Accounting for CorporationsMrs. Paz Castro

Corporation• An artificial being created by

operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident of its existence (The Corporation Code of the Philippines, Sec. 2).

• One way in corporations raise new capital is by issuing stock.

– Equity financing – the method of obtaining funds by issuing ordinary or preference shares – is less risky than debt financing – issuance of bonds, notes or mortgage, because dividends on ordinary shares are not paid unless declared by the board of directors.

– When a company does not declare cash dividends, the cash from profitable operating activities may be invested to finance expanded operations.

– A corporation may need the proceeds from an ordinary share issue to improve the balance between liabilities and shareholders’ equity.

Attributes of a corporation• A corporation is an artificial being

with a personality separate and apart from its individual shareholders and members.

• It is created by operation of law. It cannot come into existence by mere agreement of the parties as in the case of business partnerships. Corporations require special authority or grant from the State, either by a special incorporation law that directly creates the corporation or by means of a general corporation law.

• It enjoys the right to succession. A corporation has the capacity of continued existence subject to the period stated in the Articles of Incorporation. The death, withdrawal, insolvency or incapacity of the individual shareholders or members will not dissolve the corporation. The transfer of ownership of shares of stock does not dissolve the partnership.

• It has the power, attributes and properties expressly authorized by law or incident to its existence.

• Ownership of a corporation is divided into shares. Proprietorship in a corporation is divided into units known as shares of stocks.

• Management of the business is vested in a board of directors (BOD) elected by the stockholders. The BOD is the governing body or decision-making body of the corporation.

Comparison between Partnership and Corporation

Partnership Corporation

Formed by 2 persons Formed by 5 persons

Starts with agreement among partners; may be formed orally

Starts with the issuance of a certificate of incorporation issued by SEC

Unlimited liability Limited liability

Limited life Unlimited life

Transfer of equity of a partner needs the consent of other partners

Shares can be transferred from one shareholder to another without getting the consent of other shareholders

Partner is an agent of the partnership

Shareholders do not act as agents of the corporation

Advantages of a corporation• The corporation has the legal

capacity to act as a legal entity.• Shareholders have limited liability.• It has the continuity of existence.• Shares of stock can be transferred

without the consent of the other shareholders.

• Its management is centralized in the board of directors.

• Shareholders are not general agent of the business.

• Greater ability to acquire funds.

Disadvantages of a corporation

• A corporation is relatively complicated in formation and management.

• The greater degree of government control and supervision.

• It requires a relatively high cost of formation and operation.

• It is subject to heavier taxation than other forms of business organizations.

• Minority shareholders are subservient to the wishes of the majority.

• In large corporations, management and control have been separate from ownership.

• Transferability of shares permits the uniting of incompatible and conflicting elements in one venture.

Classes of corporationsSection 3 of the Corporation Code

classified private corporations into:

• Stock corporation. Corporations which have share capital divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held

• Non-stock corporation. A non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees or officers. Any profit that a non-stock corporation may obtain as an incident to its operation shall, whenever necessary or proper, be used for the furtherance of the purpose/s for which the corporation was organized (The Corporation Code of the Philippines, Sec. 87).

– Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil service, or similar purposes (Sec. 88).

Other classifications of corporations

• According to number of persons:– Corporation aggregate – consisting of

more than one corporator.– Corporation sole or a special form of

corporation usually associated with the clergy – consists of only one member or corporator and this successors such as a bishop.

• According to nationality:– Domestic corporation – organized

under Philippine laws.– Foreign corporation – organized

under foreign laws.

• According to whether for public or private purpose:

– Public corporation – formed for the government of a portion of the state

– Private corporation – created for private aim, benefit or purpose

• According to whether for charitable purpose or not:

– Ecclesiastical corporation – organized for religious purposes

– Eleemosynary corporation – established for public charity

– Civil corporation – established for business or profit

• According to their legal right to corporate existence:

– De jure corporation – existing in fact and in law.

– De facto corporation – existing in fact but not in law.

• According to degree of public participation with regard to their share ownership:

– Close corporation – share ownership is limited to selected persons or member of a family not exceeding 20 persons.

– Open corporation – the share is available for subscription or purchase by any person.

