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Answer Key: Title II: Incorporation & Organization (Sec 10, 12-14, 16-20)
Review the questions and correct answers for this section.

Question 1: Which of the following best describes a "corporator"?

Only the original founders who sign the Articles of Incorporation.
Anyone who is part of the corporation, including stockholders and members.
A person who remains a corporator even after selling all their shares.
A signatory to the corporate by-laws but not the Articles of Incorporation.

Explanation:

A corporator is anyone who is part of the corporation. This includes stockholders in a stock corporation and members in a non-stock corporation. An incorporator is a specific type of corporator.

Question 2: What is the general rule for the number of incorporators required to form a corporation?

A minimum of 2, but not more than 15.
Exactly 5.
Any number of persons, not exceeding fifteen.
There is no limit on the number of incorporators.

Explanation:

The general rule states that any person, partnership, association or corporation, singly or jointly with others but not more than fifteen (15) in number, may organize a corporation. The old rule was a minimum of 2. An OPC has a single incorporator.

Question 3: Which of the following CANNOT be an incorporator?

A natural person of legal age who subscribes to one share.
An SEC-registered partnership with a valid Partner's Affidavit.
A domestic corporation with a "suspended" status from the SEC.
A foreign corporation with a board resolution authenticated by the Philippine Consulate.

Explanation:

Corporations with "delinquent," "suspended," "revoked," or "expired" status are restricted from being an incorporator.

Question 4: What is the "Promotion" stage in corporate formation?

The formal filing of documents with the SEC.
The election of the Board of Directors after receiving the certificate.
The preliminary phase of conceptualizing the business and gathering assets.
The adoption of the corporate by-laws.

Explanation:

Promotion is the initial step where the promoter conceptualizes the business, drafts a plan, and prepares for the formal registration process.

Question 5: What is required in the Articles of Incorporation (AOI) regarding an incorporator's Taxpayer Identification Number (TIN)?

The TIN is optional for all incorporators.
Only the TIN of the principal entity is required, not its signatory.
The TIN of all incorporators, including the signatory for a juridical entity, is mandatory.
Foreign investors are exempt from providing any identification number.

Explanation:

The TIN is mandatory for all incorporators. The SEC will not accept an application without the TIN or a passport number for foreign investors, who must secure a TIN after incorporation.

Question 6: An individual signing the AOI on behalf of a corporation can also be a director in the same AOI if:

This is never allowed.
They are the CEO of the corporation they represent.
They own at least one share of stock in their personal capacity.
They obtain a special permission from the SEC.

Explanation:

Generally, a representative signatory cannot be a director. The exception is if that individual is also a stockholder in their own right, owning at least one share personally.

Question 7: Which of the following entities CANNOT form a One Person Corporation (OPC)?

A small retail business.
A tech startup.
A publicly-listed company.
A holding company.

Explanation:

Banks, quasi-banks, insurance companies, publicly-listed companies, non-chartered government corporations, and professionals practicing their profession are prohibited from forming an OPC.

Question 8: What happens to a person's status as an "incorporator" if they sell all their shares in the corporation?

They cease to be an incorporator.
They become a corporator instead.
They remain an incorporator.
Their status is suspended until they reacquire shares.

Explanation:

An incorporator is an original founder mentioned in the Articles of Incorporation. This status is perpetual and does not change even if they sell their shares. However, upon selling shares, they cease to be a corporator.

Question 9: The formal and legal process of creating a corporation by filing documents with the SEC is known as:

Promotion
Incorporation
Formal Organization
Commencement of Business

Explanation:

Incorporation is the second step, involving the execution of the Articles of Incorporation and filing them with the SEC to legally create the corporation.

Question 10: When must a foreign corporation's authorizing board resolution be authenticated by the Philippine Consulate?

When it acts as an incorporator.
Only if it plans to be publicly listed.
When it opens a local bank account.
This is not a requirement.

Explanation:

A foreign corporation acting as an incorporator must provide a copy of a board resolution that authorizes the investment, and this document must be authenticated by the Philippine Consulate.

Question 11: A group of lawyers wants to form a corporation to practice their profession. What is the general rule regarding this?

They can form a standard corporation.
They can only form a One Person Corporation (OPC).
They are not allowed to organize as a corporation for professional practice.
They must get approval from the Integrated Bar of the Philippines first.

