PARTNERSHIP AND CORPORATION (ACC 002)

CORPORATE FORMATION
At the end of the chapter, the students should be able to:
1. To understand how to form a corporation and to make them aware of the principles of a
corporation operating in the Philippines;
2. To understand the terminologist, accounting principles and concepts apply in a
corporation;
Definition of 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.
(Section 2 of the Corporation Code of the Philippines) The Corporation Code of the Philippines
governs a corporation under the supervision of the Securities and Exchange Commission.
The following terminologist explains the definition of the corporation:
Artificial being - A corporation is considered a person or entity separate from the shareholder.
Being an artificial person, the corporation can acquire and own fundamental properties, open a
bank account, and have the right to sue and answer all legal claims. The corporation has a legal
personality or juridical personality separated from any of the owners; ABC Corporation is
different from the names of shareholders as shown in a bank account; the name ABC
Corporation is registered and not the names of the shareholders.
Right of Succession - A corporation has a legal life of 50 years from the date of incorporation
and is extended for another 25 years for every extension provided by the Code. The corporation
shall continue despite death, incapacity, and shareholder withdrawal. The owner of share capital
can transfer the share anytime, even without the approval of the majority of shareholders, and
the operation will not stop despite the share transfer.
Corporate ownership - The Corporation has issued a share certificate to shareholders upon
full payment of the share capital. Buying a share is a form of investing in the corporation. Capital
invested is divided into several shares.
The more shares held, the more equity is invested in the corporation. That's the reason for the
majority and minority shareholdings.
Limited Liability - The shareholders are not liable for any corporate debt more than their
investment in the corporation. In the case of corporate liquidation, shareholders are free from
unpaid corporate liabilities because their responsibilities are only up to the extent of their
investment.
Transferability of interest - A shareholder has the right to transfer his share capital without the
prior consent of the other shareholders. The transfer or sale of capital shares does not affect the
corporation's regular business operation and corporate structure.
ADVANTAGES AND DISADVANTAGES OF A CORPORATION
The following are the advantages of a corporation:
Sources of Capital - A corporation's capital sources are more significant in scope than those of
a partnership because share capital is sold to all interested buyers through banks or financial
intermediaries. A corporation can be owned by numerous shareholders. The law does not
impose any restriction as to the number of investors who would like to invest. Share capital is
issued to shareholders through the share market or through share brokers and investment
houses.
Limited liability - The shareholder enjoys limited liability on corporate debt in case of
liquidation. The obligation to pay corporate creditors is only up to the amount of investments
invested in the corporation because of the fund doctrine principle of the corporation. The
personal asset of the shareholder is no longer required to satisfy the claim of the corporate
creditor.
Corporate Life - A corporation has an unlimited life. It can exist legally for 50 years and
renewable for another 25 years. The legal life of the corporation makes the corporation more
stable than any form of business organization. It exists more during the life of the original
incorporator of the corporation.
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Commencement of business operation - the corporation shall commence business operation

within two years from the date of incorporation. Non-operational within two after the
incorporation, the registration is considered revoked by the Securíties and Exchange
Commission without the need for any court hearing.
The following are the disadvantages of a corporation:
Legal requirements - A corporation is subject to more government requirements than sole-
proprietorship and partnership forms of business organizations.
Incorporators must file for the approval of Articles of Incorporation and their Corporate By-Laws
to the Securities and Exchange Commission. They are also required to file annually their
financial reports.
Mutual Agency - This principle does not apply to corporate shareholders because the Board of
Directors manages a corporation and not a single shareholder only. Not all shareholders except
those appointed by the Board are mandated to exercise corporate management. Shareholders
are not required to enter into any contract or transaction that would affect the corporation or
under the corporation's name unless they are authorized to do so by the Board of Directors.
CORPORATE STRUCTURE
A corporation has the following organizational structures: (1) The corporation is also called a
shareholder and is one of the corporation's owners. The investor is called a shareholder even if
they hold only one share of capital. The share capital has two types: A capital share with a
voting right and a non-voting right. It depends on the share capital an investor wants to hold, but
apparently, they have the right to elect the members of the Board of Directors based on the
number of shares held. (2) The Board of Directors is responsible for the overall supervision and
serves as the internal administrator of the corporation.
The Board issues corporate policies about the overall operations and declaration of dividends.
(3) Corporate officers are responsible for implementing the policies and plans issued by the
Board of Directors. The president is appointed by the Board and the key officers of the
corporation. The functions of the president include the overall operation of the firm, such as
production, purchasing, selling, marketing, hiring of employees, borrowings, and other incidental
transaction calls for the operation. (4) Incorporators are founders of the corporation whose
names are written in the Articles of Incorporation.
KIND OF CORPORATION
1. A private corporation is owned and organized by a group of shareholders for private and
commercial purposes; it includes the ownership of the private sector other than government
ownership. Meralco, for instance, is a private corporation partially owned by the government, but
it is still classified as a private corporation. As we discussed before, the corporation's capital is
divided into shares capital, except that the corporation issued no share capital to investors.
There are two kinds of private corporations: Stock Corporations and Non-stock Corporations:
A Corporation that issues share capital is called A stock Corporation. This Corporation is usually
organized for profit. Corporate ownership is divided into share capital with the right to receive
dividends based on the number of shares held.
A non-stock corporation such as a religious sect or a religious school is a nonprofit Non-stock
Corporation. No share capital is distributed, nor is profit and loss distributed. The corporators
are called members, and the purpose for its creation may be religious, civic, social, educational,
and charitable in nature.
1. A public corporation is a government corporation organized to accomplish its public
functions, such as the national government, provincial, city, or municipal government,
and barangay.
2. A close corporation is a family corporation in which stock is held by a selected few and
not open to any person. It is also called a private-held corporation.

