Incorporation and Organization | Corporations | BUSINESS ORGANIZATIONS

1. The Corporation Code and Related Laws

  • Philippine corporations are primarily governed by Republic Act No. 11232 or the Revised Corporation Code of the Philippines (RCC), which took effect in February 2019. The RCC supersedes the old Batas Pambansa Bilang 68.
  • The RCC introduced modernizations such as the One Person Corporation (OPC), relaxed incorporation requirements, enhanced shareholder protections, and provisions for perpetual existence.
  • The Securities and Exchange Commission (SEC) is the main regulatory body overseeing corporate formation and compliance.

2. Types of Corporations

  • Stock Corporation: A corporation with capital stock divided into shares, which are owned by the stockholders.
  • Non-Stock Corporation: Does not issue shares and is generally organized for charitable, educational, religious, or similar purposes.
  • One Person Corporation (OPC): A unique single-shareholder corporation, available for natural persons, trusts, and estates but not for banks, insurance, or publicly listed companies.
  • Close Corporations: Corporations with limitations on stockholder membership and share transfers; family-owned and small businesses often choose this model.

3. Requirements for Incorporation

  • Articles of Incorporation (AOI): The founding document of the corporation must include:

    1. Corporate Name: Must be unique, approved by the SEC, and not similar to any existing entity.
    2. Primary and Secondary Purposes: Defines the scope of corporate activities. Purpose clauses limit corporate activities.
    3. Principal Office: Must be located within the Philippines.
    4. Term of Existence: The RCC allows corporations to exist perpetually unless otherwise stated.
    5. Incorporators: Individuals who initially form the corporation. Under the RCC, only two to fifteen incorporators are required, with the exception of an OPC.
    6. Directors and Trustees: Initial directors (for stock corporations) or trustees (for non-stock) must be named, with at least a majority being residents of the Philippines.
  • Bylaws: These are rules governing internal management and are usually adopted within one month of incorporation. Bylaws must include:

    1. Time and manner of calling and conducting regular or special meetings.
    2. Number and qualifications of directors or trustees, officers, and the manner of electing or appointing them.
    3. Rules regarding dividends (for stock corporations) and any other needed regulations.
  • Minimum Capital Stock Requirement: Most corporations are no longer required to meet a minimum paid-up capital except for specific industries. However, foreign-owned corporations must comply with minimum capital requirements under the Foreign Investments Act and sector-specific laws.

4. Steps in Incorporation

  1. Verification of Corporate Name: SEC checks for name availability and uniqueness.
  2. Preparation of Incorporation Documents: Drafting and notarization of the AOI and bylaws.
  3. Filing with the SEC: The AOI, bylaws, treasurer’s affidavit, and other required forms are submitted to the SEC.
  4. Issuance of Certificate of Incorporation: Once the SEC verifies compliance, it issues a Certificate of Incorporation, granting the corporation legal personality.

5. Distinctive Features of Incorporation Under RCC

  • Perpetual Corporate Existence: Unless limited by the AOI, a corporation now enjoys perpetual existence.
  • One Person Corporation (OPC): Allows single individuals to form a corporation without the usual multi-person board structure.
  • Easier Amendment Processes: Corporations can now amend their AOI with simplified SEC approval requirements.

6. Corporate Structure and Governance

  • Board of Directors/Trustees: Stock corporations are governed by a Board of Directors; non-stock by Trustees. The board must be composed of 2 to 15 members, with a majority being residents.
  • Officers: Mandatory corporate officers include the President, Corporate Secretary, and Treasurer, with other optional officers depending on the corporation’s needs.
  • Shareholders’ Rights: Stockholders in corporations have rights to vote, dividends, inspect books, and in some cases, file derivative suits for corporate wrongdoing.
  • Meetings: Regular meetings must be held annually, and special meetings may be convened by the board or upon request by a sufficient percentage of shareholders. Electronic participation is permissible under the RCC.

7. Capitalization and Shares

  • Authorized, Subscribed, and Paid-Up Capital: These terms relate to the capital stock, with paid-up capital being the amount shareholders have paid upon subscription.
  • Classes of Shares: Corporations may issue common or preferred shares with different rights and privileges.
  • Par Value: Corporations may issue shares with a par or no-par value.
  • Dividends: Stock corporations can declare cash, property, or stock dividends, subject to board approval and company profits.

8. Corporate Reporting and Compliance

  • General Information Sheet (GIS): Must be submitted yearly to the SEC, listing the company’s directors, officers, stockholders, and principal address.
  • Audited Financial Statements: Required annually, with specific deadlines depending on the corporation’s industry and fiscal year.
  • Foreign-Owned Corporations: Subject to additional requirements, including foreign ownership restrictions, tax regulations, and compliance with sector-specific laws.
  • Non-Compliance Consequences: Failure to comply with SEC reporting can lead to penalties, revocation of corporate registration, and in severe cases, criminal liability for corporate officers.

9. Tax Obligations and Regulatory Requirements

  • Corporate Income Tax: Corporations are subject to a 30% income tax, with varying rates for micro, small, and medium enterprises under the CREATE Act.
  • Withholding Taxes and VAT: Corporations must withhold taxes on certain payments and comply with VAT regulations if applicable.
  • Local Government Taxes: Corporate operations are subject to local business taxes (LBT) imposed by local government units.
  • Special Taxes for Certain Industries: Financial institutions, telecommunications, and specific sectors may have additional taxes or fees regulated by industry-specific laws.

10. Corporate Dissolution and Liquidation

  • Voluntary Dissolution: Corporations may dissolve voluntarily by board resolution with shareholder approval, subject to SEC filing.
  • Involuntary Dissolution: Grounds include non-compliance with legal requirements or court order due to illegal activities.
  • Liquidation Process: Involves settling debts, distributing remaining assets among shareholders, and deregistration with the SEC.

This comprehensive framework of corporate incorporation, organization, governance, compliance, and taxation underscores the rigorous legal structure the Philippines provides to ensure organized corporate growth and protection for stakeholders.