Gaining an understanding of the basic concepts of a corporation as a business structure is a must-have for anyone who wishes to become an investor or a business owner.
This article discusses some basic insights into the subject and how they relate to securities investing in general and therefore would be of great help to those who are new to investments or those who are planning to make the move.
Corporation Defined in the Philippine Context
The Corporation Code of the Philippines sets out the general rules governing all corporations in the country. The Code defines a corporation as “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 to its existence.”
Corporations are under the close watch of the Securities and Exchange Commission (SEC) and have periodic reportorial duties to the agency.
Types of Corporations in the Philippines
Corporations may be classified as public (owned and controlled by the government) or private. We’ll focus on private corporations on this article.
Unlike those in other counties like the US and the UK, we only have two types of private corporations in the Philippines: stock and non-stock. Examples of non-stock corporations include the following: educational institutions, non-profit organizations, associations, foundations, etc. Stock corporations are easier to spot: they are business enterprises whose main motivation for existence is to make profit for its shareholders.
I’d like to bring your attention to this phrase: “profit for its shareholders.”
It doesn’t mean that non-stock corporations should not generate any profit. They can, but in no way should they be able to distribute the income derived from its operations to its members — unless by magic.
On the other hand, a stock corporation is profit-oriented in nature. And it may, if it so decide, distribute the corporate profits to its shareholders.
As an investor, you are most likely to be interested only in stock corporations, particularly those that are listed in the Philippine Stock Exchange (PSE).
Good to know: The owners of a stock corporation are called shareholders or stockholders. The owners of a non-stock corporation are called members.
Formation — Giving Birth To A Corporation
To form a new corporation, its founders (or incorporators) must file an application for charter to the Securities and Exchange Commission. Once this application is approved, this charter or articles of incorporation should state the following:
- The name of the corporation.
- The purposes and the nature of the corporation.
- Location of the corporate headquarters.
- Names, nationalities and addresses of the incorporators.
- The maximum number of shares of authorized capital stock that may be issued, the par value of each class of stock, and a description of the various classes of such stock.
- The names, nationalities and addresses of the original members of the Board of Directors.
- The rights of the stockholders.
That is provided for in Section 14 of the Corporation Law.
- A private corporation has a lifespan of 50 years.
- At least 5 natural persons, but not more than 15, may form a private corporation.
- The corporation is primarily managed by its Board of Directors, who are elected at the corporation’s annual stockholder’s meeting.
Capitalization — The Estimated Cost of Giving Birth to a Corporate Baby
When forming a new corporation, the articles of incorporation should state the following:
- The maximum number of shares that may be issued.
- The par value of each class of stock.
Both are arbitrary numbers. ( No wonder, both are both are also very confusing. 🙂 )
Well, think of it this way:
- The maximum number of shares essentially refers to the total pool of stocks (or shares) that investors (including future investors) can buy or subscribe.
- The par value is the amount of money, expressed in Peso, that you assign to be the price of each share. Sometimes this is also called face value (which could hurt if you have a problem with your face 🙂 ).
When you multiply the maximum number of shares by the par value of each share, you can what is called the authorized capital stock.
The Corporation Law does not specify a minimum authorized capital stock requirement, but it states in part that “at least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription.”
Again a little explanation is in order.
- Subscribed capital — This amount refers to the number of shares actually issued to the shareholders.
- Paid-up capital — This is the amount that is actually paid in by the investors, where payment may be in the form of cash, real property, equipment, service, or anything of value.
Good to know: The Corporation Code also specifies that “in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos.”
Let’s end this article by stating the rights afforded to shareholders.
- Examine the books of a corporation.
- Receive dividends when paid.
- Transfer shares from themselves to other investors.
- Receive the remaining assets of the corporation after all other claims in the property of the corporation are satisfied.
- Vote at an annual meeting to elect the Board of Directors.
- Receive a stock certificate.
You don’t have to be ultra-rich to be able to enjoy these rights. No matter how small your shareholding is in a particular company, the Law sees to it that your rights as an owner and investor are protected.
This is one of the wonders of becoming a stock holder.
We have barely scratched the surface on the topic of stock investing. This is a good start, though. A lot of our future articles on securities investments will be making a reference to this page and the basic concepts that we discussed here.