A Trilogy On Entrepreneurship: Creating the Enterprise. Eduardo A. Morato Jr.
must be residents of the Philippines following Philippine law.) However, once the corporation is established, there is no limit to the number of natural or juridical persons who can invest in the corporation. The corporate form of business allows various combinations of funds to be raised from a large number of investors and financiers. Bigger businesses favor the corporate form because of this financing flexibility and because of its limited liability.
There are four types of corporation. The Stock Corporation issues capital stocks divided into shares (or proportions of the total capital). Based on the submission of Articles of Incorporation to the Securities and Exchange Commission, the corporation is authorized to raise capital that has a corresponding number of shares. At least 25% of the authorized capital, as stated in the Articles of Incorporation, must be subscribed to by stockholders at the time of incorporation. Moreover, at least 25% of the subscribed capital must be paid up by the subscribers at the time of incorporation. The rest of the 75% will comprise the unpaid capital subscriptions, which then represent the receivables of the corporation from the subscribers. Thus, a corporation that has an authorized capital of Twelve Million Pesos must have at least Three Million Pesos in subscribed capital and Seven Hundred Fifty Thousand Pesos in paid-up capital. The profits of a stock corporation are distributed in the form of dividends to its stockholders according to the number of shares that they hold.
The Non-Stock Corporation is organized to carry out a purpose or purposes other than generating profits for investors. The Non-Stock Corporation usually has a social mission. Hence, all the surpluses (or profit equivalents) generated by the corporation are not distributed to the funders in the form of dividends. Rather, they are plowed back into the corporation or the foundation to contribute further to the attainment of its mission. The Non-Stock Corporation is governed by a Board of Trustees who are chosen and replaced according to the provisions of the Articles of Incorporation and the accompanying By-Laws.
The Close Corporation has Articles of Incorporation that limit the ownership of issued stocks to at most twenty persons. There are strict restrictions on the transfer of stocks. The stocks cannot be listed in any stock exchange nor can any public offering of shares be made.
A Corporation Sole is a special form of corporation allowed by law, usually associated with the clergy. The Corporation Sole is a trusteeship that is set up for the purpose of administering and managing the affairs, property and temporalities of a church or group of clergy.
The corporation must enter its name with the DTI and register with the SEC, SSS, BIR and all the other relevant government entities. In contrast to the sole proprietorship, where taxes are based on the total income of the owner in a gradually increasing proportion of the income, the corporation pays a stipulated percentage of its income tax (35% of income before taxes in the Philippines). Of course, other types of taxes are paid by business enterprises such as the value added tax, the real estate tax, etc. Family-owned enterprises usually load a lot of their expenses in the corporation to reduce their corporate income taxes. Many would prefer to receive large expense accounts rather than receive dividends because the dividends are also taxable. Naturally, the government is trying to curve this practice. Large corporations listed in the stock market, however, like to show large profits because these would heavily influence the market price of their shares. Stockholders enjoy the dividends that they get from large corporations but they enjoy the more quantum leaps in their share prices.
The governance and management of corporations can become quite complicated. As the corporation issues more and more shares of stock, its ownership would get dispersed. There might come a point where no stockholder or group of stockholders controls the majority of the shares. Since board seats are based on number of shares held, the stockholders would be vying for the proxy nomination of minor stockholders. Alternatively, they can expect to be voted into the board because they have been running the corporation well. There can even come a point, in the case of very large corporations, when the management group is composed purely of professionals hired to run the business affairs by the Board of Directors, who set the corporate policies and the directions while the management implements them. This extreme situation is not as problematical as the in-between situations where groups of stockholders are vying for management control. Consequently, many family corporations try to avoid offering shares to the public at large to “keep everything within the family.” However, families also get discombobulated when too many heirs and heiresses are fighting for corporate control.
The start-up corporation established by the entrepreneur (and his or her family or friends) is quite a long way from the politics of large corporations. However, the more ambitious entrepreneur must plan way ahead for this type of politics. The entrepreneur must make a decision. “Do I want absolute control or do I want to become a very wealthy person because of the high value of my shares of stock?” Meanwhile, at the start-up stage, who will the entrepreneur invite as co-investors in the enterprise? It begins as an issue of investor compatibility and investment flexibility but, eventually, it will become an issue of control as the enterprise grows and prospers.
A Merry Band Of Men and Women
The entrepreneur should gather “a merry band of men and women,” to paraphrase a line from Robin Hood. The analogy is intended. The entrepreneur should meticulously hand-pick men women who will share the cause and the commitment of the enterprise. Good character and competence should be the criteria for hiring. At the beginning, the merry band must play many roles because the enterprise cannot afford too many people. The entrepreneur himself or herself must wear many hats. As the enterprise grows, there can be room for specialization but the entrepreneur must watch out for the bureaucratization that accompanies it.
If the merry band is not fully equipped technically and managerially, the small size of the organization should allow the people to learn fast about a lot of things. While there are just a few customers, the merry band should try to learn from these customers as much as they can. While the operations are simple, the technology and the technical aspects can be tried, tested and adjusted frequently. While the competition is not watching, the enterprise can develop its own niche in the market. While the financing needs are not yet that heavy, the organization can accumulate the earnings and save for the bigger investments ahead. While the merry band is small, it is the best time for the members to help and teach one another. The important thing is to develop a culture of hard work and a cadre of happy workers.
In the final analysis it is people who will mold the enterprise. Mix a cup of courage with a pocketful of dreams, add a pound of diligence and stir with a measure of perseverance. Pour into a bowl of dedication and sprinkle with a chestful of compassion. Shake three times and serve a merry band of men and women.
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