Corporation Form of Business: An Overview

Corporation Form of Business Overview

• Module continues the description of a corporate form of business and how it obtains its permanent capital
• Focuses on equity capital that shareholders invest

Republic Act No. 11232 (Revised Corporation Code of the Philippines)

• Defines a corporation as an artificial being
• Created by law
• Has right of succession
• Possesses authorized powers, attributes and properties
• Can act as a single person with rights and duties
• Stockholders are those who put capital into a corporation
• Manila Electric Company, Jollibee Corporation, and San Miguel Corporation are examples

Learning Objectives

• Know corporation definition and special features
• Identify corporation types
• Account for corporation formation

Characteristics of a Corporation

• Separate legal entity with a personality apart from owners
• Can own assets, incur liabilities, enter contracts and sue/be sued under its own name
• Created by law, not by mere agreement
• Right of succession allows it to continue despite changes in ownership
• Powers/attributes are those provided by law and incidental to its existence, as per RA No. 11232
• Ownership is divided into shares (stocks)
• Business is managed by a Board of Directors (BOD) elected by stockholders, and is the governing body of a stock corporation

Advantages of a Corporation

• Unlimited life due to its power of succession
• Death of a shareholder does not affect existence
• Offers more business continuity than sole proprietorships/partnerships
• Can obtain a strong credit line because of continuity
• Bigger source of capital drawn from many investors
• Stockholders have limited liability, up to their investment amount
• Easy ownership transfer by share transfer without requiring consent
• Capacity to act as a legal entity
• Centralized management under Board of Directors

Disadvantages of a Corporation

• Difficult to form due to complicated legal requirements and high costs
• Must comply with specific rules and regulations
• Limited liability of stockholders can weaken or limit its credit capacity
• Subject to more governmental control
• Potential for abuse of power by the Board of Directors due to centralized management
• Activities are limited by the articles of incorporation
• Subject to more taxes on net income and dividends

Classes of Corporation - According to Purpose

• Public or Government: renders government service
• Private: serves a private purpose, aim, or benefit
• Quasi-public: a private corporation given a franchise to perform public functions

Classes of Corporation - According to Law of Creation or Nationality

• Domestic: organized under Philippine laws
• Foreign: organized under laws of other countries
• Multi-national: with assets/operations in one or more countries other than its origin

Classes of Corporation - According to Membership Holdings or Unit of Ownership

• Stock: capital is divided into shares of stock, authorized to distribute dividends
• Stock certificate is evidence of shares
• Generally profit-oriented
• E.g., Manila Electric Company, San Miguel Corporation and Bank of the Philippine Islands
• Non-stock: capital comes from fees/contributions
• No income is distributed as dividends
• Profits are used to further the corporation's purpose(s)
• Generally non-profit, organized for religious/charitable/scientific purposes
• E.g., De La Salle University and Ateneo de Manila University

Classes of Corporation - According to Extent of Membership

• Open: ownership is widely held by many investors
• Closely held or family: 50%+ of stock owned by five or fewer persons

Classes of Corporation - As to Legal Right

• De jure: Complies with all legal and statutory requirements for corporate existence
• De facto: Incorporators tried to incorporate in good faith but failed to comply with requirements

Classes of Corporation - Special corporation from 2019 Corporation Code of the Philippines

• Educational corporations: Governed by special laws and general provisions of the Corporation Code
• Religious corporations: May be incorporated by one or more persons, classified into corporations sole and religious societies
  • Corporation sole: Formed by chief religious leaders to administer affairs/property of a religious organization

Classes of Corporation - One Person Corporation

• Corporation with a single stockholder
  • Only a natural person, trust, or an estate may form

Components of a Corporation

• Incorporators: Originally formed the corporation, appear in the Articles of Incorporation
  • Must be 5-15 natural persons, not artificial persons
• Stockholders/shareholders: Owners of a stock corporation
• Members: Gave fees/contributions to a non-stock corporation
• Corporators: Compose the corporation as stockholders (stock corporation) or members (non-stock corporation)
• Promoters: Undertake steps to organize the corporation
• Subscribers: Agreed to buy shares but will pay later
• Underwriters: Sell shares to the public

