Chapter 4 3.

Death of any of the shareholders will not dissolve the

CORPORATION corporation because of the transferability of shares.

4. The created governing body is composed of "top calibered"

CORPORATION shareholders who direct the corporate affairs. More success
Republic Act No. 11232 known as the Revised Corporation can be attained.
Code of 2019 defines a corporation as:

“An artificial being created by operation of law, having the DISADVANTAGES OF A CORPORATION
right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence”. 1. It is not easy to organize because of complicated legal
requirements.

Characteristics of Corporation 2. A limited credit line may be extended by creditors to a

corporation because creditors cannot run after the personal
1) SEPARATE LEGAL ENTITY - This means that a corporation assets of the shareholders in case a corporation cannot pay
as an "artificial person" has a legal personality, separate and its obligation.
distinct from its shareholders. As such, under its own
corporate name, it may take, hold, or dispose property under 3. Since management of a corporation is vested on Board of
its corporate capacity. It may enter into contract, can sue and Directors who may happen to be the majority shareholders,
can be sued to court. As a creation of law, it cannot be abuse of powers is possible.
established by a mere agreement of parties like in the case of
partnership. For them, to come into existence, authority has 4. Subject to strict governmental control.
to be granted by the state.

2) TRANSFERABLE UNIT OF OWNERSHIP - The ownership of a Classes of Corporation

corporation is divided into units called "shares" which can be
transferred from one person to another Without the consent a) Stock Corporation – Is a private corporation organized for
of other shareholders. profit. Its capital is divided into share of stock and is
authorized to distribute corporate profits on the basis of
3) LIMITED LIABILITY OF SHAREHOLDERS - This means that shares held.
the shareholders are liable only of the corporation's debts on
the extent of their capital contributions. The creditors of the b) Non-Stock Corporation - Is a private corporation organized
corporation cannot run after the personal properties of the "not for profit". If by incident it generates profits, such profit
shareholders in satisfaction of their claims. should be spent to continue attaining the objectives of its
creation.
4) CONTINUITY OF EXISTENCE - This means that a
corporation has the capacity for continued existence because Examples are civic, religious, social, charitable institution, etc.
it has the right of succession as evidence by the
transferability of its shares. It is further strengthened by the
2019 Revised Corporation Code providing a corporation to Nationality of Corporation
have a perpetual life of existence unless its Article of
Incorporation provides otherwise. a) Domestic Corporation - Is one that is organized under the
Philippine laws.
4) GOVERNING BODY - Because there will be hundreds if not
thousands of shareholders, it will be difficult for each one of b) Foreign Corporation - Is one that is organized under any
them to partake in managing the business. Thus, they elect law other than the Philippines.
among themselves to form a governing body called "Board of
Directors" who will formulate the policies of the corporation.
The corporation law provides that the number of board of Other Classifications of Corporation
directors be not less than five but not more than fifteen. As to purpose:

a) Public Corporation - Is one that is organized to govern a

portion of the state for the general good and welfare.
ADVANTAGES OF A CORPORATION Examples are barangays, municipalities, cities and provinces.

1. Greater source of capital because there can be as many b) Private Corporation - Is one that is formed for some
shareholders as there are authorized shares to be issued. private purpose, benefit, aim or end.

2. Shareholders are not liable to corporate obligations in c.) Government-Owned or Controlled Corporation -
excess of their contribution. This is however, a disadvantage a corporation owned by the Government directly or through
on the part of the creditors. its instrumentalities either wholly, or, where applicable as in
the case of stock corporations, to the extent of at least 51%  It can’t be held criminally liable for a crime committed
of its capital stock. by its officers.