• According to their relation to another corporation:

– Parent or holding corporation – a corporation that is related to another corporation that it has the power to either directly or indirectly elect the majority of the directors of a subsidiary corporation.

– Subsidiary corporation – a corporation controlled by another corporation known as a parent corporation.

Steps in the creation of a corporation

• Promotion – It is the process of bringing together the incorporators or the persons interested in the business, of procuring subscriptions or capital for the corporation and of setting in motion the machinery that leads to the incorporation of the corporation itself.

– At least 25% of the authorized share capital must be subscribed.

– At least 25% of total subscriptions must be paid.

– Filing of the articles of incorporation with the SEC together with treasurer’s affidavit, statement of financial position, certificate of bank deposit, and certificate as to the name of the corporation.

– Payment of the filing and publication fees; and

– Issuance by the SEC of the certificate of incorporation

• Formal organization and commencement of business operations

– Formal organization requires the adoption of by-laws and the election of the board of directors and of the administrative officers.

• Incorporation – Verification from the records of the

Securities and Exchange Commission (SEC) that the proposed corporate name is not the same or similar to an existing corporation.

– Drafting and execution of the articles of incorporation by the incorporators. The person elected as temporary treasurer should execute an affidavit regarding the share capital subscribed and paid up. The treasurer should submit a sworn statement of assets and liabilities of the corporation.

– Deposit by the treasurer of the cash paid for the shares subscribed in the bank in the name of the treasurer in trust for and to the credit of the corporation. The bank is required to issue a certificate of deposit.

– It also includes the taking of such other steps as are necessary to enable the corporation to transact the legitimate business or accomplish the purpose for which it was created.

– Sec. 22 of the Corporation Code states that if a corporation does not formally organize and commence the transaction of its business within 2 years from the date of its incorporation, its corporate powers shall cease and the corporation shall be deemed dissolved.

– If a corporation has commenced business but subsequently becomes continuously inoperative for a period of at least 5 years, the same shall be a ground for the suspension or revocation of its certificate of incorporation.

Articles of incorporation• In the Philippines, the general law

which governs the creation of private corporations is the Corporation Code of the Philippines. Sec. 14 provides that all corporations organized under this Code shall file with the SEC articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters except as otherwise prescribed by this Code or by special law:

– The name of the corporation;– The specific purpose/s for which the

corporation is formed;– The principal place of business which

must be within the Philippines;– The term of existence;– The names, nationalities and

residences of the incorporators;– The number of directors or trustees,

which shall not be less than 5 nor more than 15;

– The names, nationalities and residences of the persons who shall act as directors or trustees until the first regular directors or trustees are elected and qualified.

– if it be a stock corporation:• Amount of authorized share capital in

pesos,• Number of shares into which it is divided,• In case the shares are par value shares:

– The par value of each share,– Names, nationalities and residences of the

original subscribers,– The amount subscribed and paid by each

subscriber on his subscription.• In case of no par value, the articles need

only state such fact, and the number of shares into which said share capital is divided.

– If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed.

By-laws• The rules of action adopted by the

corporation for its internal government and for the government of its officers, shareholders or members.

• The by-laws shall be adopted within 1 month from the issuance of the certificate of incorporation by the SEC.

• Failure to file a code of by-laws shall render the corporation liable for the revocation of its registration.

• A private corporation may provide in its by-laws for:

– The time, place and manner of calling and conducting regular or special meetings of the directors or trustees;

– The time and manner of calling and conducting regular or special meetings of the shareholders or members;

– The required quorum in meetings of shareholders or members and the manner of voting therein;

– The form for proxies of shareholders and members and manner of voting them;

– The qualifications, duties and compensation of directors or trustees, officers and employees;

– The time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof;

– The manner of election or appointment and the term of office of all officers other than directors or trustees;

– The penalties for violation of the by-laws;

– In the case of stock corporation, the manner of issuing stock certificates;

– Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.

Rights of a shareholder• Right to be issued certificate of

stock or other evidence of share ownership and to transfer such shares.

• Right to attend and vote in person or by proxy at shareholders’ meetings.

• Right to elect and remove directors.

• Right to adopt, amend or repeal the by-laws.

• Right to purchase a portion of any new shares issued to maintain the same percentage of stock percentage.

This is known as the pre-emptive right. However, this right is not absolute and may be denied.

