CORPORATION
A corporation is formed by individuals called shareholders. It is a legal entity that is
separate from its owners. In reality, shareholders do not necessarily operate the business. Instead,
shareholders elect a board of directors who then elects the corporation's officers to operate the
business. Depending on the corporation, shareholders may also serve as officers. It can enter into
binding contracts, buy and sell property, sue and be sued, be held responsible for its actions, and
be taxed.
The liability of the shareholders of a corporation is limited to the amount of their share
capital. It consists of at least five to 15 incorporators, each of whom must hold at least one share
and must be registered with the SEC. Minimum paid up capital is Peso 5,000. A corporation can
either be stock or non-stock company regardless of nationality. Such company, if 60% Filipino –
40% foreign-owned is considered a Filipino corporation; if more than 40% foreign-owned, it is
considered a domestic foreign-owned corporation.
Corporations are, for tax purposes, separate entities and are considered a legal person.
This means, among other things, that the profits generated by a corporation are taxed as the
“personal income” of the company. Then, any income distributed to the shareholders as
dividends or profits are taxed again as the personal income of the owners.
Since corporation is a separate legal entities, it provide liability protection. The personal
assets of shareholders are not subject to the liabilities of the corporation.
Corporations are owned by shareholders who invest money in the business by buying
shares of stock. The portion of the corporation they own depends on the percentage of stock they
hold. For example, if a corporation has issued 100 shares of stock, and you own 30 shares, you
own 30 percent of the company. The shareholders elect a board of directors, a group of people
(primarily from outside the corporation) who are legally responsible for governing the
corporation. The board oversees the major policies and decisions made by the corporation, sets
goals and holds management accountable for achieving them, and hires and evaluates the top
executive, generally called the CEO (chief executive officer). The board also approves the
distribution of income to shareholders in the form of cash payments called dividends.
ADVANTAGES
1. One of the most attractive things about a corporation is that the owners have limited
liability. This means that in case of debts, the assets of the owners are very safe and
remains untouched by the creditors.
2. There is a possibility to lower taxes especially when the owner and the business share
profits.
3. At certain times, benefits may be deducted as business expenses.
4. The ownership of a corporation is easily transferable. This means that in an event
whereby the current shareholders and directors foresee a dark future, they might sell the
corporation and hence avoid losing their capital investment.
5. Profits and losses belong to the corporation
6. Personal assets cannot be seized to pay for business debts
7. It makes it possible for business to raise funds by selling stock.
8. Because of their size and ability to pay high sales commissions and benefits, corporations
are generally able to attract more skilled and talented employees than are proprietorships
and partnerships.
9. Because the corporation has a legal life separate from the lives of its owners, it can (at
least in theory) exist forever.
DISADVANTAGES
1. It is very expensive compared to setting up simple business setups such as sole
proprietorship and partnerships.
2. Starting a corporation involves a lot of paperwork. When it comes to legal paperwork, the
owner must file it with the secretary of state.
3. A corporation operates as a separate legal entity and hence is entitled to pay taxes.
4. There is slow decision making in corporations since the directors have to be consulted
before any verdict is reached.
5. Start a corporate business requires complex paperwork
6. It is subject to levels of regulations and governmental oversight that can place burden on
small businesses.
7. With some exceptions, corporate income is taxed twice
8. Agency problem or conflict of interests occurs since managers and shareholders have
different interest, the former concerns with career advancement while the latter is
interested more with the profits without regard to the well-being of the employees.
