Ave Maria College

SENIOR HIGH SCHOOL DEPARTMENT

School ID No. 402686 Gov’t Permit No. 0059 s. 2015
SS ABM G125-FUNDAMENTALS OF ACCOUNTANCY BUSINESS & MANAGEMENT 2

LESSON 3: ACCOUNTING FOR CORPORATIONS

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.

A. Attributes of a Corporation
1. A corporation is an artificial being with a personality separate and apart from its individual shareholders
or members.
2. It is created by operation law. It cannot come into existence by mere agreement of the parties as in the
case of business partnerships. Corporations require special authority or grant from the State, either by a
special incorporation law that directly creates the corporation or by means of General Corporation.
3. It enjoys the right of succession. A corporation has the capacity of continued existence regardless of the
death, withdrawal, insolvency or incapacity of the individual shareholders or members. The transfer of
ownership of shares of stock does not dissolve the corporation.
4. It has the powers, attributes and properties expressly authorized by law or incident to its existence. For
example, an investment by a transportation company in an insurance corporation designed to reduce
insurance costs, may be interpreted as an act which is reasonably requisite and necessary to carry out the
business of land transportation. It is because insurance costs from part of the legitimate expenses of a
transportation operator.

Advantages of Corporation

1. The corporation has the legal capacity to act as a legal entity

2. Shareholders have limited liability
3. It has continuity of existence
4. Shares of stock can be transferred without the consent of the other shareholders
5. Its management is centralized in the board of directors
6. Shareholders are not general agents of the business
7. Greater ability to acquire funds

Disadvantages of Corporation

1. A corporation is relatively complicated in formation and management

2. There is a greater degree of government control and supervision
3. It requires a relatively high cost of formation and operation
4. It is subject to heavier taxation than other forms of business organizations
5. Minority shareholders are subservient to the wishes of the majority.
6. In large corporation, management and control have been separated from ownership
7. Transferability of shares permits the uniting of incompatible and conflicting elements in one venture.

B. Classes of Corporations
1. Stock corporation- Corporations which have share capital divided into shares and are authorized to
distribute to the holders such shares dividends or allotments of the surplus profits on the basis of the
shares held.
2. Non-stock corporation- A non-stock corporation is one where no part of its income is distributable as
dividends to its members, trustees or officer. Any profit that a non-stock corporation may obtain as an
incident to its operation shall, whenever necessary or proper, be used for the furtherance of the purposes
for which the corporation was organized (The Corporation Code of the Philippines, Sec.87).
Non-stock corporations may be formed or organized for charitable, religious, educational, professional,
cultural, recreational, fraternal, literary, scientific, social, civic service, or similar purposes.
C. Other Classifications of Corporation
1. According to number of persons:
a. Corporation aggregate. A corporation consisting of more than one corporator.
b. Corporation sole or a special form of corporation usually associated with the clergy. It is a
corporation which consists of only one member or corporator and his successors such as a
bishop.
2. According to nationality:
a. Domestic corporation. A corporation organized under Philippine Laws.
b. Foreign corporation. A corporation organized under foreign laws.
3. According to whether for public or private purpose:
a. Public corporation. A corporation formed or organized for the government of a portion of the
state (e.g. provinces, cities, municipalities and barangays).
b. Private corporation. A corporation created for private aim, benefit or purpose.
4. According to whether for charitable purpose or not:
a. Ecclesiastical corporation. Those organized for religious purposes.
b. Eleemosynary corporation. Those established for public charity.
c. Civil corporation. Those established for business or profit.
5. According to their legal right to corporate existence:
a. De jure corporation. A corporation existing in fact and in law. It is organized in strict conformity
with the law.
b. De facto corporation. A corporation existing in face but not in law.
6. According to degree of public participation with regard to share ownership:
a. Close corporation. A corporation whose share ownership is limited to selected persons or
members of a family not exceeding 20 persons.
b. Open corporation. A corporation where the share is available for subscription or purchase by any
person.
7. According to their relation to another corporation:
a. Parent or holding corporation. A corporation that is related to another corporation that it has the
power to either directly or indirectly elect the majority of the directors of a subsidiary
corporation.
b. Subsidiary corporation. A corporation controlled by another corporation know as a parent
corporation.

