disappearance of personal liability for the
unpaid stock subscription as may be encountered in the case of par value stock. No-par
value share provides a remedy of the over-capitalization and stock watering of the
corporation.

ADVANTAGE OF PAR VALUE SHARE

Par value shares are easily sold as the public is more attracted to buy this kind of
share. There is a greater protection to creditors and there is an unlikelihood of sale of
subsequently issued shares at a lower price.

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 EXERCISES

Exercise I - Theory

1. Ruth, Alice, Will, and Lil are partners. They own a soap factory. The partners
thought of incorporating. Can they incorporate?

2. Differentiate a stock corporation from a non-stock corporation. Give examples.

3. Compare par value shares and no-par value shares.

4. Distinguish an article of incorporation from bylaws

5. What are the rights of a shareholders?

6. What are the classes of shares in the New Corporation Code? Describe each.

7. Differentiate cumulative from noncumulatative preference share; participating

from nonparticipating preference share.

7. Are all issued shares outstanding? Why?

9. It is possible to issue a) a par value shares at P 4? b) a no-par

value share at P 4?

10. What is a One Person Corporation?

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Exercise II - Alice and 5 other accountants wanted to form a corporation for the practice
of their profession. Will they be allowed to register as a corporation? Why or why not?

Exercise III - HAPPY Corporation has 1, 500,000 authorized ordinary shares, P 100 par.
60% of these has been subscribed and paid at par. Compute for:

a. Authorized share capital

b. Total number of issued shares

Exercise IV – Sincere Corporation authorized share capital is P 5,000,000 divided into

100,000 shares with par value of P 50 per share. Seventy percent of the total authorized
shares had been issued. One half of these was issued at par and one half was issued at
P 55 per shares.

a. How many shares are issued?

b. What is the total amount received by the corporation?

c. Compute for the legal capital

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Exercise V – Multiple Choice. Write the letter of your choice on the spaces before the
numbers.

___ 1. Which is/are not characteristic/s of a corporation?

I - Separate legal entity
II - Limited liability
a. I only
b. II only
c. I and II
d. Neither I nor II

___ 2. The following are the advantages of a corporation except.

a. The corporation has a continuous existence
b. Financing is easier to obtain
c. The corporation is subject to greater degree of governmental control
d. The ownership of shares of stocks can be transferred without the
consent of the other shareholders.

___ 3. ABC Corporation issues shares of stocks and distributes dividends to

shareholders. ABC Corporation is a/an
a. Ecclesiastical corporation
b. Eleemosynary corporation
c. Non- stock corporation
d. Stock corporation

___ 4. KLM Corporation was organized in the United States. It established a

business in the Philippines, KLM Corporation is a
a. Domestic Corporation
b. Foreign Corporation
c. Open Corporation
d. Non-stock Corporation

___ 5. The number of incorporators could be (Choose the best answer)

a. 1 – 15
b. Less than 5
c. 15 - 20
d. More than 5

___ 6. They are the persons who bring about or cause to bring about the formation
of a corporation
a. Incorporators
b. Promoters
c. Subscribers
d. Underwriters

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___ 7. The portion of the authorized share capital that has been subscribed but not
fully paid:
a. Subscription receivable
b. Subscribed share capital
c. Share capital
d. Revaluation surplus

___ 8. Which statement is true?

a. The total consideration received for a par value share represents the
legal capital
b. The par value of a share could not be less than P5.
c. Wasting assets corporation should pay dividends up to the balance of
the retained earnings
d. It is legal to return the amount of share capital during the lifetime of
the corporation for a wasting asset corporation

___ 9. The shares which have been issued by the corporation as fully paid and later
reacquired by the corporation.
a. Treasury shares
b. Escrow shares
c. Promotion shares
d. Founder’s shares of stock

___ 10. Which is/are true?

Statement I – The cumulative preference shareholders are entitled to receive
the current year dividends and the dividends in arrears.
Statement II - The preference shareholders are entitled to receive dividends
after the ordinary shareholders had received their dividends.
Statement I Statement II
a. True True
b. True False
c. False True
d. False False

___ 11. Which is false?

I - No share may be deprived of voting rights except those classified and
issued as preferred or redeemable shares, unless otherwise provided in the
new Corporation Code
II - Holders of ordinary shares receive dividends ahead than the preference
shares.
a. I only c. I, and II
b. II only d. Neither I nor II

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Exercise VI - Identification. Identify the terms being described. Place the answers on the
spaces provided.

________________ 1. A corporation formed or organized for the government of a

portion of a state
________________ 2. A corporation organized for religious purpose
________________ 3. A type of corporation composed only of 1 person
________________ 4. A type of preference share which entitles the holder the
option to exchange it for some other securities of the issuing
corporation.
________________ 5. Corporators of a non-stock corporation.
________________ 6. Preference shares that can be redeemed at a specified price
at the option of the corporation.
________________ 7. Shares issued to promoters.
________________ 8. The corporation organized for a purpose other than for
religion.
________________ 9. The corporation which exist only in fact and in law.
________________ 10. The corporation whose ownership is limited to selected
persons or members of family.
________________ 11. The corporation whose ownership is widely held by many
investors.
________________ 12. The document that contains provisions for the internal
administration of the corporation.
________________ 13. The maximum number of shares a corporation may issue.
________________ 14. The minimum issuance price of a no par share.
________________ 15. The persons who agreed to take and pay for the original,
unissued shares of a corporation.
________________ 16. The process of formalizing the organization of the
corporation.
________________ 17. The Republic Act that established the Revised Corporation
Code of the Philippines.
________________ 18. The residual ownership equity which exercises no special
preference over any other stock.
________________ 19, The type of share whose holder has the option to exchange
the stock for some other security of issuing corporation.
________________ 20. The type of stock whose amount is specified in the Articles
of Incorporation and on the stock certificate.

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Exercise VII. - True or False. Write true if the statement is correct, otherwise write false
on the spaces provided before the numbers.

____________ 1. A corporate form of business is subject to greater governmental

control.
____________ 2. A corporation can be formed by another corporation, association
and natural persons.
____________ 3. The life of a corporate is set at 50 years.
____________ 4. A corporation is dissolved when a majority shareholder sold all
his shares of stocks.
____________ 5. A corporation just like a partnership has limited liability
____________ 6. A partnership is more complicated to organize than a sole
proprietorship and corporation.
____________ 7. A shareholder cannot sell his interest without the consent of the
other shareholders.
____________ 8. A shareholder or member has the right to inspect the books of the
corporation.
____________ 9. Any corporation should be organized by at least 5 persons
____________ 10. Capital and capital stock are synonymous.
____________ 11. Management oversight of a corporation is vested on the board of
directors
____________ 12. Ordinary and preference shares are entitled to dividends in
arrears.
____________ 13. Outstanding shares are issued shares.
____________ `14. Par value shares may be issued at less than P 5/share.
____________ 15. Preference and ordinary shares have voting rights.
____________ 16. Securities and Exchange Commission is a government body that
regulates the operation of a corporation.
____________ 17. Share certificates are documents that evidence the rights of
ownership of shareholders.
____________ 18. Shares of stocks of any corporation are traded in the stock
exchanges.
____________ 19. The New Code states that at least 25% of the subscribed share
capital should be paid by the shareholders.
____________ 20. The shareholders have the right to adopt and amend by-laws
____________ 21. Treasury shares are shares under the names of the shareholders.

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