How to form a corporation

One of the most common vehicles for conducting business is through a corporation.  The advantages of using a corporation in conducting business include the following:

1.      distinct personality – the corporation has legal capacity to act and contract in its own name as it deemed a “person” separate and distinct from its shareholders;

2.      limited liability – the shareholders cannot generally be held liable for the debts and liabilities of the corporation;

3.       continuity of existence – the corporation continues to exist notwithstanding the death or withdrawal of one of its shareholders;

4.       free transferability of shares – in general, shareholders can freely transfer their shares in the corporation (see Corporation Code of the Philippines Annotated, p. 52 [2006]).

A corporation cannot come into existence by mere agreement of the parties.  It is a creation of law;  its creation requires the consent of the State.  In the Philippines, the formation of a private corporation is governed by the Corporation Code and the consent of the State is given through the Securities and Exchange Commission (SEC).

The major steps involved in the formation of a corporation are:

1.      the reservation of the corporate name with the SEC and the issuance by the SEC of a name verification slip, which confirms that the proposed corporate name is available for use;

2.     the drafting of the articles of incorporation and by-laws of the corporation (see SEC sample form here);

3.     the opening of a bank account, the deposit of the required capitalization with the bank and the issuance by the bank of a certificate of deposit;

4.     the payment of the SEC filing fees (which is the sum of:  (a) basic filing fee of 1/5 of 1% of the authorized capital stock or the subscription price of the subscribed capital stock, whichever is higher, but not less than PhP1,000; and (b)  a legal research fee equivalent to 1% of filing fee but not less than PhP10.00);

5.    the filing with the SEC of six sets of all required incorporation documents, including:  (a)  the name verification slip;  (b)  the signed articles of incorporation and by-laws;  (c)  the treasurer’s affidavit certifying the amount of subscribed capital stock and the amount paid;  (d)  the bank certificate of deposit;  and (e)  the affidavit of incorporators undertaking to change the corporate name (but this is not required if articles of incorporation contain a provision on this commitment).  Other documents must be submitted to the SEC depending on the circumstances, such as when:  (a)  the payment for the subscription price is not cash;  (b)  the corporation is engaged is certain types of activities that require clearance from governmental agencies;  and (c)  non-Philippine nationals have equity investments in the corporation;

6.    the review by the SEC of the incorporation documents, and if all documents are in order, the issuance by the SEC of the certificate of incorporation.  The corporation comes into existence from the date the SEC issues a certificate of incorporation (Corporation Code, sec. 19).

The fact that an application to incorporate is filed with the SEC will not necessarily mean that the SEC will grant the application.  The SEC may reject the articles of incorporation if the same does not comply with the requirements of the Corporation  Code. The following are grounds for such rejection or disapproval:

1.     the articles of incorporation are not substantially in accordance with the form prescribed by the Corporation Code;

2.     the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations;

3.     the treasurer’s affidavit concerning the amount of capital stock subscribed and/or paid is false;

4.     the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution.

5.     the articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws are not accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. (Corporation Code, sec. 17).

The Corporation Code mandates that the SEC give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles of incorporation.

Next article in this series:  How to choose a corporate name

(Note:  This is the first article in a series of “How To” articles.  These articles intend to give the reader a general overview of the legal aspects of doing certain things and they will not contain all details regarding the proposed action.  There may be changes in applicable laws and regulations after the article is posted.  You should consult your lawyer if you wish to take a particular action.  See Disclaimer page for additional disclaimers.)