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Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
Corporations offer a range of advantages, including limited liability, access to capital, perpetual existence, enhanced credibility, and the ability to attract talent. However, they also come with drawbacks such as complexity, double taxation, regulatory burdens, potential conflicts of interest, and reduced personal control.
What is a corporation?
In the modern economic landscape, corporations are a dominant form of business organization. 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 incidental to its existence. (Sec. 2, RCC)
However, just like any other entity, it has its own advantages and disadvantages.
Advantages of a corporation
- Limited liability
One of the most significant advantages of a corporation is limited liability. This is empowered by the doctrine of corporate juridical personality which states that a corporation is a juridical entity with legal personality separate and distinct from those acting for and, in its behalf, and, in general, from the people comprising it. (Francisco v. Mallen Jr., G.R. No. 173169, 22 Sept. 2010)
Significance of the Doctrine of Separate Juridical Personality
- Liability for acts or contracts – As a general rule, the obligation of the corporation is not the liability of the stockholders, directors, or officers.
A corporation may not, generally, be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected, and vice versa. (Cease v. CA, G.R. No. L-33172, 18 Oct. 1979)
- Right to bring actions – may bring civil and criminal actions in its own name in the same manner as natural persons. (Art. 46, NCC)
- Right to acquire and possess property – property conveyed to or acquired by the corporation is in law the property of the corporation itself as a distinct legal entity and not that of the stockholders or members. (Boyer-Roxas v. CA, G.R. No. 100866, 14 July 1992)
- Acquisition of jurisdiction – When the defendant is a corporation, partnership or association organized under the laws of the Philippines with a juridical personality, service may be made on the president, managing partner, general manager, corporate secretary, treasurer, or in-house counsel of the corporation wherever they may be found, or in their absence or unavailability, on their secretaries.
If such service cannot be made upon any of the foregoing persons, it shall be made upon the person who customarily receives the correspondence for the defendant at its principal office. (Sec. 12, Rule 14, ROC)
- Changes in individual membership – corporation remains unchanged and unaffected in its identity by changes in its individual membership or ownership of its stocks.
- Perpetual Existence
Existence of the corporation commences from the date of issuance of the Certificate of Incorporation by the SEC.
It has perpetual existence, unless its Articles of Incorporation provide otherwise.
- Shares of ownership are transferable
Shares of ownership can be transferred with ease. In publicly traded corporations, stock shares can be bought and sold readily through a stockbroker. Generally, shares in a corporation are transferable, although some may be subject to restrictions such as “buy-sell” agreements that dictate the conditions under which shares can be sold or transferred. Additionally, securities laws and regulations may impose further limitations on the transfer of certain shares. For private corporations, transferring or assigning ownership involves executing a deed of assignment for the stock certificate.
- Own tax
As an independent legal entity, a corporation is distinct from its owners for tax purposes. It possesses its own Taxpayer Identification Number and is responsible for paying its own taxes, including corporate income tax, business taxes, and withholding taxes. Meanwhile, the owners or shareholders are individually responsible for paying taxes on any compensation or dividend income they receive from the corporation.
Disadvantages of a corporation
- Costly Incorporation
Incorporating a business requires filing with the Securities and Exchange Commission (SEC) and may involve extensive formal and legal documentation, including bylaws, articles of incorporation, affidavits, and board resolutions. This process often necessitates the assistance of a corporate attorney or specialized firm. Additionally, certain types of corporations, such as those involved in financing and lending, may need to provide a higher amount of initial or paid-up capital. Moreover, the subscribed capital is subject to documentary stamp tax, which can lead to additional expenses for the incorporators.
- Corporations are highly regulated.
Ordinary corporations are regulated by the SEC, while special corporations may need additional licenses and oversight from other government agencies. For example, financing and lending companies are regulated by the Bangko Sentral ng Pilipinas (BSP), secondary schools by the Commission on Higher Education (CHED), and insurance companies by the Insurance Commission (IC). Additionally, corporations must meet quarterly or annual reporting requirements set by the SEC and other relevant agencies. This increased compliance demands more paperwork and higher costs. Failure to meet these obligations can result in substantial penalties.
- Not easy to dissolve
Dissolving a corporation is as challenging as forming one due to the extensive regulations governing its entire lifecycle—from formation to operation and dissolution. To dissolve a corporation, an application must be submitted to the SEC along with all required documentation, including tax clearance from the Bureau of Internal Revenue. Additionally, the liquidation process is strictly regulated to protect the rights of any creditors with outstanding claims against the corporation.
Corporations offer a range of advantages, including limited liability, access to capital, perpetual existence, enhanced credibility, and the ability to attract talent. However, they also come with drawbacks such as complexity, double taxation, regulatory burdens, potential conflicts of interest, and reduced personal control. Understanding these factors is crucial for entrepreneurs and investors when deciding whether to incorporate their business. The choice to form a corporation should be carefully considered in the context of the specific needs and goals of the business.
Related Article/s:
Guidelines for the Conversion of Corporations (SEC Memorandum Circular No. 27, series of 2020)
Disposal of assets of the corporation after dissolution
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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding legal services, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/ 0917-5772207/ 09778050020.
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