Corporation is one of the three forms of business.

Most of the large and successful companies are

corporations due to its inherent advantages. The remaining modules for this subject would deal with the
transactions affecting a corporate form of business organization.

After successful completion of this module, you should be able to:

 Understand the definition and characteristics of a corporation
 Identify advantages and disadvantages of a corporation
 Identify classes of corporation
 Identify components of corporation
 Determine how to organize a corporation
 Know corporate records
 Understand share capital, its types and classes
 Record share capital transactions

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 incidental to its existence.
(Section 2, RA No. 11232, Revised Corporation Code of the Philippines − 2019)

1. Separate legal entity – artificial being. A corporation has a personality separate and
distinct from that of its individual owners. Like a partnership, a corporation can enter
into contracts, purchase properties, sue and be sued in its own name and not the name
of its owners.
2. Created by operation of law. The phrase "by operation of law" is a legal term that
indicates that a right or liability has been created for a party, irrespective of the intent
of that party, because it is dictated by existing legal principles. A partnership becomes
a juridical person from the time the contract begins while a corporation only becomes
a juridical person upon registration and approval of the Securities & Exchange
Commission (SEC).
3. Right of succession. Unlike in partnership where a change in the original relationship
of the partners results to dissolution, corporations have the right to continue its
existence irrespective of the death, withdrawal, insolvency or incapacity of the
individual members or stockholders, and regardless of the transfer of their interest. A
corporation shall have perpetual existence unless its articles of incorporation provides
otherwise. (Section 11, RA No. 11232, Revised Corporation Code of the Philippines –
2019)
4. Powers, attributes, properties authorized by law. A corporation can exercise only
the powers expressly conferred upon it by law and its articles of incorporation, those
implied from such powers expressly granted, and those that are incidental to its
existence.
5. Ownership divided into shares. In general, the proprietorship in a corporation is
divided into units known as share capital. The buyers of this share capital are called
shareholders or stockholders and are considered the owners of the business.
6. Centralized Management. The management of a corporation is vested upon the Board
of Directors elected by the shareholders. The Corporation Law provides that the
number of directors must not be more than fifteen (15). The Revised Corporation Code
also allowed the establishment of “One Person Corporation”.

1. Perpetual and continuous existence

2. Ability to obtain strong credit because of continuous existence
3. Large sources of financing, especially for publicly listed corporations
4. Limited liability of stockholders
5. Ease in transfer of ownership
6. Smooth flow of business due to centralized management

1. Not easy and cheap to organize

2. Limited liability may weaken credit capacity
3. Subject to rigid governmental control
4. Subject to more taxes
5. Centralized management does not allow participation from stockholders in
conducting corporate affairs
1. As to Membership Holdings
a. Stock Corporation – a corporation that has capital stock divided into shares and is
authorized to distribute earnings based on number of shares held. The owners of
stock corporations are called stockholders or shareholders.
b. Non-stock Corporation – a corporation that does not have owners represented by
shares of stock and in which no part of income is distributable to owners called
members.
2. As to Purpose
a. Public Corporation – one that is organized for the government of a portion of the
state, like provinces, cities, municipalities and barangays.
b. Private Corporation – one that is formed for a private purpose or end.
 Government Owned & Controlled Corporations (GOCC). These are
corporations created by special laws, where the government owns at least a
majority of its outstanding voting capital stock. They may be performing
governmental or proprietary functions.
 Quasi-public Corporations. Those organized for profits which are granted
a franchise by the state to perform public service.
3. As to Compliance of Law
a. De jure Corporation – one that has been created in strict compliance with all the
legal requirements. It exists both in fact and in law.
b. De facto Corporation – one that is defectively created and is existing only in fact
but not in law.
4. As to Law of Creation
a. Domestic Corporation – one incorporated under Philippine Laws.
b. Foreign Corporation – one formed, organized and existing under any laws other
than those of the Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country.
5. As to Extent of Ownership
a. Close Corporation (Privately Held) – one whose shares are limited to few,
restricted to their transfer, and not listed in any stock exchange. A closed
corporation is owned by its founder, management and a group of private investors.
b. Open Corporation (Publicly Listed) – one whose shares are open to the public such
as those whose shares are listed in the stock exchanges. Open Corporations has sold
all or a portion of itself to the public, through an initial public offering, in return the
shareholders (public) can claim the portion of the company’s assets. Since it
 concerns the public, they are required to publish public financial statements and
other related disclosures.
NOTE: Initial Public Offering (IPO) is the first issuance of stock from a private company for
public sale. This is the point where a private company decides to sell their shares to the public.
While a Secondary Offering is the sale of new or additional shares by a company that has
already made an initial public offering in order to raise additional capital.

1. Incorporators – are those stockholders or members mentioned in the articles of

incorporation as originally forming and composing the corporation and who are
signatories of such document. They must be natural persons.
2. Corporators – those who compose the corporation.
a. Stockholders – are corporators of a stock corporation.
b. Members – the corporators of a non-stock corporation.
3. Promoters – is a natural or juridical person who usually discovers a prospective
business and brings persons interested to invest in it through the formation of a
corporation.
4. Subscribers – they are the persons who have agreed to take original, unissued share but
will pay at a later date.
5. Underwriters – are those who administer the public issuance and distribution of stocks
from a corporation to the general public in initial public offerings. They promise to use
best efforts to sell the issue to the public at the best possible price.

