CHAPTER 8 (ORGANIZATION AND FORMATION OF A ▲ Classes of Corporation

CORPORATION) 1. As to Membership Holdings

• Corporation – is an artificial being created by operation of law, having the • Stock corporation – private corporation in which the capital is divided into
right of succession and the powers, attributes and properties expressly shares of stock and is authorized to distribute corporate earnings to holders on
authorized by law or incident to its existence. the basis of shares held.
■ Shareholders/Stockholders – the owners of stock corporations
▲ Characteristics of a Corporation • Non-stock corporation – private corporation in which capital comes from
1. Separate legal entity - artificial being fees paid by individuals composing it.
- A corporation is an artificial being with a personality that is separate from that ■ Member – the owners of a non-stock corporation
of its individual owners.
- It may, under its corporate name, take, hold or convey property to the extent 2. As to Purpose
allowed by law, enter into contracts, and sue or be sued.
• Public corporation – corporation that is organized to govern a portion of the
state (e.g. municipalities, provinces).
2. Created by operation of law • Private corporation – corporation that is organized for a private benefit, aim
- A corporation is generally created by operation of law. or end
- The mere agreement of the parties cannot give rise to a corporation. • Quasi-public corporation – private corporation which is given a franchise to
perform functions of a public character
3. Right of succession
- Irrespective of the death, withdrawal, insolvency, or incapacity of the 3. As to Compliance of Law
individual members or shareholders, and regardless of the transfer of their • De jure corporation – a corporation which exists in both law and fact
interest or share capital, a corporation can continue its existence up to the - It exists in law because it has complied with all the legal requirements; it
period of time stated in the articles of incorporation but not to exceed fifty exists in fact because it actually operates as a corporation
years.
• De facto corporation – a corporation which exists only in fact but not in law.
- It does not exist in law because of non-compliance with certain legal
4. Powers, attributes, properties authorized by law requirements.
- A corporation has only the powers, attributes and properties expressly
authorized by law or incident to its existence.
4. As to Law or Creation
- Being a mere creation of law, a corporation can only exercise powers provided
by law and those powers which are incidental to its existence. • Domestic corporation – a corporation that is organized under Philippine laws
• Foreign corporation – a corporation that is organized under the laws of other
countries
5. Ownership divided into shares
- Proprietorship in a corporation is divided into units known as share capital.
5. As to Extent Of Membership
- The buyers of this share capital are called shareholders or stockholders and are
considered owners of the business. • Open corporation – a corporation whose ownership widely held by investors,
usually a private stock corporation.
• Closely-held corporation/Family corporation – private corporation in which
6. Board of directors 50% or more of its stock is owned by five (5) persons or less.
- Management of the business is vested in a board of directors elected by the
shareholders.
6. Other Types of Corporation
- The board of directors is the governing body or decision-making body of the
corporation. • Holding corporations – a corporation that owns the outstanding stock of
other companies.
- The Corporation Law provides that the number of directors be not less than
five but not more than fifteen. - It usually does not produce goods or services itself.
- Its purpose is to own shares of other companies to form a corporate group

▲ Advantages of a Corporation • Subsidiary corporations – a corporation owned and controlled by another

company
1. The corporation enjoys continuous existence because of its power of
succession. • Ecclesiastical corporations – a corporation concerned only with religious
matters and consisting wholly of ecclesiastics
2. The corporation has the ability to obtain a strong credit line because of
continuity of existence. • Lay corporations – a corporation composed of laymen and organized for
other than spiritual purposes
3. Large scale business undertakings are made possible because many
individuals can invest their funds in the enterprise.
4. The liability in the corporation.is limited to extent of their investment ▲ Components of a Corporation

5. The transfer or shares can be effected without the need for prior consent of • Incorporators – the persons who originally formed the corporation and
other shareholders whose names appear in the Articles of Incorporation

6. Its smooth operation is guaranteed management. - They must be natural persons as distinguished from artificial persons.
• Corporators – the who compose the corporation whether as shareholders or
members.
▲ Disadvantages of a Corporation
• Stockholders/Shareholders – the corporators of a stock corporation.
1. It is not easy to organize of complicated legal requirements and high in its
organization. • Members – the corporators of a non-stock corporation.