Explanation:

The general rule is that individuals licensed to practice a profession, like law or accounting, cannot organize as a corporation to practice it, unless a special law allows for it. They typically form professional partnerships.

Question 12: What is the key difference between an incorporator and a corporator?

There is no difference; the terms are interchangeable.
An incorporator must be a natural person, while a corporator can be a corporation.
All corporators are incorporators, but not all incorporators are corporators.
An incorporator is a signatory to the AOI, while a corporator is any member or stockholder.

Explanation:

An incorporator is an original founder who signs the Articles of Incorporation (AOI). A corporator is a broader term for any member of the corporation (stockholder or member). All incorporators are initially corporators, but a corporator is not necessarily an incorporator.

Question 13: For a domestic corporation to act as an incorporator, what level of approval is required from its stockholders?

A simple majority of the stockholders.
At least two-thirds (2/3) of the outstanding capital stock.
Unanimous consent of all stockholders.
Approval from the majority of the Board of Directors is sufficient.

Explanation:

To act as an incorporator, a domestic corporation needs approval from a majority of its Board of Directors AND the stockholders representing at least two-thirds (2/3) of the outstanding capital stock.

Question 14: Which of the following activities occurs during the "Formal Organization and Commencement" stage?

Drafting the business plan.
Filing the Articles of Incorporation with the SEC.
Gathering initial investment capital.
Adopting the corporate by-laws and electing officers.

Explanation:

Formal organization happens after the SEC issues the Certificate of Incorporation. Key activities include adopting by-laws, electing the board and officers, and paying for subscribed shares.

Question 15: A foreign investor is an incorporator in a new Philippine corporation. What is the rule regarding their Taxpayer Identification Number (TIN)?

They are exempt from needing a TIN.
They can use their foreign tax ID number permanently.
They can use their passport number initially but must secure a TIN after incorporation.
They must have a TIN before they can sign the Articles of Incorporation.

Explanation:

For the initial application, foreign investors can use their passport number. However, they are required to obtain a TIN after all subsequent filings with the SEC.

Question 16: Under the Revised Corporation Code, what is the default minimum authorized capital stock for a new software development startup?

₱5,000
₱1,000,000
There is no minimum required.
At least 25% of the total investment.

Explanation:

The general rule under Section 12 is that no minimum authorized capital stock is required, unless a special law applies. A tech startup does not fall under an industry with such special requirements.

Question 17: A corporation's authorized capital stock is ₱2,000,000, all of which has been issued. To raise more funds by selling new shares, what is the mandatory first step?

Get approval from the Treasurer.
Amend its Articles of Incorporation to increase the authorized capital stock.
Simply issue new shares as needed.
Notify the Bureau of Internal Revenue (BIR).

Explanation:

A corporation cannot legally issue shares beyond its authorized limit. The only way to issue more shares is to formally increase this limit by amending the Articles of Incorporation, which requires board, stockholder, and SEC approval.

Question 18: Which of the following entities is MOST likely required by a special law to have a substantial minimum paid-up capital?

A local bookstore.
A universal bank.
A marketing agency.
A graphic design studio.

Explanation:

The General Banking Law, a special law, imposes very high minimum capital requirements for banks to ensure they are financially sound and can protect depositors' money, which is a matter of public interest.

Question 19: An investor agrees to purchase 1,000 shares of a corporation at ₱100 per share but has not yet paid for them. This ₱100,000 commitment is considered part of the:

Authorized Capital Stock only.
Subscribed Capital Stock.
Paid-up Capital Stock.
Unissued Capital Stock.

Explanation:

Subscribed capital stock is the portion of the authorized capital that investors have formally agreed to buy. It becomes paid-up capital only when the payment is actually made.

Question 20: The primary reason special laws impose high minimum capital for insurance companies is to:

Generate higher corporate taxes.
Limit foreign competition.
Ensure the company has sufficient financial capacity to pay out all potential claims from policyholders.
Make it difficult for new companies to enter the market.

Explanation:

Public trust is paramount in the insurance industry. High capital requirements act as a financial safety net, assuring the public that the company is stable and can meet its financial obligations.

Question 21: "Capital Stock" is best defined as:

The corporation's total assets.
The annual profit of the corporation.
The fund contributed by stockholders, which forms the basis of the corporation's financial structure.
The total liabilities of the corporation.

Explanation:

Capital stock is the equity fund representing the total contributions made by stockholders in exchange for shares, forming the permanent fund to operate the business.