1. Promotion 2. Incorporation 3. Operation

Promoters look for  Drafting the articles of Commencement of business
investors and decide to incorporation and by-laws. operations. A corporation
form a corporation.  Filing of the articles of must commence its business
incorporation with the SEC and within five (5) years from the
payment of required fees. Stock date of its incorporation.
corporations shall not be Failure to do so will revoke its
required to have a minimum certificate of incorporation.
capital stock, except as (Sec 21, Revised Corp. Code)
otherwise specifically provided
by special law. (Sec 12,
Revised Corp. Code)
 Approval by SEC and issuance
of Certificate of Registration.
The corporation generally maintains the following records:

1. Records of all business transactions (journals, ledgers, vouchers, and other

supporting documents) – these are maintained by accountants and bookkeepers.
2. Minutes of all meetings of directors – this contains the matters discussed by the Board
of Directors in their meetings, it is maintained by the corporate secretary.
3. Minutes of all meetings of shareholders – at least once a year, corporations hold
shareholder meetings to decide on important matters such as election of new officers,
removal of directors, etc. – this is also the responsibility of the corporate secretary.
4. Stock and transfer book – this contains the history of ownership of the corporation’s
stock
a. Shareholders’ (stockholders’) journal – chronological and numerical record
of stock certificates issued
b. Shareholders’ (stockholders’) ledger – alphabetical record of individual
shareholders. After recording in the journal, the transaction must also be posted
in the shareholders’ ledger
c. Subscribers’ ledger – alphabetical record of individual subscriber
5. Optional and supplementary records

This is the amount specified in the articles of incorporation paid in or to be paid in for carrying on of the
business of the corporation.
 Authorized Share Capital. This is the total amount of shares which a corporation is allowed
to issue. This is computed by multiplying the authorized number of shares by the par value
per share. In case of no-par, no-stated value shares, the authorized share capital cannot be
computed.
 Subscribed Share Capital. This is the part of share capital subscribed whether partially paid
or unpaid.
 Outstanding Share Capital. This refers to the total shares of stock issued to subscribers or
stockholders, whether or not fully or partially paid, except treasury shares.
 Paid-up Share Capital. The part of share capital paid to the corporation by subscribers and
shareholders.
 Unissued Share Capital. The part of share capital which is not issued or subscribed.
 1. Par Value Share Capital – one with a nominal value appearing on the stock certificate
and articles of incorporation.
2. Stated Value Share Capital – one with a nominal value appearing on the articles of
incorporation but not on the stock certificate.
3. No-par, No stated Value Share Capital – one with no nominal value appearing on the
articles of incorporation and stock certificate. No-par, no stated value shares must be issued
for a consideration of at least Five pesos (P5.00) per share. (Sec 6, Revised Corporation
Code)

This refers to the total par or stated value of all issued and subscribed shares. In the case of no-par, no-
stated value shares this is equivalent to the total cash or consideration received.

1. Ordinary Share Capital (Common Stocks)

 When a single class of share capital is issued, it is an ordinary share capital.
 This type of stock entitles the holder to equal distribution or pro-rata distribution of
profits without any preference or advantage over other classes of shares
2. Preference Share Capital (Preferred Stock)
 This type of stock entitles the holder to enjoy priority as to distribution of dividends
and distribution of assets upon corporate liquidation.
 Generally issued with a par value and a dividend rate
 The different types of preference shares are:
i. Cumulative. Entitles preference shares to unpaid dividends of prior years
(dividends in arrears) before payment of current dividends.
ii. Non-cumulative. Only entitles preference shares to dividends of the current
year, even if there are unpaid dividends in previous years.
iii. Participating. Allows holders to receive additional dividends on top of the
current year’s stipulated dividends. May be full or partial participation.
iv. Non-participating. Allows holders to receive only the stipulated dividend.
v. Convertible. Entitles the holder the option to exchange the preference share
for ordinary shares.
vi. Redeemable. Gives the issuing corporation the power to redeem or purchase
back the preference share after a certain period for a certain price (call
price).
*All pro-forma journal entries are assumed to be ordinary share capital transactions.