2. The limited liability of its shareholders may weaken its credit capacity. • Promoters – they are the persons who undertake to (a) form a company based
on a given project, (b) set it going, and (c) take the necessary steps to
3. It is subject to rigid governmental control. accomplish the purpose for which the corporation is organized
4. It is subject to more taxes. • Subscribers – the persons who have agreed to take original, unissued shares
5. Its centralized management restricts a more active participation by but will pay at a later date.
shareholders in the conduct of corporate affairs. - They may be incorporators or not and they may eventually become
shareholders the moment the full payment of their subscriptions is made
• Underwriters – those who undertake to dispose of the shares to the general
public
▲ Organizing a Corporation • Subscribers' ledger – alphabetical record of individual subscribers.
l. Promotion – the incorporator make preliminary arrangements to set up a 5. Optional and supplementary records
tentative working organization and to solicit subscriptions to raise sufficient
capital for the business.
▲ Share Capital (Capital Stock)
2. Incorporation – the process of formalizing the organization of the
corporation. • Share capital – the amount fixed by the corporate charter to be subscribed
and paid in or secured to be paid in by the shareholders a corporation either in
• Drafting of the articles of incorporation which must be duly executed and money or in property, labor or services upon the organization of the corporation
acknowledged before a notary-public. or afterwards; and upon which it is to conduct its operations
• Filing of the articles of incorporation with the Securities and Exchange
Commission (SEC) together with the statement showing that at least of 25% of
the total authorized share capital has been subscribed and that at least 25% of ▲ Classes of Share Capital
the total subscriptions have been paid. • Ordinary share capital – entitles the holder to an equal or pro-rata division
• After the required fees have been paid and upon approval of the articles of of profits without any preference or advantage over any class of share
incorporation, the SEC issues a certificate of incorporation, the date of which • Preference share capital – entitles the holder to enjoy priority as to
being considered as the date registration or incorporation. distribution of dividends and distribution of assets upon corporate liquidation
• Commencement of the business – the business should start its operations ■ Dividends – are corporate profits distributed to its shareholders.
within two years from the date of incorporation.
- Failure to do so will automatically dissolve the corporation without the need ▲ Basic Rights of Shareholders
for a hearing.
l. To share in the distribution of corporate profit
2. To share in the distribution of assets upon corporate liquidation
■ Organization costs/Pre-operating costs – costs incurred during
3. To vote in shareholders' meeting
incorporation, such as filing fees, cost of printing stock certificates, promoters'
commission and legal fees 4. To maintain one's ownership interest in the corporation through purchase of
additional shares when a new capital is issued. This is known as the preemptive
- Under PAS 38 Intangible Asset, organization or pre-operating costs are
right
charged to expense in the period incurred

• Par value share capital – has a nominal or face value stated on the face of the
▲ Articles of Incorporation – enumerate the powers and limitations upon the
stock certificate and in the articles of incorporation
corporation by the government
• No-par but with stated value share capital – has a nominal value stated in
1. The name of the corporation
the articles of incorporation but not on the face of the stock certificate
2. The purpose or purposes for which the corporation is formed
• No-par, no stated value share capital – has no nominal value stated either in
3. The place of the principal office of the corporation the articles of incorporation nor on the face of the stock certificate
4. The term of existence of the corporation, not exceeding 50 years - In our Corporation Code, a no-par share capital is to be issued for a
5. The names, nationalities, and addresses of the incorporators consideration of not less than P 5
6. The names of the directors who will served until their successors are duly
elected and qualified in accordance with the by-laws ▲ Preference Share Capital
7. The authorized share capital, the classes of share capital to be issued, and the - Generally issued with a par value and a dividend rate
number of shares and terms of each class indicating the par value per share, if
- The holders of preference shares have priority as to distribution of dividends
there is any
and as to distributions of assets in the event of corporate liquidation.
8. The amount of subscriptions to the share capital, the names of the drivers and
- The holders are not assured of regular receipt of dividends, rather, this means
the number of shares subscribed by each
that dividend requirements on preference shares must first be met before any
9. The total amount paid on the subscriptions to the share capital and the payment can made to holders of ordinary shares.
amount paid by each subscriber on his subscription

