The Corporation as a Business Structure

nicolas and de vega law offices corporation as a business

Business enterprises in the Philippines are organized principally in one of four forms, namely: the single proprietorship, the general partnership, the limited partnership, and the corporation. With the advent of Republic Act No. 11232, or otherwise known as the Revised Corporation Code, the so-called one person corporation came into play. With all these forms of business enterprises, the choice of the form of organization is ultimately made by the original organizers and is dictated by the requirements of the business.

The corporate structure

Under the law, a corporation is defined 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.

The formation and organization of a corporation is governed by laws, particularly the Revised corporation code, as mandated by Section 16, Article XII of the 1987 Constitution, to wit:

“The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.”

The advantages of a corporation, as a business enterprise, are the following: the capacity to act as a legal unit, limitation of or exemption from individual liability of shareholders, continuity of existence, transferability of shares, centralized management of board of directors, professional management, standardized method of organization and finance; and easy capital generation.

Notwithstanding the fact that a corporation is replete with advantages, it cannot be denied that there are also some disadvantages such as: it is prone to double taxation; subject to greater governmental regulation and control; corporation may be burdened with inefficient management if stockholders cannot organize to oppose management; limited liability of stockholders may at times translate into limited ability to raise creditor capital; it is harder to organize compared to other business organizations; it is harder or more complicated to maintain; and, the “owners” or stockholders do not participate in the day to day management.

Under the Revised corporation code, which took effect on 23 February 2019, 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 persons 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. Each incorporator of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock.

A corporation with a single stockholder is considered a One Person Corporation. This is a novel provision provided in the Revised corporation code. The term of existence of a corporation is perpetual unless its articles of incorporation provides otherwise.

All about capitalization

As a general rule, the Revised corporation code provides that stock corporations shall not be required to have a minimum authorized capital stock. The exception is when a minimum authorized capital stock is otherwise provided by special laws.

Batas Pambansa Blg. 68, or otherwise known as the corporation code, provides that 25% of the authorized capital stock must be subscribed and 25% of which must be paid up, the remaining balance to be payable on a date fixed or upon call, which in no case shall be less than Php 5,000.00. This provision has been removed from the Revised corporation code.

Also, a One Person Corporation shall not be required to have a minimum authorized capital stock except as otherwise provided by special law.

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, must be included in the Articles of Incorporation of the corporation.

For purposes of capitalization, the following terms are defined as follows:

Authorized capital stock is the amount fixed in the articles to be subscribed and paid, or agreed to be paid by stockholders in money, property services or other means at the organization of the corporation and afterwards and upon which it is to conduct business.

Subscribed capital stock is the amount of capital stock that is subscribed.

Outstanding capital stock is the portion of capital stock issued and held by persons other than the corporation itself.

Unissued capital stock is the portion of capital stock not issued or subscribed. Paid-up capital stock is the portion of subscribed or outstanding capital stock that is paid.

Legal capital is the amount equal to the aggregate par value in or issued value of outstanding capital stock.

Classification of Shares

A share or a stock is the representation of a person’s right or interest in a corporation, its management, the right to vote, incorporate earnings may be of dividends, and property upon dissolution.

The authorized capital stock when divided into shares may further be divided into classes/series or both, having rights, privileges or restrictions as stated in the AI. Absent such, they are equal in all respects. This classification may also be undertaken for the purpose of complying with constitutional or legal requirements.

Common shares are entitled to a pro-rata division of profits. If shares are classified as common, they may or may not have par value except when it is a bank, trust company, insurance company, public utility, building or loan association.

Preferred shares are given preference in the distribution of assets, dividends or other privileges, provided such are not in violation of the Revised corporation code or do not have a right greater than corporate creditors. Such preferences must appear in the AI. If the shares are classified as preferred, it should always have par value. The certificate must state the issued value.

A share with par value refers to a fixed minimum issue price stated in the articles and the certificate. Bank, trust company, insurance company, public utility, building or loan association must always issue shares with par value.

Shares with no par value refers to the absence of any stated value in the articles and the certificate.

Founder’s shares are classified in the Articles as having been given certain rights or privileges not enjoyed by others. Provided, if the exclusive right to vote and be voted for in the election of the Board of Directors, it should be for a limited period not exceeding 5 years subject to SEC approval.

Corporation may issue redeemable shares when expressly allowed by the Articles. Redeemable shares may be purchased and taken up by the Corporation upon the expiration of a fix period, regardless of the existence of unrestricted retained earnings and such other terms and conditions stated in the articles and the certificate of stock.

Treasury shares are shares that have been issued and paid for but subsequently reacquired by purchase, redemption, donation or any other lawful means. Treasury shares may again be disposed of for a reasonable price as determined by the board of directors.

What are the rules on non-voting shares?

Preferred shares may be deprived of voting rights, together with redeemable shares but if so, there must be a class/series which shall have full voting rights.

Holders of nonvoting shares shall nevertheless be entitled to vote on the following matters:

(a) Amendment of the articles of incorporation;

(b) Adoption and amendment of bylaws;

(c) Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate property;

(d) Incurring, creating, or increasing bonded indebtedness;

(e) Increase or decrease of authorized capital stock;

(f) Merger or consolidation of the corporation with another corporation or other corporations;

(g) Investment of corporate funds in another corporation or business in accordance with this Code; and

(h) Dissolution of the corporation.

About Nicolas and De Vega Law Offices

If you need assistance in corporate law, commercial law, corporate or commercial litigation including One Person Corporations, or civil or other criminal law-related issues,  we can help you. Nicolas and de Vega Law Offices is a full-service law firm in the Philippines.  You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines.  You may also call us at +632 84706126, +632 84706130, +632 84016392 or e-mail us at [email protected]. Visit our website