• Right to receive dividends when declared.

• Right to inspect corporate books and records, and to receive financial reports of the corporation’s operations.

• Right to participate in the distribution of corporate assets upon dissolution.

• Incorporators are shareholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and are signatories to said articles of incorporation (Sec. 5). They must be natural persons as distinguished from artificial beings. An incorporator will always retain his status as such though no longer having an interest in the corporation.

Components of a corporation• Corporators are those who

compose a corporation whether as shareholders or members, at any time. This term includes incorporators, shareholders or members (Sec. 5). Note: A corporation or a partnership can be a corporator, but cannot be an incorporator. A partnership can be a corporator in a corporation but a corporation cannot be a general partner in a partnership.

The Code specifies that 5 or more persons, not exceeding 15, may form a private corporation provided that they are of legal age, owners or subscribers to at least 1 share of capital stock and that the majority are residents of the Philippines. Note: all incorporators are corporators of a corporation, but not all corporators are incorporators.

• Shareholders or stockholders are corporators in a stock corporation (Sec. 5). Shareholders may be natural or juridical persons.

• Members are corporators of a non-stock corporation (Sec. 5).

• Subscribers are persons who have agreed to take and pay for original, unissued shares of a corporation formed or to be formed. Note: All incorporators are subscribers but a subscriber need not be an incorporator.

• Promoters are persons who bring about or cause to bring about the formation and organization of a corporation.

• Underwriters are usually investment bankers who have:

– Agreed, alone or with others, to buy at stated terms an entire or a substantial part of an issue of securities; or

– Guaranteed the sale of an issue by agreement to buy from the issuing corporation any unsold portion at a stated price; or

– Agreed to use his best efforts to market all or part of an issue; or

– Offered for sale shares he has purchased from a controlling stockholder.

Classes of shares in general• Par value shares. One in which a

specific amount is fixed in the articles of incorporation and appearing on the certificate of stock. The par value is the minimum issue price of the share.

– Section 6 of the Code states that preference (or preferred) shares of stock may be issued only as par value shares

• However, the minimum stated value of a no-par value share is 5 pesos (P5.00) per share (Sec. 6). In addition, shares issued without par value are deemed fully paid.

Banks, trust companies, insurance companies. Public utilities, and building and loan associations are not permitted to issue no-par value shares of stock.

• No-par value shares. One without any value appearing on the face of the certificate of stock. A no-par value share may have a stated value which may be fixed in the articles of incorporation or by the board of directors or the shareholders. Thus, the issue price may vary from time to time as it is usually fixed based on the book value of the corporation’s shares.

• Voting shares. Those issued with the right to vote.

• Non-voting shares. Those issued without the right to vote.

• Ordinary shares. These shares entitle the holder to an equal pro-rata division of profits without any preference.

• Preference shares. These shares entitle the holder to certain advantages or benefits over the holders of ordinary shares.

• Promotion shares. Those issued to promoters as compensation in promoting the incorporation of a corporation, or for services rendered in launching or promoting the welfare of the corporation.

• Treasury shares. A stock that has been issued by the corporation as fully paid and later reacquired but not retired.

• Convertible shares. A stock which is convertible or changeable from one class to another class.

• Authorized shares. The maximum number of shares which a corporation may issue.

• Issued shares. Shares issued to shareholders which at present may or may not be in the hands of the shareholder.

• Unissued shares. Shares which never been issued and are available for issuance.

• Outstanding shares. Shares issued to shareholders or subscribers whether fully or partially paid except for treasury shares.

• Subscribed shares. Shares which investors have contracted to acquire.

Minimum subscription and paid-in capital

• At the time of incorporation, at least 25% of the authorized capital stock (or share capital) as stated in the articles of incorporation must be subscribed and at least 25% of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of a call, or in the absence of a fixed date or dates, upon call for payment by the board of directors.

• In no case shall the paid-in capital be less than 5,000 (P5,000) pesos (The Corporation Code of the Philippines, Sec. 13). In practice, the SEC requires higher minimum capital requirement for particular types of corporation.

• These requirement are mandatory. The SEC shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the treasurer elected by the subscribers showing the minimum subscription and paid-in capital requirements have been complied with.

