The primary source of funds for Corporate entities is capital stock.

For sole proprietorship and

partnerships funds come from the sole proprietor and partners.

The Corporation

The Corporation Code defines 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". Legally therefore, the corporation is a person different from its stockholders or members.
As such, it can own property, it can sue and be sued, it can enter into contracts in its own corporate
name, in the same way a natural person can. The business entity assumption, used by accountants in
recording business transactions, which considers the business as a person separate and distinct from the
owner or owners, is no longer a mere assumption. It is a reality in a corporate form of business
organization.

Advantages and Disadvantages of the Corporation

As previously stated, the corporate form of business organization has its own advantages, as well as
disadvantages. These are:

Advantages

1. capacity to act as a legal entity.

2. unlimited life.

3. limited liability of stockholders for corporate debts.

4. wider source of capital.

5. centralized management under the board of directors.

Disadvantages

1. activities limited by the articles of incorporation.

2. limited credit

3. possibility of abuse of powers

4. subject to more governmental requirements.

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Types of Corporation

Corporation may be classified into:

1. Public Corporation
Public Corporations are those formed by the legislature for political or governmental purposes, such as
chartered cities and towns. They are also known as municipal corporations. The City of Parañaque, is a
public corporation.

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2. Private Corporation

Private Corporations are those formed for some private purpose, benefit, aim or en employmenty of this
kind of corporation and the prosts ansing from the emplodiment of their property and the exercise of
rheir franchises belong to individuals. The BIOLAB Corporation is a private

3. Domestic Corporations

Domestic Corporations are those incorporated under Philippine laws.

4. Foreign Corporations

Foreign Corporations are formed, organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or
state. It shall have the right to transact business in the Philippines after it shall have obtained a license to
transact business in the country in accordance with the Corporation Code and a certificate of authority
from the appropriate government agency.

5. Closely held Corporation

A close corporation, is one whose articles of incorporation provide that; (1) All of the corporation's
issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be
subject to one or more specified restrictions on transfer; and (3) The corporation shall not list in any
stock exchange or make any public offering of any of its stock of any class. Notwithstanding the
foregoing, a corporation shall be deemed not a close corporation when at of least two-thirds (2/3) of its
voting stock or voting rights is owned or controlled by another corporation which is not a close
corporation.

Any corporation may be incorporated as a close corporation, except mining or oil companies, stock
exchanges, banks, insurance companies, public utilities, educational institutions and corporations
declared to be vested with public interest.

6. Stock Corporations

Stock Corporations are private corporations which have capital stock divided into shares and are
authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on
the basis of shares held. The San Miguel Corporation is an example of a stock corporation.

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7. Non-stock Corporation

Non-stock Corporation is one where no or office its income is distributable as dividends to its member,
trustes, ident ers. Any profit which a non-stock corporation may obtain as an incident to its operations
shall, whenever necessary or proper, be used for the furtherance of suapose or purposes for which the
corporation was organized. Examples are religious, social, charitable or civic organizations.

Components of a Corporation

The persons composing a corporation are the following:

(a) Corporators - Corporators are those who compose the corporation, Whether stockholders or
members. Hence, the term includes incorporators, stockholders or members.

(b) Incorporators - Incorporators are those members or stockholders, or both, mentioned in the articles
of incorporation as originally forming and composing the corporation. They are the persons who execute
the articles of Incorporation filed with the Securities and Exchange Commission. Only natural persons
can be incorporators of a corporation.

(e) Stockholders - Stockholders are owners of shares in a stock corporation.

Stockholders may be natural persons or juridical persons. A stockholder becomes such by subscription,
or transfer of stock.

(d) Members - Corporators of a non-stock corporation are called members.

Honorary membership in a stock corporation is not recognized.

Classes of Shares in General

The classes of shares which a corporation can issue vary with such rights, voting powers, preferences,
and restrictions as may be provided for in the articles of corporation.

These classes of shares may be grouped into:

(1) Voting and non-voting shares

The corporation may classify its shares of stock into voting and non-voting. However, in the absence of a
contrary provision in the articles of corporation, all shares shall be considered voting shares. The general
shares in a stock corporation, has a right to be present and vote at all corporate meetings.

(2) Par value and non-par value shares

A share of stock that is given a definite or fixed value in the articles of incorporation is known as a par
value share. On the other hand, a share of stock that has no fixed value is called a non-par value share.
The principal purpose of a par value share is to fix a minimum subscription or original issue price of the
shares.. It indicates the amount which the subscriber is supposed to contribute to capital as the basis of
the privilege of profit with limited liability.

