MERCANTILE AND TAXATION LAWS: BUSINESS ORGANIZATIONS – CORPORATIONS

I. Overview of Corporations

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 incident to its existence. In the Philippines, corporations are governed by Republic Act No. 11232, known as the Revised Corporation Code of the Philippines, which took effect in 2019, amending Batas Pambansa Blg. 68 (Corporation Code of 1980). The law regulates the formation, operation, and dissolution of corporations, providing clear rules on corporate governance, shareholder rights, and corporate responsibilities.

II. Nature and Characteristics of a Corporation

Artificial Being: A corporation exists independently of its members or shareholders. It is a legal entity separate from the people who compose it.
Created by Operation of Law: A corporation comes into existence only by compliance with the statutory requirements under the Revised Corporation Code, unlike partnerships or sole proprietorships that may be formed through contracts or agreements among parties.
Right of Succession: A corporation has perpetual existence unless its Articles of Incorporation provide otherwise. The death, incapacity, insolvency, or withdrawal of shareholders does not affect the continuity of the corporation’s legal existence.
Powers, Attributes, and Properties: A corporation has the powers conferred upon it by law or its articles of incorporation. These include the power to sue and be sued, acquire properties, enter into contracts, and carry out the purposes for which it was incorporated.

III. Types of Corporations

Stock Corporations: These are corporations with capital stock divided into shares and authorized to distribute dividends to its shareholders. Stock corporations are profit-oriented and are required to issue stocks representing ownership.
Non-Stock Corporations: These corporations do not issue shares of stock and are organized primarily for purposes other than profit (e.g., charitable, educational, cultural, or similar purposes). Non-stock corporations return no portion of their income to members as dividends but use their income for the promotion of the corporation’s purposes.
Close Corporations: A close corporation is one whose ownership is restricted to a small group of people, usually family members or close associates. Shares cannot be transferred without first offering them to existing shareholders. Close corporations are exempt from certain formalities, such as the holding of an annual stockholders’ meeting.
One Person Corporations (OPCs): Under the Revised Corporation Code, the Philippines now allows One Person Corporations (OPC), which is a corporation with a single stockholder, typically an individual or a trust. This structure offers the benefits of limited liability without requiring multiple shareholders.

IV. Incorporation Process

Articles of Incorporation: To incorporate, the incorporators must submit Articles of Incorporation to the Securities and Exchange Commission (SEC). The articles must contain:
- Name of the corporation.
- Purpose(s) for which the corporation is being formed.
- Principal place of business.
- Term of existence (either perpetual or fixed).
- Number of directors (at least 2 but not more than 15 for stock corporations).
- Names, nationalities, and addresses of the incorporators.
- Authorized capital stock, number of shares, and par value (if any).
By-laws: After the incorporation, the corporation must adopt a set of by-laws that govern the internal management of the corporation, such as the schedule of meetings, roles of officers, quorum requirements, etc.

V. Corporate Governance

Board of Directors: The corporate powers of a stock corporation are exercised by a Board of Directors. The directors must be shareholders and are elected by the stockholders. The Revised Corporation Code introduced reforms in corporate governance, such as the establishment of an Independent Director for certain corporations (e.g., publicly listed corporations).
Officers: Officers of the corporation, such as the president, treasurer, and corporate secretary, are appointed by the Board. The president must be a director, while the treasurer must be a shareholder.
Meetings:
- Stockholders’ Meetings: Annual meetings must be held to elect directors and discuss corporate affairs. Stockholders may attend meetings in person or via remote communication.
- Board Meetings: Directors hold regular or special meetings to make decisions on behalf of the corporation.
Corporate Books: Corporations are required to maintain certain books, such as the stock and transfer book and minutes book, recording essential corporate actions and resolutions.

VI. Shareholders’ Rights

Right to Vote: Shareholders have the right to vote on corporate matters, primarily in the election of directors and major corporate decisions such as mergers, consolidations, and amendments to the Articles of Incorporation.
Right to Dividends: Stockholders are entitled to dividends when declared by the Board, subject to certain conditions, such as the availability of unrestricted retained earnings.
Pre-emptive Right: Existing stockholders have the right to purchase newly issued shares to maintain their proportional ownership in the corporation, unless waived in the Articles of Incorporation.
Right to Inspect Corporate Books: Shareholders may demand to inspect the corporation’s books and records at reasonable times, provided that the request is made in good faith and for a legitimate purpose.
Right to Information: The Revised Corporation Code provides for the right of shareholders to be informed of the corporate affairs, specifically during stockholders’ meetings.
Appraisal Right: Shareholders may demand the payment of the fair value of their shares if they dissent from certain corporate actions, such as mergers, consolidation, and amendment of articles that significantly alter their rights.

VII. Corporate Taxation

Corporate Income Tax: Corporations are subject to the Regular Corporate Income Tax (RCIT) of 25% on taxable income (reduced from 30% by the CREATE Law effective in 2021). Small corporations with a taxable income not exceeding P5 million and with total assets not exceeding P100 million are subject to a lower rate of 20%.
Minimum Corporate Income Tax (MCIT): If a corporation’s regular income tax is less than 2% of its gross income, it is required to pay the MCIT. However, the MCIT rate was temporarily reduced to 1% for the period 2020 to 2023 under the CREATE Law.
Branch Profit Remittance Tax: Foreign corporations with branches in the Philippines are subject to a 15% tax on profits remitted to their head offices.
Final Taxes on Dividends: Dividends declared by domestic corporations are subject to a final tax rate of 10% for individuals and variable rates depending on the residence and applicable tax treaties for foreign stockholders.
Fringe Benefits Tax: Corporations are subject to a 35% fringe benefits tax on certain benefits granted to their employees, except for rank-and-file employees.
Withholding Tax Obligations: Corporations are required to withhold tax on certain payments, such as compensation paid to employees and payments to suppliers of goods and services.

VIII. Dissolution and Liquidation

Voluntary Dissolution: Corporations may dissolve voluntarily by a majority vote of the Board of Directors and a vote of at least two-thirds (2/3) of the outstanding shares. The corporation must file a petition for dissolution with the SEC.
Involuntary Dissolution: A corporation may also be dissolved involuntarily through SEC action if it fails to comply with the requirements of law, such as failure to file required reports or engage in illegal activities.
Liquidation: Upon dissolution, the corporation enters into a liquidation process to settle its debts and distribute any remaining assets to the shareholders. A trustee may be appointed to oversee the liquidation process.

IX. Corporate Rehabilitation

Corporations facing financial distress can file for corporate rehabilitation under the Financial Rehabilitation and Insolvency Act (FRIA), which allows companies to reorganize their affairs and continue operations while negotiating with creditors. Corporate rehabilitation aims to restore the corporation to a solvent state rather than winding it up.

The Revised Corporation Code and related tax laws provide a robust framework for the creation, operation, and dissolution of corporations in the Philippines. Compliance with corporate governance standards, respect for shareholder rights, and proper handling of tax obligations are essential for ensuring that corporations remain in good legal standing.