■ Classes of Preference Shares

▲ By-Laws – contains provisions for the internal administration of the
1. Cumulative preference shares – entitle the holders to the receipt of
corporation
previous years' unpaid dividends before any payment can be made to ordinary
l. The date, place and manner of calling the annual shareholders' meeting shareholders upon dividend declaration.
2. The manner of conducting meetings
3. The circumstances which may permit the calling of special meetings of the 2. Non-cumulative preference shares – entitle the holders to the receipt of
shareholders current dividends but not on the previous years' unpaid dividends.
4. The manner of voting and the use of proxies
5. The manner of electing the directors and the number of directors 3. Participating preference shares – entitle the holders to the receipt of
6. The term of office of the directors additional dividend after holders of both preference and ordinary shares have
7. The authority and duties of the directors been paid up to the current year's dividend.

8. The manner of selecting the corporate

9. The authority and responsibilities of the officers 4. Nonparticipating preference shares – entitle the holders to the receipt of
dividends up to the current period only.
10. The procedure for amending the articles of incorporation
11. The procedure for amending the by-laws.
5. Convertible preference shares – entitle the holders the option to exchange
the shares for some other securities of the issuing corporation, normally
▲ Corporate Records ordinary shares.
l. Record of all business transactions (journals, ledgers, vouchers, and other
supporting documents) 6. Redeemable preference shares – entitle the issuing corporation the option
2. Minutes of all meetings of directors. to redeem or call the shares at a certain call price.
3. Minutes of all meetings of shareholders
4. Stock and transfer book
• Shareholders' journal – chronological and numerical record or stock
certificates issued.
• Shareholders' ledger – alphabetical record of individual shareholders.
▲ Ordinary Share Capital (Common Stock) Authorized Preference Share Capital
- Represents residual ownership equity.
2014
- The holders of this class of share capital carry the greatest risk, however, they
Jan 1 1,000,000
ordinarily share in earnings to the greatest extent if the corporation is
successful.
- Although the right to vote is a basic right of all shareholders, it is frequently Authorized Ordinary Share Capital
given exclusively to ordinary shareholders as long as dividends are paid
regularly to preference shareholders. 2014
Jan 1 2,000,000
▲ Authorized Share Capital
• Authorized shares – number of shares (both preference and ordinary shares) Unissued Preference Share Capital
that a corporation may issue
• Authorized share capital – determined by multiplying the authorized shares 2014
by the par or stated value of the share capital Jan 1 1,000,000
- A corporation cannot issue shares more than the authorized shares stated in the
Articles of Incorporation. However, it may increase its authorized shares and
authorized share capital by amending its Articles of Incorporation. Unissued Ordinary Share Capital
- May be recorded under the journal entry method or the memorandum entry 2014
method Jan 1 2,000,000

■ Memorandum Entry Method

Authorized to issue xxx shares of xxx share capital with a par value of P xxx.
▲ Issuance of Share Capital
- A share capital may be issued in exchange for cash, non-cash assets, services,
■ Journal Entry Method liability or other form of securities.
- The total amount recorded is computed by multiplying authorized shares by - It may be sold also on a subscription basis.
the par or stated value of the share capital
• Shareholders' ledger – used to maintain records affecting the shareholding of
- Cannot be used if the share capital is a no-par and no-stated value stock each shareholder such as transfer or sale of share capital.
• Stock certificate book – where the shares issued to shareholder are recorded
Unissued XXX Share Capital xxx
Authorized XXX Share Capital xxx ■ Terms Related to Share Capital
• Authorized Share Capital – the maximum number of shares the corporation
Illustrative problem A: The Joyful Company was organized on January 1, can issue as specified in the article of incorporation
2014 with authorized share capital as follows: • Issued Share Capital – shares which have been sold and paid for in full.
10,000 shares of 10% preference share capital with a par value of P100 per • Subscribed Share Capital – the portion of the authorized share capital that
share has been subscribed but not yet fully paid.
200,000 shares of ordinary share capital with a par value of P10 per share • Outstanding Share Capital – are issued shares, which are in the hands of the
shareholders.
Case 1 - The memorandum entry method is used - The number of outstanding shares will equal the difference between the issued
shares and the treasury shares.
2014
• Treasury Stock – are issued shares acquired by the corporation but not retired
Jan 1 Authorized to issue 10,000 shares of 10% preference share
and are therefore, awaiting to be reissued at a later date.
capital with a par value of P 100 per share.
1 Authorized to issue 200,000 shares of ordinary share capital with a
■ Issuance of Par Value Share
par value of P 10 per share.
◊ Issuance For Cash
Illustrative Problem B: The Happy Corporation was organized on January 1,
10% Preference Share Capital 2014 and is authorized to issue 100,000 shares of P10 par value ordinary shares.
2014 Subsequently, 25,000 shares were sold.
Jan 1 Authorized shares, par To issue 10,000 value P10
Memorandum Entry Method
Case 1 – The issuance price is P10 (at par)
Ordinary Share Capital
Cash 250,000
2014 Ordinary Share Capital 250,000
Jan 1 Authorized shares, par To issue 200,000 value P10