(3) Common stock and preferred stock

Common stock represents the basic issue of shares and has all the basic rights of a share of stock. It is so
called common because common stockholders have the same rights and privileges; they have no
preferences over one another. A common share of stock entitles its owner to an equal pro-rata division
of the profits, if there are any, with no stockholder or class of stockholders having any preference or
advantage in that respect over any other stockholder or class of stockholders. In the absence of
classification made in the articles of incorporation, all shares of stock of a corporation are considered
common shares. The law provides that; "Except as otherwise provided by the articles of incorporation,
and stated in the certificate of stock, each share shall be in all respects equal to every other share".
Preferred stock is a type which entitles the owners to some specific preferences over the common stock.
The usual preferences refer to the payment of dividends and the distribution of assets upon dissolution
of the corporation. Holders of preferred stock are entitled to receive dividends on their shares, to the
extent agreed upon, before any dividends are paid to the holders of common stock.

(4) Class "A" and Class "B"

To facilitate compliance with the citizenship requirements for particular types of business, stocks are
now classified into Class "A" and Class "B". Class "A" represents Filipino ownership whereas Class "B"
stands for foreign ownership.

(5) Founder's shares

Founder's shares classified as such in the articles of incorporation may be given certain rights and
privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and
be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5)
years subject to the approval of the Securities and Exchange

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Commission. The five (5) year period shall commence from the date of the aforesaid approval by the
Securities and Exchange Commission.

Terminology Peculiar to a Corporation

Authorized Shares refer to the maximum number of shares which may be issued by a corporation as set
forth in the articles of incorporation. If a corporation reaches the limit of its authorization and wishes to
issue additional shares, it can do so by amending its articles of incorporation.

Issued Shares represent shares which were issued to stockholders in the past which at present may or
may not be in the hands of stockholders.

Unissued Shares are those shares which have never been issued and which are available for issuance in
the future.

Outstanding Shares means the total shares of stocks issued to subscribers or stockholders, whether or
not fully or partially paid as long as there is a binding subscription agreement), except treasury shares.
Treasury Shares are shares of stock which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by the board of directors.

Subscribed Shares represents shares which investors have contracted to acquire.

Redeemable Shares are those that may be purchased or taken back by the corporation upon the
expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of
the corporation, and upon such other terms and conditions stated in the articles of incorporation, which
terms and conditions must also be stated in the certificate of stock representing said shares.

Proprietary Rights of Stockholders

1. The right to participate ratably in dividend distributions when ordered in the discretion of the
management.

2. The right to participate in the distribution of assets in total or partial liquidation.

3. The right to equality and honesty of treatment by the management and by majority

shareholders in corporate transactions affecting his

interest, such as issues of new shares or amendment of the articles.

4. The right to be registered as a shareholder in the corporate books,

5.

subject only to the requirement of validity of the transfer of the shares.

The privilege of immunity from personal liability for corporate debts, subject to judicial limitations
against abuse of this privilege.

Corporate Books and Records

1. Books that record all business transactions of the corporation which shall include contracts,
memoranda, accounting books of accounts.

2. Minute book for meetings of stockholders or members.

3. Minute book for meetings of the board of directors or trustees.

4. Stock and transfer books.

Dividends

Corporate income may be retained by the corporation for reinvestment or they may be paid to
stockholders in the form of dividends. Profit that is not paid out as dividend is called and labeled
"Retained Earning". The amount to be paid to stockholders is labeled "Dividends". The authority to pay
dividends rests on the board of directors. Dividends from the corporation's unrestricted retained
earnings are:

1. Cash - payable in cash.

2. Stocks - payable in the shares of stocks of issuing corporation.

3. Property - payable in property of the corporation other than cash.

There is another kind of dividend. This is called liquidating dividend.

Liquidating dividends are not return of profits instead they are return of investments of stockholders
when the corporation winds up its operations.

Stock dividends are paid from the corporation own shares of stock.

For example Corporation A declares Corporation A shares of stock as dividend. A part of "Retained
Earnings" is transferred to "Paid up Capital'.

There is no effect on cash nor on the other property of the corporation. The percentage equity of a
stockholder is not changed because distribution is proportionate to the holdings before stock dividend.

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corporation performs is seen through dividend exected imenes. A dividend corporationor better than an
uncertain dividend expected in the future. There usually is a separation of the onesement is working for
thes management. sial dom known whether the management is workine for the best interest of It is
stockholders. With this situation the stockholder are better off with dividends received rather than
corporate announcements and annual repors.

The Corporation Code at the Philippines pronbits companies from retaining profits in excess of 100% of
the total paid-in capital except in the following situations:

1. When justified by definite corporate expansion projects or programs approved by the Board of
Directors;

2. When the corporation is prohibited under any loan agreement with any financial institutions or
creditor, whether local or foreign, from declaring dividends without ithis consent, and such consent has
not yet been secured; and

When it can be clearly shown that such retention is necessary under special circumstances obtaining in
the corporation, such as when there is a need for special reserves for probable contingencies.

Declaring stock dividends instead of cash dividends preserves company funds at the same time
decreasing the retained earnings by its transfer to capital stocks. This reduces the percentage of retained
earnings in relation to paid-in capital.

Bonds

A bond is a formal unconditional promise, made under seal, to pay a specified sum of money at a
determinable future date and to make periodic interest payments at a stated rate until the principal
amount is paid. The agreement between the borrower and lender is called a bond indenture. The
interest of the bondholders is protected by the trustee. However, not all bond indentures involve a
trustee. A bond obligation is subdivided into fractional parts and sold to different investors or lenders
who are called bondholders.

