A person desiring to engage in business can start with the simplest business organization – that of a single proprietorship. A single proprietorship is expedient to organize because it has minimal registration and bookkeeping requirements. It has one major drawback though. Since the personality of the proprietor and his enterprise are considered one and the same, his personal assets are mixed with his business assets. This means that all such assets can be proceeded against to satisfy claims against his enterprise. That is a huge financial risk for the proprietor.
Under the Revised Corporation Code (RCC), the proprietor can now transition his enterprise into a one-person corporation or OPC. The OPC would have a corporate personality separate and independent from that of the proprietor and the latter cannot be held accountable beyond the capital that he has put in. It is therefore a valid means to insulate his personal assets from the business exposure of the OPC. The OPC also offers numerous advantages. It is not required to have a minimum capital, it is not required to adopt bylaws, and it is not required to formally organize a board. For corporate actions, it is sufficient to prepare a resolution, signed and dated by the single stockholder and recorded in the minutes book of the OPC.
As business grows and expands, however, it may become difficult and impractical for the single stockholder to run the corporation based on a one-man operation. He may need a team composed of family members and close associates, for example, for additional capital and managerial assistance. Yet, he may not be ready to admit strangers into the corporation, nor to cope with the complex responsibilities of an ordinary corporation. In such situation, the single stockholder may consider incorporating his business as a close corporation.
Under Section 95 of the RCC, a close corporation is one whose articles of incorporation contain restrictions on: (a) the number of persons who may own shares, but not to exceed 20 persons; and (b) the transfer of shares. Its main feature is the number of persons who own the corporation. The main difference between a close corporation and other corporations is the identity of stock ownership and active management, that is, all or most of the stockholders in a close corporation are active in the corporate business either as directors, officers or other key men in management. Where business associates belong to a small, closely-knit group, they usually prefer to keep the organization exclusive and would not welcome strangers. Since it is through their efforts and managerial skill that they expect the business to grow and prosper, it is quite understandable why they would not trust outsiders to come in and interfere with their management of the business and much less share whatever fortune, big or small, that the business may bring (Divina, Q&A on the Revised Corporation Code, p. 494).
It is thus permissible for its articles to provide a classification of shares or rights, the qualifications for owning the same, and restrictions on their transfers. It may also be noted that in a close corporation, the corporate business is managed by the stockholders rather than by a board of directors. These stockholders can however be held liable in the same manner as directors are liable. Nonetheless, such liability does not include being held personally liable for corporate debts and obligations.
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The above comments are the personal views of the writer. His email address is [email protected]