NON-STOCK CORPORATIONS

NON-STOCK CORPORATIONS AND

FOUNDATIONS
SEC. 87 & 88, BP BLG. 68

• A Non-stock Corporation is one where no part of its income is

distributable as dividends to its members, trustees, or officers.
• Any profit which a non-stock corporation may obtain as an
incident to its operations shall, whenever necessary or proper,
be used for the furtherance of the purpose or purposes for
which the corporation was organized.
• Non-stock corporations may be formed or organized for
charitable, religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic service, or similar
purposes, like trade, industry, agricultural and like chambers, or
any combination thereof.
 ELEEMOSYNARY PURPOSE AND NON-
DISTRIBUTION OF PROFITS

• The non-existence of capital stock is not determinative on whether

the entity is a non-stock corporation; and it is legally possible for a
corporation having capital stock to still be considered a non-stock
corporation.
• In fact, under pertinent jurisprudence, the existence of stocks in an
eleemosynary-purposed company has not disqualified it from
being considered as a non-stock non-profit corporation.
• Non-stock and non-profit corporations may actually earn profits as
an incident to their primary operations, and so long as the profits
are devoted for their eleemosynary purpose.
• What is prohibited is to operate the company for profit and/or
distribute any profits so earned to its officers and members.
(Collector of Internal Revenue v. Club Filipino Inc. de Cebu, 5 SCRA
321 [1962])
 DISTRIBUTION OF NET ASSETS AND
PROFITS UPON DISSOLUTION

• In the event of dissolution, after the payment of all liabilities and

return of assets received subject to limitations permitting their use,
the remaining assets may be distributed to the members, or any
class or classes of members, as provided for in its articles of
incorporation and by-laws
• In the absence of distribution rules in the articles of incorporation
and by-laws, the remaining assets may be distributed to such
persons, societies, organizations or corporations, whether or not
organized for profit, as may be specified in a plan of distribution as
adopted by the board of trustees and ratified by the members.
• In a regular non-stock corporation it is possible for its net assets, as
well as the accumulated profits from its years of operations, to
inure to the benefit of private individuals or entities for profit but
only as a consequence of dissolution.
 BASIC PRINCIPLES

• A non-stock corporation may only be formed or organized for

charitable, religious, educational, professional, cultural, fraternal,
literary, scientific, social, civic or other similar purposes.
• It may not engage in undertakings such as the investment
business where profit is the main or underlying purpose.
• Although the non-stock corporation may obtain profits as an
incident to its operation such profits are not to be distributed
among its members but must be used for the furtherance of its
purposes. (People v. Menil, G.R. 115054-66, 12 September 1999)
• The non-profit corporation is employed in activities where there
would be difficulties in properly monitoring and quantifying the
effectiveness and quality of the services rendered, which in
essence is covered by the concept of "contractual failure."
 NON-APPLICABILITY OF THE
NATIONALIZATION LAWS

• A foreigner may a member or an officer of a non-stock

corporation. Save for the position of the Secretary, who must be
a Filipino citizen and a resident of the Philippines, the
prohibition of foreign citizens becoming officers in corporations
engaged in business does not apply to the activities of a non-
stock corporation which do not fall within the coverage of a
nationalized industry or area of business reserved by law
exclusively to Filipino citizens. (SEC Opinion No. 12, series of
2002, 21 Nov. 2002).
 DELINQUENCY OF MEMBERSHIP DUES

• Non-stock corporation may seize and dispose of the

membership share of a fully-paid member on account of its
unpaid debts to the corporation (i.e., unpaid monthly dues)
when it is authorized to do so under the corporate by-laws.
• The right of a non-stock corporation to expel a member through
the forfeiture of such member’s share may be established in the
by-laws alone, and need not be embodied in the articles of
incorporation. (Sec. 91, BP Blg 68)
• Thus, an association whose member fails to pay his membership
due and annual due as required in the by-laws, and which
provides for the termination or suspension of erring members
as well as prohibits the latter from intervening in any manner in
the operational activities of the association, must be observed.
 BOARD OF TRUSTEES

