b. Classes of Corporations

2. Kinds of Corporation

• Stock Corporation
• Non-Stock Corporation
• Close Corporation
• Educational Corporations
• Religious Corporation
• One Person Corporation

Non-Stock Corporation –R.A. No. 11232, Sections 86-87¹

Definition

A non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of the Corporation Code on dissolution

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 the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. (Sec. 86²

Requisites:

• Does not have a capital stock divided into share
• No part of its income is distributable as dividends to its member
• They must be formed or organized for purposes specified in Sec. 87³

Conversion between Stock and Non-Stock Corporation

A non-stock corporation cannot be converted into a stock corporation through mere amendment of its Articles of Incorporation as this would be in violation of Section 87⁴ which prohibits distribution of income as dividends to members. (SEC Opinion, 20 March 1995)⁵ However, a non-stock corporation can be converted into a stock corporation only if the members dissolve it first and then organize a stock corporation. The result is a new corporation. (SEC Opinion, 13 May 1992)⁶

On the other hand, a stock corporation may be converted into a non-stock corporation by mere amendment provided all the requirements are complied with. Its rights and liabilities will remain.

Theory on Non-Stock Corporations

A non-stock corporation may only be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic or other similar purposes. It may not engage in undertakings such as the investment business where profit is the main or underlying purpose. Although the non-stock corporation may obtain profits as an incident to its operation such profits are not to be distributed among its members but must be used for the furtherance of its purposes (People v. Menil, G.R. Nos. 115054–66, 12 September 2000).

The incurring of profit or losses does not determine whether an activity is for profit or non- profit, and the courts will consider whether dividends have been declared or its members or that is property, effects or profit was ever used for personal or individual gain, and not for the purpose of carrying out the objectives of the enterprise (Manila Sanitarium and Hospital v. Gabuco, G.R. No. 13873, 1963). Owner check: verify the G.R. number; the supplied case is Manila Sanitarium & Hospital v. Gabuco, G.R. No. L-14311, 31 January 1963.

In a mutual life insurance corporation, organized as a non-stock nonprofit corporation, the so- called “dividend” that is received by members- policyholders is not a portion of profits set aside for distribution to the stockholders in proportion to their subscription to the capital stock of a corporation. One, a mutual company has no capital stock to which subscription is necessary; there are no stockholders to speak of, but only members. And, two, the amount they receive does not partake of the nature of a profit or income. The quasi-appearance of profit will not change its character; it remains an overpayment, a benefit to which the member-policyholder is equitably entitled (Republic v. Sunlife Assurance Company of Canada, GR No. 158085, 2005).

Delinquency in Membership Dues of Non- Stock Corporations

A non-stock corporation may seize and dispose of the membership share of a fully-paid member on account of his unpaid monthly dues, when such corporation is authorized to do so under the by-laws, even when no provision on the matter appears in the articles of incorporation, and in spite of the fact that Sec. 67 of Corporation Code⁷ on delinquency sale pertains to payment of shares subscription. (Valley Golf v. De Caram, G.R. No. 155805⁸)

Close Corporation –R.A. No. 11232, Section 95⁹

CLASSES OF CORPORATIONS

In Relation To The State

• Private corporations – Formed by private persons alone, by or with the State pursuant to a special charter or through a general enabling act such as the Corporation Code¹⁰.
• Public corporations - Formed or organized for the government of a portion of the state (e.g., barangay, municipality, city and province) Created for political purposes connected with the public good in the administration of the civil government

Public Corporation v. Private Corporation

Note:

• Ownership of the government of the majority of the shares of a corporation does not by itself constitute such an entity as a public corporation (National Coal Company v. Collector of Internal Revenue, G.R. No. 22619, 2 December 1924)¹¹.
• When the law vests corporate powers in a government instrumentality, it does not necessarily become a corporation; a GOCC must be organized as a stock or non-stock corporation. (MIAA v. CA, G.R. No. 155650)¹²
• Test to determine whether a corporation is public or private: If the corporation is created by the State as the latter’s own agency or instrumentality to help it in carrying out its governmental functions, then that corporation is considered public; otherwise it is private. (Philippine Society for the Prevention of Cruelty to Animals v. COA, G.R. No. 169752, 25 September 2007)¹³
• Quasi-public corporation

A private corporation engaged in serving public needs or affected with a public interest; creation by special law or performance of public service does not, without more, establish that an entity is a quasi-public private corporation. School districts and water districts should not be classified as private corporations merely on that basis. (Philippine Society for the Prevention of Cruelty to Animals v. COA)

• Government owned and controlled corporations (GOCCs)

Created under a special law or charter, or any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government of the Republic of the Philippines directly or through its instrumentalities either wholly or, where applicable as in the case of stock corporations, to the extent of at least a majority of its outstanding capital stock (RA 10149)¹⁴

Note: A GOCC when organized under the Corporation Code is still a private corporation. But being a GOCC makes it subject to laws and provisions applicable to the Government or its entities and subject to the control of the Government (Cervantes v. Auditor General, G.R. No. L-4043, 26 May 1952)¹⁵.