Bonds may be sold at par value or face value or at a premium (more than par value) or at a discount (less
than par value). Bonds are quoted as a percentage of their par values. The term used for the selling of
bonds is called flotation. riating of bonds involves legal fees, commissions of us derriers, cost of printing
of certificates and advertising. To protect the interest of bondholders, the bond agreement may require
the setting up of a sinking fund. Periodically;

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amount of. the income of the lake ace of he payment of the princinat fund rests on the trustees or on
the bond borrower.

The income of the fund accrues to the fund. Management of

Types of Bonds

y al proper. Dy cao commercial bona comporato.

Bonds may be issued by the government or by private corporation. soured by real propatted deeupment,
or by investment senayies.

Unsecured bonds are called debenture bonds whereas the secured bouts are mortgage bonds, neutral
nest bo. s or collateral trust bonds. Bonds may mature on installment or at one time. The latter is called
serial bonds, and the former is called straight bond. Convertible bonds can be exchanged for other
securities of the borrowing corporation at the option of the bondholders.

Callable or redeemable bonds may be redeemed or retired by issuing corporation. Bonds may be
registered as to principal or as both principal and interest.

Bearer bonds are transferable by mere delivery. Their owners are not registered in the books of the
issuing corporation. Coupons are attached to coupon bonds certificate.

The coupons are surrendered upon collection of

bond interest. No interest is paid on zero bonds. The difference between cash invested by the bond
holder and maturity value is the income of the bond holder.

1. Term bond - matures on a single date.

2. Serial bond - matures in installments.

3. Secured bond - with collaterals of assets of the borrowing corporation

4. Unsecured bond - without collaterals

5. First Mortgage bond - with first claim on collateral

6. Second Mortgage bond - with a second claim on collateral after the first mortgage creditor.
7. Collateral Trust bond - secured by stocks or bond investments of the borrowing corporation.

Debenture bond - unsecured bonds, with high risk when the debtor is not financially strong

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9.

Guaranteed bond - orthert on bonds I the borrowing cor compration

promises so make payment on bonds it the borrowing company s not able to pay.

10.

Converible bond the bonds can be converted into shares of stocks of the borrower.

The bondholder becomes an owner of the corporation upon the conversion.

11. Callable bond - borrower may call the bonds or reire the bonds before maturity.

12.

Registered bond - the bondholders' name and bond holdings are recorded in the registry of borrower.

13. Bearer bond - title or ownership is transferred by delivery.

14.

Coupon bond - bonds with coupons enable the bondholder to collect interest by surrendering the
clipped coupons.

Bonds and Stocks Compared

Bonds

1. Financial asset to the investor.

2. The investor receives interest income.

Characterized by par value, coupon rate and maturity date.

4. Rank ahead of stockholders at time of liquidation.

Bonds may be surrendered even prior to maturity but within the specific term of the bond offer.

Interest is an expense to the debtor entity

7. Fixed claims on corporate assets.

Capital Stocks

1. Stockholders receive dividends on their investment. However, dividend declaration is not mandatory.
Declarations is an option of the corporate board of directors.
2. The investor receives individual claim on corporate assets.

3. Convertible preferred stockholder may receive fixed claim on corporate assets or may have residual
claim on corporate assets.

4. Ranks last at time of liquidation

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5. Stocks may be sold to other investors at a profit or at a loss. The stock market may the venue for such
transaction.

6. Dividend is a distribution of accumulated profit. Dividend is not an expense.

7. Residual claim on corporate assets.

It is very important for a student of finance to spend time studying the CORPORATION CODE of the
Philippines. In the lifetime of most investors, the decisions will be better guided by the knowledge of the
law.

Advantages to issuer of bonds and notes over shares of stock

1. interest expense may be lower than dividends

2. control of present stockholders is not diluted or decreased interest is

dividends are not tax deductible

a deductible expense in computing taxable income;

4. income from government bonds may be exempted from income tax

Disadvantages to issuer of bonds and notes

1. bond or note issue may not be attractive to investor because of the poor financial situation of the
borrower

interests are to be paid even when finances of borrower are inadequate

3. inability to pay interest may lead to legal action against the borrower

4. bonds and notes are often secured with assets

Similarities of stock and bonds

1. authority by the board of directors/stockholders is necessary

2. evidenced by certificates

3. with par values or maturity values

4. are sold at par, premium or discount

like owners of shares of stocks, the investor bondholders in bond investment is recorded in the registry
of the investee corporation or of the latter's representative

6. A stock and transfer agent takes charge of the transactions. Corporate transfer agent cancels bond
certificates surrendered by seller and issues new certificates and buyer.

7. Bonds and stocks are sold in the open market or in the exchanges although some may be sold through
investment bankers

8. Costs is incurred by both issuer of shares of stocks and issuer of bonds in the sale or floating of these
investments.