• The second paragraph of Sec. 108 of the Corporation Code,

although setting the term of the members of the Board of
Trustees at five years, contains a proviso expressly subjecting
the duration to what is otherwise provided in the articles of
incorporation or by-laws of the educational corporation—that
contrary provision control on the term of office. (Barayuga v.
Advestist University of the Philippines, 655 SCRA 640 [2011])
• A trustee occupying his office in a hold-over capacity could be
removed any time, without cause, upon the election or
appointment of his successor.
 TRUSTEES
RIGHT AND MANNER OF VOTING FOR

• •General Rule: Straight Voting (Sec. 24, BP Blg. 68)

• •Exception: Cumulative voting can apply only in a non-stock
corporation when it is provided for in the articles of
incorporation or the by-laws.
• Nevertheless, although it fulfills the twin requisites of non-
stock and non-profit corporation, by virtue of the fact that it is a
corporation that has capital stock provided for in its articles of
incorporation, Section 24 provides that cumulative voting
would apply.
• Not more than fifteen (15) in number as may be fixed in their
articles of
 TRUSTEES
NUMBER AND ELECTION OF TRUSTEES

• No person shall be elected as trustee unless he is a member of

the corporation.
• Could be more than 15 as may be fixed in the AOI or by-laws
• 1/3 of their number shall expire every year; and subsequent
elections of trustees comprising one-third (1/3) of the board of
trustees shall be held annually and trustees so elected shall have
a term of three (3) years.
• Trustees thereafter elected to fill vacancies occurring before the
expiration of a particular term shall hold office only for the
unexpired period.
• Unless otherwise provided in the articles of incorporation or the
by-laws, officers of a non-stock corporation may be directly
elected by the members. (n)
 JURIDICAL PERSONS AS MEMBERS OF
BOARD OF TRUSTEES

• Juridical persons may become members of the Board of

Trustees of a non-stock corporation.
• A non-stock corporation whose membership is composed of
juridical persons was allowed to be registered, provided that
a provision for the classification of members shall include
duly designated or authorized representatives of juridical
persons as members of the corporation, for purposes of
qualifying them as members of the Board of Directors, which
shall be provided in the articles of incorporation or by-laws.
 MEETINGS OF THE BOARD OF TRUSTEES

• Meetings of directors or trustees may be held anywhere in

or outside the Philippines, unless the by-laws provide
otherwise. (Sec 53, BP Blg. 68)
 ELECTION OF OFFICERS

• It is usually the board of trustees that appoints the officers of a

non-stock corporation, similar to the rules under stock
corporations.
• However, in a non-stock corporation, unless otherwise provided
for in the articles of incorporation or the by-laws, officers of a
non-stock corporation may be elected directly by the members.
• If the officers in a non-stock corporation are directly elected by
the members, the power to remove them is vested directly in
the members.
 CONVERSION OF NON-STOCK CORPORATION TO
STOCK CORPORATION

• The conversion of a non-stock educational institution into a

stock corporation is not legally feasible, as it violates Section 87
of Corporation Code that no part of the income of a non-stock
corporation may be distributable as dividends to its members,
trustees or officers.
• The conversion of an existing "non-stock non-profit" corporation
into a "stock corporation" without dissolving it first would be
tantamount to distribution of its assets or income to its
members inasmuch as after its conversion, the assets of the
non-stock corporation would now be treated as payment to the
subscriptions of the members who will now become the
stockholders of the stock corporation.
 WHAT IS A FOUNDATION?

• Foundations are essentially non-stock corporations governed by

BP Blg. 68.
• Both a regular non-stock corporation and a foundation are tax-
exempt institution under Section 30 of the NIRC when they are
organized for the eleemosynary purposes specified therein and
no profit inures to the benefit of their members, officers and
trustees.
• This tax-exempt status of ordinary non-stock corporations and
foundations only pertain to income earned from pursuing their
eleemosynary purposes, and not to other profit-seeking venture
outside of their main purpose.
 DISSOLUTION: RIGHT OF MEMBERS TO
PROPORTIONATE SHARE OF REMAINING ASSETS

• General Rule: In the event of dissolution of a non-stock

corporation, its assets shall be distributed in accordance with
the rules.
• Exception: Unless, it is so provided in the Articles of
Incorporation or By-Laws, the members are not entitled to any
beneficial or vested interest over the assets of the non-stock
corporation.
• In other words, non-stock, non-profit corporations hold their
funds in trust for the carrying out of the objectives and
purposes expressed in its charter.