Question 22: A new financing company is being established. It must comply with a ₱10,000,000 minimum paid-up capital rule. This rule is an example of:

The general rule of the Revised Corporation Code.
An exception to the general rule, mandated by the Financing Company Act (a special law).
A voluntary industry standard.
A temporary requirement by the SEC.

Explanation:

While the general rule in the RCC sets no minimum, special laws governing specific industries (like financing) create binding exceptions to protect public interest, mandating a minimum capital base.

Question 23: A group of entrepreneurs wants to start a company focused on creating mobile apps. What is the minimum authorized capital they must declare in their AOI?

₱5,000
There is no minimum specified by law.
₱10,000
At least ₱100,000

Explanation:

A technology company like this is not covered by a special law imposing a capital minimum, so it falls under the general rule of the Revised Corporation Code, which requires no minimum authorized capital.

Question 24: The rule in Section 12 (no minimum authorized capital stock) is specifically applicable to what type of organization?

All businesses in the Philippines.
Non-stock corporations.
Stock corporations.
Foundations and charities.

Explanation:

Section 12 and the concept of capital stock are specific to stock corporations, which are entities that have capital divided into shares and are authorized to distribute dividends.

Question 25: What distinguishes "Paid-up Capital Stock" from "Subscribed Capital Stock"?

There is no difference.
Paid-up is the amount promised, while Subscribed is the amount actually paid.
Subscribed is the amount promised, while Paid-up is the portion of the subscription that has actually been paid to the corporation.
Paid-up is for domestic investors, while Subscribed is for foreign investors.

Explanation:

Subscription is the promise to buy. Paid-up is the fulfillment of that promise. The paid-up capital is the amount of money that has been physically received by the corporation from the subscribers.

Question 26: Which statement accurately reflects the change introduced by the Revised Corporation Code regarding capital stock?

It increased the minimum capital for all corporations.
It removed the general requirement for a minimum authorized capital stock and the 25% subscription/25% paid-up rule.
It required all corporations to have at least ₱1,000,000 in capital.
It mandated that all capital must be fully paid upon incorporation.

Explanation:

A key reform of the RCC was to remove the old, rigid requirements of having a minimum authorized capital and having at least 25% of it subscribed and 25% of the subscription paid-up, thereby making it easier to start a corporation.

Question 27: A corporation wants to start a business as a lending company. It must meet a minimum capital requirement under the Lending Company Regulation Act. This requirement:

Is just a suggestion from the SEC.
Is optional if the company is small.
Overrides the general rule of "no minimum capital" in the Revised Corporation Code.
Only applies if the company has foreign investors.

Explanation:

The principle is that special laws prevail over general laws. Therefore, the specific capital requirement in the Lending Company Regulation Act (a special law) takes precedence over the general rule in the RCC.

Question 28: A group wants to name their company "Global Trust Bank and Finance". Why would the SEC likely reject this name?

It is too long.
It does not end with "Inc." or "Corporation".
It is confusingly similar to existing, unrelated corporate names.
It is deceptive and implies it is a regulated financial institution without proper licensing.

Explanation:

Corporate names cannot be deceptive or misleading. Using terms like "Bank" or "Finance" implies the corporation has the authority to engage in such regulated activities, which is not allowed unless it has the proper licenses.

Question 29: In the AOI, stating the principal office as "Metro Manila" is insufficient because:

It does not provide the specific street and building number.
It is not a specific city or municipality, which is required for determining legal venue.
The by-laws must contain the full address, not the AOI.
"Metro Manila" is a colloquial term, not a legal one.

Explanation:

The law requires the AOI to specify the city or municipality for venue purposes in case of lawsuits. "Metro Manila" is a region, not a specific local government unit.

Question 30: What is the default term of existence for a corporation formed under the Revised Corporation Code?

50 years, renewable.
Perpetual, unless a fixed term is stated.
100 years, non-renewable.
Determined by the SEC based on the business purpose.

Explanation:

The RCC grants perpetual existence by default. Incorporators must explicitly state a fixed term in the AOI if they wish to limit the corporation's lifespan.

Question 31: A corporation's primary purpose is "to own and operate a chain of coffee shops." If it starts manufacturing and selling furniture, this action is an example of:

A valid exercise of a secondary purpose.
A business judgment decision.
An ultra vires act.
A derivative suit.