d.) Quasi-Public Corporation - Is a private corporation which

is given a franchise to perform public duties but is organized Corporate entities are entitled to the following
for profits like bus and airlines, light and power, telephone constitutional rights:
companies or government-owned and controlled
corporation.  Due process
 Equal protection, and
 Protection against unreasonable searches and seizures.
As to admission of Shareholders:
However, a corporation is not entitled to the privilege against
a) Open Corporation - Is one in which any person is self-incrimination.
welcomed to become a shareholder.
A corporation is not entitled to moral damages.
b) Closely-Held Corporation - Is one in which ownership is
limited to selected persons or members of the family. Any Juridical personality of the corporation ends when liquidation
corporation may be incorporated as close corporation, ends, and inchoate rights or expectancies of stockholders are
except mining or oil companies, stock exchanges, banks, realized. Until such conveyance is made, title over the assets
insurance companies, public utilities, educational institutions remains with the corporation.
and corporations declared to be vested with public interest.

What Is Capital Structure?

As to other purpose: The term “capital structure” refers to the mix of debt and
equity that a company employs to fund its business growth.
a) Ecclesiastical Corporation - Is one which is organized for Debt is usually raised in bank loans, bond issues, or
religious purposes. commercial papers, while the most common equity sources
are common stock, preferred stock, or retained earnings.
b) Lay Corporation - Is one which is organized for a purpose Typically, a company’s capital structure is expressed as a
other than religious purposes. debt-to-equity ratio or debt-to-capital ratio.

WHO MAY FORM A CORPORATION? What is Equity Capital?

Any person, partnership, association or corporation, singly or Equity Capital refers to money put up by the shareholders,
jointly with others but not more than fifteen (15) in number who are then owners. This form of capital comes in two
may organize a corporation for any lawful purpose or types.
purposes: Provided, That natural persons who are licensed to
practice a profession, and partnership or associations  Contributed Capital
organized for the purpose of practicing a profession shall not This is money invested in the business in exchange
be allowed to organize as a corporation unless otherwise for shares of stock or ownership. Contributed capital
provided under special laws. Incorporators who are natural can come from shareholders.
persons must be of legal age.
 Retained Earnings
This form of capital is profits from past years kept by
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY the company and used to strengthen the balance
The doctrine of corporate juridical personality states that a sheet. It can also fund growth, acquisitions, or
corporation is a juridical entity with legal personality separate expansion.
and distinct from those acting for and, in its behalf, and, in
general, from the people comprising it. (Francisco v. Mallen
Jr. G.R. No. 173169, September 22, 2010). What is Debt Capital?
Debt Capital is money that has been borrowed to help
General Rule: Separate personality is vested to a corporate support a business’ capital structure. This money may be
entity when it is issued the certificate of incorporation by the borrowed over either short term or long term periods.
SEC.

The exceptions are: FEATURES OF CAPITAL STRUCTURE

a. De Facto Corporation
b. Corporation by Estoppel An appropriate capital structure should incorporate the
following features:
 As a separate juridical personality, a corporation can be
held liable for torts committed by its officers for  Flexibility: The consideration of flexibility gives the
corporate purpose. finance manager the ability to alter the firm’s capital
structure with a minimum cost and delay, if warranted
 by the changed environment. It should also be possible  Government policies: The rules and policies introduced
for the company to provide funds whenever needed to by the government impact corporate decisions
finance its profitable activities. pertaining to capital structure.

 Profitability: A sound capital structure should permit

the maximum use of leverage at a minimum cost so as IMPORTANCE
to provide better profitability and thus maximizing
earnings per share.  A firm having a sound capital structure has a higher
chance of increasing the market price of the shares and
 Solvency: Extensive debt threatens the solvency and securities that it possesses. It will lead to a higher
credit rating of the company. The debt financing should valuation in the market.
be only to the extent that it can be serviced fully and  A good capital structure ensures that the available funds
also be paid back (if required). are used effectively. It prevents over or under
 capitalization.
 Conservatism: No company should exceed its debt  It helps the company in increasing its profits in the form
capacity. As already explained that the interest is to be of higher returns to stakeholders.
paid on debt and the principal sum is also to be paid.  A proper capital structure helps in maximizing
These payments depend on future cash flows. If future shareholder’s capital while minimizing the overall cost
cash flows are not sufficient then the cash insolvency of the capital.
can lead to legal insolvency.  A good capital structure provides firms with the
flexibility of increasing or decreasing the debt capital as
 Control: The capital structure should not lead to loss of per the situation.
control in the company.