Case 2 – The issuance price is P5 (above par)

Case 2 - The journal entry method is used. Cash 375,000
2014 Ordinary Share Capital 250,000
Jan 1 Unissued Preference Share Capital 1,000,000 Ordinary Share Premium 125,000
Authorized Preference Share Capital 1,000,000
Case 3 – The issuance price is P8 (below par)
1 Unissued Ordinary Share Capital 2,000,000 Cash 200,000
Authorized Ordinary Share Capital 2,000,000 Discount on Ordinary Share Capital 50,000
Ordinary Share Capital 250,000
Journal Entry Method ◊ Issuance in Exchange for Services Rendered
Case 1 – The issuance price is P10 (at par) - When a share capital is issued in exchange for services rendered, the services
Cash 250,000 received is recorded at its fair value (AKA direct measurement), unless the fair
value cannot be estimated reliably.
Unissued Ordinary Share Capital 250,000
- If the fair value of the services received cannot be estimated reliably, it will be
recorded at the fair value of the share capital issued (AKA indirect
Case 2 – The issuance price is P5 (above par) measurement)
Cash 375,000 - The fair value of the services received shall be determined at the date the other
Unissued Ordinary Share Capital 250,000 party renders the services
Ordinary Share Premium 125,000
Illustrative Problem D: The Happy Corporation issued 1.000 shares of P10
par ordinary share capital in payment for the services of the lawyer rendered
Case 3 – The issuance price is P8 (below par)
during incorporation
Cash 200,000
Discount on Ordinary Share Capital 50,000
Case 1 - The services of the lawyer is valued at P25,000.
Ordinary Share Capital 250,000
Pre-Operating Expenses 25,000
Ordinary Share Capital 10,000
- The basic difference between the memorandum entry method and the journal
Ordinary Share Premium 15,000
entry method is the account to be credited upon issuance of the share capital
- Under the memorandum entry method, the Share Capital account is credited
upon issuance of the stock. The balance of this account represents the amount Case 2 - There is no known fair market value for the services of the lawyer.
of capital stock or share capital issued to shareholders. The fair market value of the ordinary share capital issued is P15 per share.
- Under journal entry method, the Unissued Share Capital account is credited Pre-Operating Expenses 15,000
upon issuance of the share capital thereby reducing the balance of this account. Ordinary Share Capital 10,000
The balance of this account represents the amount of authorized capital not yet Ordinary Share Premium 5,000
issued and is deducted from the balance of authorize share capital account to
determine the amount of share capital already issued to shareholders
◊ Sale of Share Capital On Subscription Basis
◊ Issuance in Exchange for Non-cash Assets or Property • Subscription – is a contract between a subscriber (buyer of share capital) and
a corporation (seller or issuer of share capital) whereby the former purchases
- When a share capital is issued in exchange for non-cash assets, the asset shares of stock of the latter with the payment to be made at later date.
received is recorded at its fair value (AKA direct measurement), unless the fair
value cannot be estimated reliably. - The corporation issues the corresponding stock certificate upon full payment
of subscription.
- If the fair value of the asset received cannot be estimated reliably, it will be
recorded at the fair value of the share capital issued (AKA indirect - Sale of share capital on subscription basis generally involves three major
measurement) transactions – (1) receipt of subscription, (2) collection from subscribers, and
(3) issuance of stock certificate upon full payment of subscription
- The fair value of the asset received shall be determined at the date the entity
receives the asset
- Original issuance of share capital at less than its par value is prohibited under Illustrative Problem E: On June 3, 2014, the Happy Corporation received
our Corporation Code subscription for 5,000 shares of its P10 par value, ordinary share capital at P15.
A down payment of 25% was received and the balance was paid in full on July
4, 2014.
• Watered share capital – when the value assigned to the asset received in
exchange for share capital is overstated
2014
• Secret reserves – when the value of the asset received is understated June 3 Ordinary Share Capital Subscription Receivable 75,000
Ordinary Share Capital Subscribed 50,000
Illustrative Problem C: The Happy Corporation issued 10,000 shares of its P Ordinary Share Premium 25,000
10 par ordinary share capital in exchange for land.