D. Components of a Corporation
1. Corporators- are those who compose a corporation whether as shareholders or members, at any time.
This term includes incorporators, shareholders or members. Note: A corporation or a partnership can be
a corporator, but cannot be an incorporator. A partnership can be a corporator in a corporation but a
corporation cannot be a general partner in a partnership.
2. Incorporators- are shareholders or members mentioned in the articles of incorporation as originally
forming and composing the corporation and are signatories to said articles of incorporation. They must
be a natural persons (i.e. human beings) as distinguished from artificial beings (e.g., a corporation or a
partnership).
The code specifies that five or more persons, not exceeding fifteen, may form a private corporation
provided that they are of legal age, owners or subscribers to at least one share of capital stock and that
the majority are residents of the Philippines. Note: all incorporators (if they continue to be shareholders)
are corporators of a corporation, but not all corporators are incorporators.
3. Shareholders- or stockholders are corporators in a stock corporation. Shareholders may be natural or
juridical persons.
4. Members- are corporators of a non-stock corporation.
5. Subscribers- are person who have agreed to take and pay for original, unissued shares of a corporation
formed or to be formed. Note: all incorporators are subscribers but a subscriber need not to be an
incorporator.
6. Promoters- are persons who bring about or cause to bring about the formation and organization of a
corporation.
7. 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
- Offered for sale shared he has purchased from a controlling stockholders.

E. How to Form a corporation

1. Organization Stage- this is the stage where persons who do the preliminary arrangements made by the
incorporator will come in. they will set-up a tentative working organization and procure subscription and
capital for the corporation. These persons are referred to as “Promoters”
2. Incorporation Stage- The Corporation Code of the Philippines provides that the Securities and
Exchange Commission ( SEC) shall not accept registration of Articles of Incorporation of any share
corporation unless notarized and accompanied by affidavit executed by the Corporate Treasure that at
least-five (25%) percent of the authorized share capital has been fully paid actual cash and/or
property, the fair valuation of which is equal to at least twenty-five (25%) percent of said subscription.
In no case, shall the paid up by capital be less than Five thousand Pesos (P5,000). This is the pre-
incorporation requirement.
When the twenty-five (25%) percent of the subscription payment is made in cash, an additional
requirement by Securities and Exchange Commission on bank certificate to attest that deposit has been
made through that bank in favour of said corporation.

Article of Incorporation

As provided for by Section 14 of the Corporation Code, the Articles of Incorporation must contain the name of
the corporation, specific purpose or purposes for which the corporation is formed, location or principal place of
business, term of which a corporation is to exist, names, nationalities and residences of incorporators and
directors, authorized share capital with number of shares into which it is divided and par value, etc.

By-laws refer to the “rules and regulations adopted by the coporation administering its internal
government”. By-laws as provide for by section 47 of the Corporation Code includes among others the
following:

1. Time, place and manner of calling and conducting regular and special meetings of directors or trustees
and of shareholders and members
2. The manner of voting and use of proxies
3. The manner of electing the Board of Directors
4. Qualification, duties and compensation of directors or trustees, officers and employees
5. Procedure of amending Articles of Incorporation and By-Laws, etc.

Corporate Name

The Securities Exchange Commission has adopted some guidelines to safeguard public interest and to
avoid conflict as to the corporate name as follows:

1. The proposed corporate name should not be identical with or similar to one already registered with
SEC.
2. The name of the corporation must have as its suffix the word “INC.” or “Incorporated” unless it
includes word “corporation” as part its corporate name
3. If proposed company is a subsidiary of a foreign corporation, the word (Phil.) or (Philippines) in
parenthesis should be affixed to the corporate name; the written consent of the mother company should
likewise be obtained.
4. No corporation or partnership should be allowed to use the word “Maharlika” or “Barangay” as part
of its business name; the same is being reserved for the government.