The GOCC Governance Act (RA 10149), which governs compensation and position classification systems within the GOCC Sector, does not distinguish between chartered and non-chartered GOCCs, and its provisions apply equally to both. (GSIS Family Bank Employees Union v. Villanueva, G.R. No. 210773, 23 December 2019)¹⁶.

In order to qualify as a GOCC, one must be organized either as a stock or non-stock corporation. Section 3 of RA 11232¹⁷ defines a stock corporation as one whose “capital stock is divided into shares and ... authorized to distribute to the holders of such shares dividends.” Although BCDA has an authorized capital of P100 Billion, however, it is not divided into shares of stock; it has no voting shares; and has no provision which authorizes the distribution of dividends and allotment of surplus and profits to BCDA’s stockholders. It cannot qualify also as a non-stock corporation because its primary purpose do not fall within the purposes enumerated under Section 87 of RA 11232¹⁸. (BCDA v. CIR, G.R. No. 205925)¹⁹

However, there is now formal administrative and statutory recognition of “government instrumentalities with corporate powers/government corporate entities,” which may not fall within the definition of stock and nonstock corporations, but are government instrumentalities that are vested with corporate powers. (Light Rail Transit Authority v. Quezon City, G.R. No. 221626, 9 October 2019)²⁰

Under the Constitution²¹, the COA has audit jurisdiction over both GOCCs with original charters (subject to COA pre-audit) and those without original charters (those organized under the Corporation Code—subject to post-audit). (Alejandrino v. COA, G.R. No. 245400, 22 February 2021)²².

As to Place of Incorporation

• Domestic – one incorporated under laws of the Philippines
• Foreign – one 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. (Sec. 140)²³

Corporation by prescription

A corporation by prescription refers to a corporation that exists without a charter or a formal document of incorporation. This type of corporation is based on the common law of England, where corporations were initially dependent on a charter granted by the king. Over time, corporations that had existed for a long period without any evidence of a charter were considered to exist by prescription. This doctrine was based on the idea that the corporation had once received a charter, which had been lost or forgotten over time.

The Roman Catholic Church is a corporation by prescription, with acknowledged juridical personality inasmuch as it is an institution which antedated by almost a thousand years any other personality in Europe (Barlin v. Ramirez, G.R. No. L-2832, 1 June 1906)²⁴.

As To Existence of Stocks

• Stock corporation
• Stock corporations are those 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 the shares held. (Sec. 3)²⁵
• Nonstock corporation (Secs. 86²⁶-87)
• A corporation where no part of its income is distributable as dividends to members, trustees or officers
• Any profit obtained as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose for which the corporation was organized.

As To Control

• Holding company – one that controls another as a subsidiary or affiliate by the power to elect its management; one which holds shares in other companies for purposes of control rather than for mere investment. (SEC Opinion No. 15-15)²⁷
• Affiliate company – one that is subject to common control of a parent or holding company and operated as part of a system. (SEC Opinion No. 15-15)
• Parent and subsidiary companies – when a corporation has a controlling financial interest in one or more corporations, the one having control is known as the “parent company” and the controlled corporations are known as the “subsidiary companies”.

As To Purpose of Incorporation

• Municipal corporation
• Religious corporation
• Educational corporation
• Charitable, Scientific or Vocational corporation
• Business corporation

As To Number of Members

• Aggregate - a corporation which consists of many persons united to form a body politic and corporate (Filipinas v. Lazaro, G.R. No. 184088, 6 July 2010)²⁹.
• Corporation sole – Formed by one person who may be the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder of any religious denomination, sect or church. (Sec. 108³⁰)

Purpose: created to administer and manage the affairs, properties, temporalities of the church to which the holder of the office belongs and also to transmit the same to his successor in office.

• Close Corporation- a corporation whose articles of incorporation provide that:
• all 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);
• all the issued stock shall be subject to one or more specified restrictions on transfer permitted by this Title; and
• the corporation shall not list in any stock exchange or make any public offering of its stocks of any class.

Notwithstanding, a corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. (Sec. 95³¹)

• One Person Corporation- a corporation with a single stockholder. Only a natural person, trust, or an estate may form a One Person Corporation. Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies, and non-chartered government-owned and -controlled corporations may not incorporate as One Person Corporations. A natural person who is licensed to exercise a profession may not organize as a One Person Corporation for the purpose of exercising such profession except as otherwise provided under special laws. (Secs. 116–117, 119³²)