Cash 18,750
Case 1 - The land has a fair value of P175,000.
Ordinary Share Capital Subscription Receivable 18,750
Land 175,000
Ordinary Share Capital 100,000 July 4 Cash 56,250
Ordinary Share Premium 75,000 Ordinary Share Capital Subscription Receivable 56,250

Land 175,000 Ordinary Share Capital Subscribed 50,000

Unissued Ordinary Share Capital 100,000 Ordinary Share Capital 50,000

Ordinary Share Premium 75,000

■ Issuance of No-par, but with Stated Value Share Capital
- A share capital without par value but with a stated value has a nominal value
stated in the articles of incorporation but not on the face of the stock certificate.
Case 2 - The land has no known market value. The fair value of ordinary
share capital
Land 150,000 ◊ Issuance For Cash

Ordinary Share Capital 100,000 Illustrative Problem F: The Happy Corporation was organized on January l.
2014 and is authorized to issue 100.000 shares P10 stated ordinary share
Ordinary Share Premium 50,000 capital. Subsequently, 25,000 shares were sold.

Land 150,000 Case 1 – The issuance price is P10 (at stated value)
Unissued Ordinary Share Capital 100,000 Cash 250,000
Ordinary Share Premium 50,000 Ordinary Share Capital 250,000
Case 2 - The issuance price is P 15 (above stated value) Cash 375,000
Cash 375,000 Ordinary Share Capital 375,000
Ordinary Share Capital 250,000
Ordinary Share Capital in Excess of Stated Value 125,000 ◊ Issuance For Non-Cash Assets Or Property
Illustrative Problem K: The Happy Corporation issued 10,000 shares of its
Case 3 - The issuance price is P8 (below stated value) ordinary share capital in exchange for land
Cash 200,000
Discount on Ordinary Share Capital 50,000 Case 1 – The land has a market value of P175,000
Ordinary Share Capital 250,000 Land 175,000
Ordinary Share Capital 175,000

◊ Issuance For Non-Cash Assets Or Property

Illustrative Problem G: The Happy Corporation issued 10,000 shares of its Case 2 - The land has no known market value. The fair market value of
P10 stated value ordinary share capital in exchange for land. ordinary share capital on the date or exchange is P15
Land 150,000
Ordinary Share Capital 150,000
Case 1 – The land has a market value of P175,000
Land 150,000
Ordinary Share Capital 100,000 ◊ Issuance For Services Rendered
Ordinary Share Capital in Excess of Stated Value 50,000 Illustrative Problem L: The Happy Corporation issued 1,000 shares of its
ordinary share capital in payment for the services of the lawyer rendered during
incorporation
Case 2 - The land has no known market value. The fair market value of
ordinary share capital on the date or exchange is P15
Land 150,000 Case 1 - The services of the lawyer is valued at P25,000
Ordinary Share Capital 100,000 Pre-Operating Expenses 25,000
Ordinary Share Capital in Excess of Stated Value 50,000 Ordinary Share Capital 25,000

◊ Issuance For Services Rendered Case 2 – There is no known fair market value for the services of the lawyer
fair market value of the ordinary share capital issued is P 15 share.
Illustrative Problem H: The Happy Corporation issued 1,000 shares of P10
stated value ordinary share capital in payment for the services of the lawyer Pre-Operating Expenses 15,000
rendered during incorporation Ordinary Share Capital 15,000

Case 1 - The services of the lawyer is valued at P25,000 ◊ Sale Of Share Capital On A Subscription Basis
Pre-Operating Expenses 25,000 Illustrative Problem M: On June 3, 2014, the Happy Corporation received
Ordinary Share Capital 10,000 subscription for 5,000 shares of its no par, no stated value ordinary share capital
Ordinary Share Capital in Excess of Stated Value 15,000 at P15. A down payment of 25% was received and the balance was paid in full
on July 4, 2014.