Comparison between Partnership and Corporation

• Partnership: Formed by at least two persons; unlimited liability; limited life; transfer of equity needs consent; partner is an agent
• Corporation: Formed by at least five persons; limited liability; unlimited life; stocks can be transferred without consent; stockholders are not agents

Organizing a Corporation - Three Stages

• Promotion: Makes preliminary arrangements and solicits subscriptions to raise capital
• Incorporation: Formalizes the organization and files necessary documents (articles of incorporation) with the SEC
  • Upon approval, the SEC issues a Certificate of Incorporation, marking the registration date
• Commencement of business: Business should start within two years from incorporation date

Organizing a Corporation - Revised Corporation Code (Section 10)

• States the number and qualifications of incorporators
• Any person, partnership, association or corporation may organize a corporation, singly or jointly, with no more than 15 members for any lawful purpose
• Licensed professionals and partnerships cannot organize as a corporation unless under special laws
• Incorporators must be of legal age
• Each incorporator of a stock corporation must own or subscribe to at least one share of capital stock
• A corporation with a single shareholder is considered a One Person Corporation

Organization Cost

• Costs incurred in forming a corporation are recorded as an expense
• Philippine Accounting Standards (PAS) 38 states organization costs are treated as expense
• E.g., filing fees, cost of printing stock certificates, promoters commission and legal fees
• Account titles possibly used include pre-operating expense, organization expense, or organization costs

Articles of Incorporation

• Establishes the existence of a corporation
• Enumerates the powers and limitations conferred upon the corporation
• Contents are the name of the corporation, the specific purpose(s), the place of the principal office (must be in the Philippines), the term of existence of the corporation (not exceeding 50 years)
• Contents are the names, nationalities and addresses of the incorporators, the number of director or trustees (5-15), the names, nationalities, and residences of persons acting as directors or trustees
• Contents are for stock corporation, the authorized share capital, the classes of stocks to be issued and number of each class of stock indicating par value
  • In addition, the names, nationalities, and residences of original subscribers and amount paid by each must be indicated
• For non-stock corporations, the amount of its capital, the names, nationalities, and residences of the contributors and the amount contributed by each
• Other pertinent matters not inconsistent with law

By-Laws

• Contains provisions for internal administration
• Must be filed within one month of the certificate of incorporation issuance date
• Time, date, place and manner of meetings of directors/trustees and stockholders
• Procedures for calling and conducting meetings of stockholders/members
• Quorum requirements for meetings of stockholders/members
• Rules for stockholder/member/director/trustee attendance and voting, including proxies
• Rules for yearly director/trustee elections, including notice procedures
• Qualifications, duties, compensation, and terms of office for directors/trustees, officers, and employees
• Procedures for selecting/appointing corporate officers
• Penalties for by-law violations
• Procedures for amending the articles of incorporation and by-laws
• Procedures for issuing stock certificates
• Other necessary matters for proper/efficient conduct of corporate affairs

Corporate Books and Records

• Section 73 in Title VIII of Revised Corporation Code
• Articles of incorporation and bylaws of amendments
• Current ownership and voting rights
• Names and addresses of board of directors/trustees and executive officers
• Record of business transactions (journals, ledgers)
• Minute books for meetings of stockholders/members/board of directors/trustees
• Resolutions of board of directors/trustees and shareholders/members
• Copies of latest reportorial requirements submitted to SEC
• Stock and transfer book contains records of stock, names of stockholders/members, installment payments, sales, and transfers of stock

Ownership in a Stock Corporation

• Each stock corporation is authorized by SEC to issue a maximum number of shares of each class of stock to collect business capital
• Investors receive a stock certificate as proof of ownership
• The certificate indicates how many shares the stockholders own
• Owners equity in a corporation is called shareholders' equity/stockholders' equity

Classes of Stock

• Corporations can issue different stock classes
• Each class gives benefits/privileges to shareholders, who choose based on risk appetite
• Par value: share with a definite/fixed value in the articles of incorporation
• No par value: share with no fixed value, but cannot be issued for less than P5.00
• Ordinary/Common share: type of share that entitles the holder to vote in meetings of stockholders, share in corporate profits (dividends), share in profits upon liquidation and purchase additional shares of stocks when companies increase capital, with preemptive rights
• Preference/Preferred share: Entitles basic rights of common shareholders (except voting rights) and gives preferences regarding dividends/asset distribution upon liquidation