Transaction Memorandum Entry Method Journal Entry Method

AUTHORIZED SHARE CAPITAL
Unissued Ord. Share Capital XX
Authorized Share Capital Memo: Authorized to issue xxx shares of ordinary share
Authorized Ord. Share Capital XX
(Entry, then post to ledger) capital with a par value of Pxxx.
(cannot be used for no-par, no stated value)
ISSUANCE OF PAR VALUE SHARE
Cash XX Cash XX
Issuance of Share Capital
Discount on OSC (below par) XX Discount on OSC (below par) XX
for Cash (Shareholders’
Ord. Share Capital (at par) XX Unissued Ord. Share Capital (at par) XX
ledger)
OS Premium (above par) XX OS Premium (above par) XX
NCA (at FV of NCA or FV of SC) XX NCA (at FV of NCA or FV of SC) XX
Issuance of Share Capital
Ord. Share Capital (at par) XX Unissued Ord. Share Capital (at par) XX
for NCA or property
OS Premium (above par) XX OS Premium (above par) XX
NOTE: If the value assigned to the assets are overstated, it is called a watered share capital. This is done to comply with the requirements of
the law that share capital must not be issued below par value. On the other hand, if the value assigned to the assets are understated, the share
capital is said to contain secret reserves. This is done to conceal the actual financial position of the corporation for competitive reasons. Both
practice are fraudulent and not allowed.
Pre-Operating Exp. (at FV of Services Pre-Operating Exp. (at FV of Services
Issuance of Share Capital in or FV of Share Capital) XX or FV of Share Capital) XX
exchange for services Ord. Share Capital (at par) XX Unissued Ord. Share Capital (at par) XX
OS Premium (above par) XX OS Premium (above par) XX
ISSUANCE OF NO-PAR, BUT WITH STATED VALUE SHARE CAPITAL
Cash XX Cash XX
Issuance of Share Capital Discount on OSC (below SV) XX Discount on OSC (below SV) XX
for Cash Ord. Share Capital (at SV) XX Unissued Ord. Share Capital (at SV) XX
OSC in excess of SV (above SV) XX OSC in excess of SV (above SV) XX
 Transaction Memorandum Entry Method Journal Entry Method
NCA (at FV of NCA or FV of SC) XX NCA (at FV of NCA or FV of SC) XX
Issuance of Share Capital
Ord. Share Capital (at SV) XX Unissued Ord. Share Capital (at SV) XX
for NCA or property
OSC in excess of SV (above SV) XX OS in excess of SV (above SV) XX
Pre-Operating Exp. (at FV of Services
Pre-Operating Exp. (at FV of Services
or FV of Share Capital) XX
Issuance of Share Capital in or FV of Share Capital) XX
Ord. Share Capital (at SV) XX
exchange for services Unissued Ord. Share Capital (at SV) XX
OS in excess of SV (above SV) XX
OS in excess of SV (above SV) XX

ISSUANCE OF SHARE CAPITAL ON A SUBSCRIPTION BASIS (WITH PAR OR STATED VALUE)

Ord. Share Capital Subscription Rec. (at selling price) XX
Ord. Share Capital Subscribed (at par) XX
Receipt of Subscription
Ord. Share Premium (above par) (SP-PV) or Ord. Share Capital
in Excess of SV XX
Cash XX
Collection of Subscription
Ord. Share Capital Subscription Rec. XX
Issuance of Stock
Ord. Share Capital Subscribed XX Ord. Share Capital Subscribed XX
Certificate upon full
Ord. Share Capital XX Unissued Ord. Share Capital XX
payment
ISSUANCE OF NO-PAR, NO STATED VALUE SHARE CAPITAL
Issuance of Share Capital Cash (at SP) XX
*cannot be used for no-par, no-stated value*
for Cash Ord. Share Capital (at SP) XX
Cash (at FV of NCA or FV of SC) XX
Issuance of Share Capital
Ord. Share Capital (at FV of NCA N/A
for NCA or property
or FV of Share Capital) XX
Pre-Operating Expenses (at FV of
Issuance of Share Capital in Services or FV of share capital) XX
N/A
exchange for services Ord. Share Capital (at FV of
Services or FV of share capital) XX
 Transaction Memorandum Entry Method Journal Entry Method
ISSUANCE OF SHARE CAPITAL ON A SUBSCRIPTION BASIS (NO PAR, NO STATED VALUE)
Ord. SC Subscription Rec. (at SP) XX
Receipt of Subscription Ord. Share Capital Subscribed (at N/A
selling price) XX
Cash XX
Collection of Subscription N/A
Ord. Share Capital Subscription Rec. XX
Issuance of Stock
Ord. Share Capital Subscribed XX
Certificate upon full N/A
Ord. Share Capital XX
payment
SUBSCRIPTION DEFAULTS

NOTE: When a subscriber fails to pay after several notices from the corporation, his subscribed shares are declared delinquent. Such shares
would be sold at a public auction and would be issued to the highest bidder. The highest bidder is the one who is willing to pay the unpaid
subscription plus any delinquency expense for the lowest number of shares.
Receivable from Highest Bidder XX
Upon default
Ord. Share Capital Subscription Rec. XX
Receivable from Highest Bidder XX
Delinquency Expenses
Cash XX
Upon receipt of payment
Cash or Treasury Shares (if there is no bidder) XX
from highest bidder or if
Receivable from Highest Bidder XX
there is no bidder
Upon issuance of Ord. Share Capital Subscribed XX Ord. Share Capital Subscribed XX
certificates of stocks Ord. Share Capital XX Unissued Ord. Share Capital XX
NOTE: The excess between the subscribed shares and the shares issued to the Highest Bidder will be issued to the defaulting subscriber. In case
there is no highest bidder, all the shares would be issued in the own name of the issuing corporation as treasury shares.