Case 2 – There is no known fair market value for the services of the lawyer
2014
fair market value of the ordinary share capital issued is P 15 share.
June 3 Ordinary Share Capital Subscription Receivable 75,000
Pre-Operating Expenses 15,000
Ordinary Share Capital Subscribed 75,000
Ordinary Share Capital 10,000
Ordinary Share Capital in Excess of Stated Value 5,000
Cash 18,750
◊ Sale Of Share Capital On A Subscription Basis Ordinary Share Capital Subscription Receivable 18,750
Illustrative Problem I: On June 3, 2014, the Happy Corporation received
subscription for 5,000 shares of its P10 stated value ordinary share capital at July 4 Cash 56,250
P15. A down payment of 25% was received and the balance was paid in full on Ordinary Share Capital Subscription Receivable 56,250
July 4, 2014.

2014 Ordinary Share Capital Subscribed 75,000

June 3 Ordinary Share Capital Subscription Receivable 75,000 Ordinary Share Capital 75,000

Ordinary Share Capital Subscribed 50,000

Ordinary Share Capital in Excess of Stated Value 25,000 ■ Subscription Defaults
- When a subscriber fails to pay his obligations after the corporation has sent
several notices to him, his subscribed shares are declared, delinquent shares.
Cash 18,750
- His subscription is declared delinquent subscription. Such delinquent
Ordinary Share Capital Subscription Receivable 18,750 subscription is then offered for sale in a public auction and delinquent shares
are issued to the highest bidder.
July 4 Cash 56,250 - The highest bidder is the one who is willing to pay the unpaid subscription
Ordinary Share Capital Subscription Receivable 56,250 plus any expense incurred in connection with the delinquency sale and is
willing to receive the least number of shares.

Ordinary Share Capital Subscribed 50,000

a. Upon default
Ordinary Share Capital 50,000
Receivable from Highest Bidder xxx
■ Issuance of No-par, No Stated Value Share Capital Share Capital Subscription Receivable xxx
◊ Issuance For Cash
Illustrative Problem J: The Happy Corporation was organized on January 1, b. Costs incurred in connection with the delinquency sale
2014 and is authorized to issue 100,000 shares of no par, no stated value Receivable from Highest Bidder xxx
ordinary share capital. Subsequently, 25,000 shares are sold at P15 per share
 Cash xxx
c. Upon receipt of payment from highest bidder
Cash xxx
Receivable Highest Bidder xxx

d. Upon issuance Of certificates of stock

Share Capital Subscribed xxx
Share Capital xxx

- All subscribed shares are issued. Shares are first given to the highest bidder.
The excess, if any, are given to the defaulting subscriber.
- If there is no bidder, all of the delinquent shares will be issued in the name Of
the corporation. Such shares are considered treasurv shares and the following
entries will be made after making the entries (a) and (b) above.

c. Treasury Share Capital xxx

Receivable from Highest Bidder xxx

d. Share Capital Subscribed xxx

Share Capital xxx

Illustrative Problem N: On June 15, 2014, the Happy Corporation received

subscription for 2.000 shares of its P10 par value ordinary share capital at P15.
A down payment of 60% was received. The final payment was due on August
15, 2014, although several notices were sent to the subscriber, no payment has
been received. On August 31, the subscription was declared delinquent and was
offered for sale in a public auction. On September 6, expenses of P500 were
incurred in connection with the delinquency sale. On September 21, payment
was received from the highest bidder and shares were issued – 1,500 to the
highest bidder and 500 to the defaulting subscriber.

2014
June 15 Ordinary Share Capital Subscription Receivable 30,000
Ordinary Share Capital Subscribed 20,000
Ordinary Share Premium 10,000

Cash 18,000
Ordinary Share Capital Subscription Receivable 18,000

Aug 31 Receivable from Highest Bidder 12,000

Ordinary Share Capital Subscription Receivable 12,000

Sept 6 Receivable from Highest Bidder 500

Cash 500

Sept 21 Cash 12,500

Receivable from Highest Bidder 12,500

Ordinary Share Capital Subscribed 20,000

Ordinary Share Capital 20,000