Corporation

Characteristics of a Corporation

1. Artificial Being

• Considered as a legal entity separate and distinct form its owners; like a natural person it can enter into contracts, own and dispose properties, sue and be sued

1. Created By Operation of Law

   • Cannot be created by mere agreement of the owners like partnership

2. Right of Succession

   • It shall continue to exist regardless of death, insolvency or withdrawal

3. Powers authorized by law ort incidence to its existence

   • May only exercise powers authorize by law

4. Managed by Board of Directors

   • They are elected by the shareholders or members of the corporation

5. Ownership is divided into shares of stocks

Advantages

1. Continuous to exist because of right of succession

2. Owners can transfer his interest with the consent of other owners

3. Owners are liable to the extent of their capital contribution

4. It has the ability to generate more funds than partnership

5. Credit capacity is strengthened by continuity of existence

6. Management is centralized in the board of directors

Disadvantages

1. Hard to organize; too expensive

2. Credit capacity may weaken because of the limited liability of the owners

3. Subject to greater degree of government control

4. Restricts other owners to participate in management as to only the board has the power

Steps to create

1. Promotion – Brining together all interested persons or incorporators

2. Incorporation –

   1. Corporation Name

   2. Drafting and execution of the articles of incorporation

   3. Filing

   4. Certificate of bank deposit is not required

   5. Payment of the filing and publication fees

   6. Issuance by the SEC of the certificate of incorporation

3. Formal organization and commencement of business operation

• Should be formally organize and commence business operation within 5 years

• Failure would result to delinquent status

• Delinquent status may resume operations within 2 years

Article of Incorporation

• Document prepared by the incorporators and filed with the SEC as evidence of existence

• Consists of:

  • Name of corporation

  • Purpose of formation

  • Location of establishment

  • Term of existence; if it is elected to perpetual existence

  • Names, nationalities, and addresses of incorporators

  • Number of incorporators is limited to fifteen persons

  • Names, nationalities, and residencies of acting directors or trustees

  • If stock corporation, number of authorized capitals, number of shares, par values, and names and nationalities of subscribers. If no par value, it is only required to state the number of stares.

  • If non-stock, amount of capita, names, nationalities, and residences of the contributors and the amount that they contributed

By-Laws

• Rules and regulates adopted by the corporation for its internal administration

• Consists of:

  • Time, place, and conducting special or regular meetings of the directors, trustees, shareholders or members

  • Manner of voting of stock holders or members

  • Number of directors, qualifications, duties, responsibilities and compensation of directors, trustees, officer and employees

  • Term of directors

  • Usage of proxies of stockholders or members and manner of voting them

  • Time of holding the election of directors or trustees

  • Manner of selecting the corporate officers

  • Procedures for amendment of the articles of incorporation and by-laws

  • Manner of issuing stock certificates, if stock corporation

Component of Corporation

1. Incorporators

   • Corporators that formed the corporation, their names appear in the article of incorporation

2. Corporators

   • Person who composes the corporation either shareholders or members

3. Shareholders

   • Owners in a stock holder

   • Both natural and juridical

4. Members

   • Owners of non-stock

5. Subscriber

   • Person that agreed to buy a share of stock but will pay at a later date

The shareholder’s equity

• Net asset of the corporation

• Consists of:

  • Share Capital

    • Represents the total amount of par or stated value of shares issued

    • Two classes:

      • Ordinary Share

        • Holders of this share has the right to vote, to share pro-rata in the income and in the vent of liquidation, to share pro-rata in the assests of the corporation

        • Rights of Shareholder

Share in profit distribution

Vote in election of directors

Stock rights

Distribution of assets upon liquidation

• Preference Share

  • Holders has no voting rights

  • Can only be issued at par value shares

Par and No-Par Value Share

• Par Value Share

  • Specific value fixed in the articles of incorporation

• No Par value Share

  • No stated value

• No Par with stated value

  • Nominal value appearing on the articles of incorporation

• No par, no stated

  • No nominal value

Authorized Share Capital

• Maximum shares authorized by the SEC to be issued

Subscribed share capital

• Portion of the authorized share capital that has been subscribed not yet fully paid

Share Premium

• Portion of excess of the par or stated value and may come from:

  • Excess of issue price

  • Excess of reissue price of treasury share

  • Donated capital

  • Distribution of small share dividends

Retained Earnings

• Representation of cumulative balance of periodic profit or losses

Treasury Share

• Represents share that was issued but reacquired by the corporation

Stockholders Equity Account Inclusions

• Ordinary/Preference Share

• Subscriber Ordinary/Preference Share

• Less: Subscription Receivable – Ordinary/Preference Share

• Share Premium – Ordinary/Preference Share

  • Add/Less these accounts to get the value of the stockholder’s equity

Legal Capital

• Portion of the paid in capital which cannot be returned to the shareholders during the lifetime of corporation

• Amount can be determined as follows

  • In case of par value

    • Legal capital is the value of shares issued and subscribed

  • In case of no-par value shares

    • Legal capital is the amount issued and subscribed including the excess over the stated value

Share Capital Transactions

1. Authorization, Subscription, and Issuance of shares

   1. Usually at the very beginning of a problem

2. Acquisition of Treasury Shares

   1. Similar as authorization but depending on the stated situation

3. Retirement of Shares

4. Accounting for Donated Capital

Accounting for Share Capital

1. Journal Entry Method

   • Uses Unissued Ordinary/Preference Share Capital Account

2. Memorandum Method

   • Uses Share Capital Account

   • This is the usual practice

Subscription & Collection

• Uses subscription receivable as debit

• Uses subscribed share capital (Ordinary/Preference) as credit

• Shares can only be issued when the FULL amount is fully paid

Issuance of Share Capital

• Cash

  • When Above Par/Stated Value

    • Cash as debit

    • Share Capital and Share Premium as credit

    • The amount of share premium will be the amount of the excess above the value of the stated par multiplied by the number of shares

  • When Below Par/Stated Value

    • Cash and Discount on Share Capital (Ordinary/Preference) as debit

    • Share Capital

    • The amount of Discount will be the amount that was subtracted by the amount that the shareholder paid to the par value

• Non-cash

  • It can be Assets or Liabilities like equipment and loans

  • Order of priorities

    • Fair value of non-cash

      • If non-cash is higher then:

        • Non cash is debit

        • Ordinary/Preference share and Share Premium is Credit

        • Similar to Above/Par Value situation

    • Fair value of shares issued

      • Similar to fair value of non-cash but the fair value of share will be used which means gaining a share premium

    • Par value of shares issued

      • Equal value of share to the non-cash value

Treasury Shares

• Cost Method

  • Treasury Shares as Debit

  • Cash as Credit

• Retained earnings

  • Unappropriated

    • Portion that can be declared and distributed as dividends

  • Appropriated

    • The portion that cannot be distributed as dividends

• Reacquisition of shares

  • Using Cost method this will also be the effect

    • Retained earnings – unappropriated as debit

    • Retained earnings – appropriated as credit

Reissuance of treasury Share

• Above Cost

  • Cash as debit

  • Treasury Share and Share Premium – Treasury share as credit

  • Appropriated will also be debit

  • Unappropriated will be credit

    • The amount of the retained earnings will be the amount of how much was the treasury share was used and should always be equal

• Below Cost

  • Order of priority

    • Share premium – treasury share

    • Retained earnings

  • Cash, S. P -Treasury Share, Retained Earnings as debit

    • If share premium – treasury shares is not enough, then it would only be the time to use the retained earnings

  • Treasury shares as debit

  • Same effect will happen to appropriated and unappropriated