Corporation Accounting Terms

• Authorized shares: Maximum number a corporation can issue
• Issued shares: Shares issued to stockholders in the past
• Unissued shares: Shares never issued, available for future issuance
• Outstanding shares: Total shares issued to subscribers/stockholders (not fully/partially paid)- except treasury shares
• Treasury shares: Issued and fully paid for shares reacquired by the corporation through purchase or donation
• Subscribed shares: Shares investors have contracted to acquire
• Subscription: Contract where a subscriber buys shares, paying later
• Certificate of stock: Acknowledgment of stockholder interest in corporation/net assets
• Share premium of par value/stated value: Credited to above par/stated value contributions
• Pre-emptive right: Stockholder right to maintain ownership interest by purchasing additional shares when new capital is issued

Accounting for Formation - Basic Share Capital Transactions

• Authorization: Records the maximum number of shares the corporation can issue
• Sale of stocks: A stockholder buys stocks and pays immediately in full, a stock certificate is issued
• Subscription: A subscriber contracts to buy stocks
• Collection: subscriber pays partially or fully
• Issuance of certificate: Issues the certificate when the subscription is fully paid

Accounting for Formation - Share Capital

• May be paid via money/cash, property/non-cash assets (recorded at fair/par value), or labor/services (recorded at fair service value)
• Share capital may be issued at par or at a premium
• Excess over par is additional paid-in capital
• Cannot be issued at a discount
• Issuing at undervalue is watered stock
• Understating asset value creates secret reserves

Accounting Methods to Record Share Capital Transactions

• Memorandum entry method
• Journal entry method

Par Value Stock Subscribed or Sold at Par

• Authorization uses memo entry method to record maximum shares and valuation
• Sale (Cash xxx, Share Capital xxx) and Subscription (Subscription Receivable xxx, Subscribed Share Capital xxx) use journal entries
• Collection entries list Cash and Subscription Receivable values in journal entry method
• Issuance of certificate entries lists Subscribed Share Capital and Share Capital values in journal entry

Par Value Stock Subscribed or Sold at a Premium

• Memo Authorization states shares authorized and par value
• Journal Sale is Cash xxx, Unissued Share Capital xxx, Share Premium xxx
• Journal Subscription is Subscription Receivable xxx, Subscribed Share Capital xxx, Share Premium xxx
• Journal Collection is Cash xxx, Subscriptions receivable xxx
• Journal Issuance is Subscribed Share capital xxx, Unissued Share Capital xxx

Stock values

• Subscription Receivable account title amount for subscribed shares x subscription price
• Subscription price amount agreed by buyer/corporation shares- at /above value
• Share Capital accounts recorded/credited at par value
• Share Premium amount is value excess, shown as: (Subscription price – par value) x (subscribed shares)

Accounting for Stock: Common vs. Preferred

• Two stock classes are ordinary/common and preference/preferred shares
• Share entitles holder with rights
• Voting is for ordinary shareholders only
• Transactions are same, labelled either ordinary/common or preference/preferred

Accounting for No Par Shares

• Has no value
• Uses memo entry method
• Whole consideration for no par is capital/ not liable for dividend distributions
• Preferred shares can be at par value
• No par stocks banks, utilities ,institutions and companies
• No par value can’t be under P5 per item
• Value price assigned (stated value) to certificate- no less than P5

Accounting methods - No Par Shares

• Authorization to issue is for shares with “no par” or “stated value of Pxx”
• Sale is Cash for Share Capital
• Sales with share is Cash, Share capital, premium for stated
• Subscription and Collection is as per par shares
• Issuance journal is Subscribed to share and capital
• Issuance with stated value shares, share capital and premiums
• Accounting cycle for any business as proprietor or other is always assets = liabilities + equity

Equity Portion

• Equity of position is ownership (owners, partners, and shareholders)
• Total company value = liability and equity.
• International accounting of standards lists and shows changes to equity

Equity Statement

• IAS standard equity – Total amount owned to parent and non-controlling members
• For each factor retrospective recognized in accordance with
• With amount at the start/ end of factor period, showing profit/loss and how it’s changed from ownership and their contributions with changes of subsidiary rights