Example• Assume that the authorized share

capital is P2,000,000 divided into 20,000 shares with a par value of P100 per share. The subscribed share capital must be P500,000 which is 25% of the authorized share capital. The paid-in capital should be P125,000 which is 25% of the subscribed share capital.

– Suppose that the authorized share capital is P60,000 divided into 6,000 P10 par value. The paid-in capital will only amount to P3,750. the incorporators must may P5,000 because this is the minimum paid-in capital required by law.

– In case of no-par value shares, the 25% requirement will be based on the authorized number of shares. If the authorized capital is pegged at 2,000 no-par value shares, then at least 500 no-par value shares must be subscribed.

Basic corporate organizational structure

• The ultimate control of the corporation rests with the shareholders. They are the owners of the corporation. The shareholders elect the members of the board of directors.

• The board of directors is responsible for the formulation of the overall policies for the corporation and for the exercise of corporate powers. The board also elects a chairman of the board.

• The president must be a director of the corporation, but he cannot act as president and secretary or as president and treasurer at the same time. The president is the only officer required by law to be a director.

• The corporate secretary must be a resident and a citizen of the Philippines. He need not be a director unless required by the corporate by-laws. It is his duty to make and keep its records and to make proper entries of the votes, resolutions and proceedings of the shareholders and directors in the management of the corporation.

• The corporate treasurer is the officer entrusted with the authority to receive and keep the money of the corporation and to disburse them as he may be authorized. He may or may not be a director.

• There is no prohibition in the law against a shareholder being a director or officer of two or more corporations. The Corporation Code does not prohibit a corporate officer from occupying the same position in another corporation organized for the same purpose. However, such situation may be prohibited by special law, the articles of incorporation or the by-laws.

• The designation of the professional management team or the administrative officers is entrusted to the board. These officers implement the policies of the board of directors and actively manage the day-to-day affairs of the corporation.

• Annually, a corporation holds the shareholders’ meeting during which the shareholders elect their directors and make other decisions.

• Subscription book. It is a book of printed blank subscription.

• Shareholders’ ledger. It is a ledger which details the number of shares issued to each shareholder.

• Subscribers’ ledger. It is a subsidiary ledger for the subscriptions receivable account; it reports the individual subscriptions of the subscribers.

• Stock certificate book. It is a book of printed blank certificates of stock.

Seatwork 5 (True or False)• All incorporators are shareholders

but not all shareholders are incorporators.

• A corporation, like a partnership, may be formed by the mere agreement of 5 or more persons.

• The authorized shares represent the maximum number of shares that a corporation may issue.

• Unissued shares represent the number of shares that may still be subscribed.

• It is legal to issue share capital at par or at more than par but not at less than par.

• Share capital that has been sold and issued to a shareholder is called an outstanding share capital.

• The owners of a stock corporation are called shareholders; the owners of a non-stock corporation are called members.

• When a partnership is incorporated, a new set of books should always be opened for the new corporation.

• A stock certificate is issued to the subscriber upon full payment of his subscription.

• Both the partnership’s owners and a corporation’s owners have limited liability for business debts.

Homework 5• A, B and C are partners operating a small

store for 2 years. The partners are considering the possible incorporation of the partnership. What are the advantages and disadvantages offered by such a change?

• Differentiate: (a) stock from non-stock corporation, (b) private from public corporation, (c) de jure from de facto corporation.

• What are the basic right of a shareholder or stockholder?

• What are the considerations that may be received in exchange for share capital or capital stock? What is the basis for measurement of such exchanges?

• Differentiate an ordinary share capital from a preference share capital.

• When does a share capital become outstanding?

• The DEF Corporation was organized on Oct. 1, 2009 with authorized ordinary share capital of 1,000 shares, P5 par value.

– How many shares must be subscribed at the time of incorporation?

– Assuming that the minimum required subscription was received at P8, how much subscription must be paid up?

• What are the steps to be followed in incorporating a partnership?

Corporate books and records• Minutes book. It contains the

minutes of the meetings of the directors and shareholders.

• Stock and transfer book. It is the record of the names of shareholders installments paid and unpaid by shareholders and dates of payment, any transfer of stock and dates thereof, by whom and to whom made.

• Books of accounts. These represent the record of all business transactions. These normally include the journal and the ledger.