3. An open corporation or publicly-held corporation is one where the stock is listed in the
stock market and available for purchase or subscription by any
person.
KINDS OF SHARE CAPITAL (SHARE OF STOCK)
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1. Shares Capital with a Par-Value

A certificate of share capital with a fixed value on its face is called a Par-value share. Par value
is written on the face of the share certificate and serves as a gauge in issuing shares capital.
The issuance can be made above par and below par; in a very remote possibility, a corporation
may issue below par value. The Corporation Code of the Philippines prohibits the issuance of
share capital below par value to safeguard the investment of the shareholders and the corporate
creditors. The amount of legal capital is based on the issuance of the share capital at par value
and stated value. Legal capital serves as protection for both investors' and creditors' claims on
corporate assets. In liquidation, the claims of creditors are paid first before any amount is paid to
the shareholder.
2. Share capital with no-par value with a stated value
A no-par value share is without a designated value or stated value in the share's capital
certificate. A share with no-par value cannot be sold at less than P5.00, as provided in the
Corporation Code of the Philippines. The law, however, allows the Board of Directors to fix the
value at some later date. The share is called no-par with a stated value share. The Corporation
Code further provides that all proceeds of no-par shares are considered legal capital.
Share capital without no-par value and stated value.
An ordinary shareholder is entitled to a pro-rata dividend second to preference shareholders. If
the corporation issued one kind of share capital, the share capital must be an ordinary share.
Ordinarily, this kind of share has a voting right and the right to manage the corporation over the
rights of preference shareholders. Ordinary shares are first offered in the initial stage of the
corporation's formation.
A preference share is share capital with preferential rights in the dividend declaration over
ordinary shareholders. This kind of share capital can be claimed as a dividend payment ahead
of an ordinary shareholder. Assume the Board of Directors declared P50,000 dividends on June
30, 2013, to be paid in 30 days. From the P50,000 dividend declaration, the dividend of
preference shares will be paid first over the ordinary shares.
LEGAL CAPITAL
The shareholders are not personally liable for the corporation's liability; the creditors' claims can
be satisfied only through its corporate assets. Consequently, the law requires a permanent
shareholder investment to protect the creditors and shareholders. This minimum permanent
investment is legal capital that cannot be distributed to the shareholders during the corporation's
lifetime under the "corporate trust fund doctrine." It provides that part of the contributed capital is
a "trust fund," to which the creditors have the right to be paid in case of liquidation. Proceeds
from the issuance of par value shares represent legal capital. Proceeds from issuing no-par
value shares are also part of legal capital.
ILLUSTRATIONS OF LEGAL CAPITAL
Illustration: Dingdong Corporation sold 2,000 shares of capital with a par value of
P50 for P160,000. Out of the total cash investment of P160,000, only P100,000 is considered
legal capital, equivalent to the share capital's par value.
Illustration: Howe Corporation sold 2,000 shares of no-par with a stated value of
P50 per share for P100,000 cash. The legal capital is the entire P100,000. You will notice that
the basis of legal capital is the whole investment amount as long as the share is no-par value
shares. The law also prohibits sales below P5 per share of this type.
RIGHTS OF SHAREHOLDER
A shareholder has the following rights:
1. The right to share in the corporate profit or receive dividends at the discretion of the
Board of Directors. Exempted from these rights are the holder/s of treasury shares.
2. The right to vote for the members of the Board of Directors in the annual shareholder's
meeting. Exempted are the holders of preference, redeemable, and treasury shares.
3. The right to share in the distribution of corporate assets upon the corporation's
liquidation.
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4. The right to purchase additional capital shares whenever there is an increase in the
authorized share capital before it can be offered to other shareholders. This right is
called a pre-emptive right.
5. The right to examine the corporate books of accounts, such as journals and ledgers.