INCORPORATORS
TYPES OF CAPITAL STRUCTURE
Companies either issue debt or equity to fund their business What is an Incorporator?
operations. Based on the mix of debt and equity, it can be An incorporator is someone who incorporates a business by
broadly classified into three major categories – highly filing forms with the state on its behalf and paying the
leveraged, lowly leveraged, and optimal. required fees. A company may have one or more
incorporators.
 Highly leveraged: When companies increase their
leverage through increased debt funding to improve The incorporators of a company are not necessarily the same
profit margins. However, it creates the obligation to pay people who will own it.
back lenders, which can aggravate the woes of a
struggling business.
HOW DOES AN INCORPORATOR WORK?
 Lowly leveraged: When companies issue more equity
and give up some ownership in the company. In this  Corporations are legal business entities separate from
way, they can fund business requirements and avoid the business owners.
liability to pay back lenders.  To form a corporation, business owners must follow a
defined process that includes filing legal paperwork
 Optimal: Optimal capital structure is achieved when called the Articles of Incorporation. 
companies are able to pull off the perfect mix of debt
and equity financing that results in maximum company
value at the minimum cost of capital. ARTICLES OF INCORPORATION

 The Articles of Incorporation is a document that

FACTORS OF CAPITAL STRUCTURE is needed to form a corporation in the Philippines.
The factors that play a key role in the determination of a  A corporation is an artificial person created by
company are as follows: law and should be registered with the Securities and
Exchange Commission (SEC).
 Cost of capital: It is the cost at which capital is raised  The existence of a corporation begins after it has
from different fund sources. The interest rate is the cost submitted the Articles of Incorporation to the SEC and
of capital for a debt, while the rate of return is that for the SEC issues a Certificate of Incorporation.
equity.
As provided for by Section 13 of the Revised Corporation
 Degree of control: The different types of shareholders Code, the Articles of Incorporation must contain the name of
and their voting rights influence a company’s capital the corporation, specific purpose or purposes for which the
structure. Typically, equity shareholders enjoy more corporation is formed, location or principal place of business,
rights than the preference shareholders or the term of which a corporation is to exist, names, nationalities
debenture shareholders. and residences of incorporators and directors, authorized
share capital with number of shares into which it is divided
and par value, etc.

Further, it also states that "unless otherwise prescribed by

special law, Articles of Incorporation of all domestic
corporations shall comply substantially with the following
form":

WHO CAN SERVE AS AN INCORPORATOR?

 Incorporators are those stockholders or members

mentioned in the Articles of Incorporation as originally
forming and composing the corporation and who are
signatories thereof.
 Generally, an incorporator must be 18 years old. The
incorporator may be an attorney or other person hired
expressly to serve as incorporator. Or, they may be a
shareholder, a member of the board of directors, or an
officer such as president, treasurer, or secretary.

An incorporator is required for two reasons:

 
 To have someone with authority to sign documents to
make sure that everything is correct.

 To assure that the corporation can do business in the

state.

SUBSCRIPTION REQUIREMENTS
In general, the minimum paid-up capital of a corporation in
the Philippines must not be less than ₱5,000. Enterprises are
required to pay, in full amount, at least 25% of the subscribed
capital stock, an amount of which should not be less than
₱5,000. Under the law, the total capital stock subscribed at
the time of incorporation must be at least 25% of the
authorized capital stock of the corporation being formed.  

The Securities and Exchange Commission (SEC) does not

require a bank certificate to prove the transfer of the paid-up
capital during the incorporation process. However, you may
have to appoint a Treasurer-in-Trust who will certify through
a Treasurer’s Affidavit that you have subscribed to 25% of the
authorized capital stock and at least 25% of such have been
fully paid in cash or property.