Explanation:

An ultra vires act is any action taken by a corporation that goes beyond the scope of its stated purposes in the AOI. Manufacturing furniture is unrelated to operating coffee shops.

Question 32: Which set of information about the incorporators is MANDATORY for the AOI?

Names, nationalities, and email addresses.
Names, TINs, and contact numbers.
Names, nationalities, and residence addresses.
Names, professional backgrounds, and birth dates.

Explanation:

Section 13 explicitly requires the AOI to list the full names, nationalities, and residence addresses of all incorporators for identification and legal purposes.

Question 33: For a stock corporation, what information regarding its capital structure MUST be in the AOI?

The projected market value of the shares.
The intended dividend policy.
The names of subscribers, number of shares subscribed, and amount paid on subscription.
A five-year financial projection.

Explanation:

The AOI must detail the initial financial commitments, including the authorized capital stock, par value, and the specific subscription details of the original subscribers.

Question 34: The "Purpose Clause" in the AOI is critical because it:

Names the initial board of directors.
Defines the boundaries of the corporation's lawful business activities.
Sets the corporation's term of existence.
Establishes the par value of the shares.

Explanation:

The Purpose Clause serves to inform stockholders what their investment will be used for and protects them from the corporation engaging in unauthorized ventures.

Question 35: What is the absolute maximum number of directors a corporation can have, as stated in the AOI?

5
10
15
20

Explanation:

The AOI must specify the number of directors, and the Revised Corporation Code sets a maximum limit of fifteen (15).

Question 36: For a non-stock, non-profit corporation, what must its AOI contain regarding its capital?

The authorized capital stock.
The par value of its shares.
The amount of capital or property contributed and the names of the contributors.
A statement that it has no capital.

Explanation:

Non-stock corporations do not have capital stock, but they have initial capital or contributions. The AOI must disclose this amount and identify the contributors for transparency.

Question 37: Incorporators want to ensure that all internal disputes are settled through mediation before any court action. Where should they formalize this rule to make it binding on all stockholders?

In the corporate by-laws only.
In the minutes of the first board meeting.
In the "Other Matters" section of the Articles of Incorporation as an arbitration/mediation clause.
In a separate private contract among the incorporators.

Explanation:

Including an arbitration or mediation clause in the AOI makes it part of the corporate charter and binding on the corporation and all its stockholders, providing a clear, enforceable mechanism for dispute resolution.

Question 38: A corporation's name is "Bright Ideas Consulting". What is missing according to the law?

A description of its services.
The name of the founder.
A suffix like "Inc.", "Corporation", or "OPC".
Its registration number.

Explanation:

To provide public notice of its corporate status and limited liability, the law requires the name to include a corporate suffix.

Question 39: If a corporation specifies a term of "20 years" in its AOI, what happens at the end of the 20th year?

It automatically continues due to perpetual existence.
It is automatically dissolved unless the term is extended by amending the AOI.
It must re-register with the SEC.
It becomes a partnership by default.

Explanation:

When a fixed term is specified, it overrides the default of perpetual existence. The corporation's life ends upon the expiration of that term unless an extension is approved and filed with the SEC before expiry.

Question 40: What is the purpose of listing the initial directors in the AOI?

To give them perpetual status as directors.
To allow them to serve as the governing body until the first regular election.
To fulfill a mere formality with no legal effect.
To make them personally liable for pre-incorporation debts.

Explanation:

The directors named in the AOI form the initial, temporary governing board, authorized to manage the corporation's affairs until their successors are duly elected and qualified by the stockholders.

Question 41: Can a corporation state that its purpose is "to engage in any and all lawful activities"?

Yes, this provides maximum flexibility.
No, the primary purpose must be specific and all-encompassing clauses are not allowed.
Yes, but only for holding companies.
No, unless approved by the President of the Philippines.

Explanation:

The purpose clause must be specific to protect stockholders and creditors. An overly broad or all-encompassing purpose is not permitted as it fails to provide meaningful notice of the corporation's business.

Question 42: What does it mean for a share to be "without par value"?

The share is free.
The share has no voting rights.
The share has no nominal value stated in the AOI, and its issue price is set by the Board.
It can only be issued by non-stock corporations.

Explanation:

No-par value shares do not have a fixed face value. The Board of Directors determines their issue price, which cannot be less than five pesos (₱5.00) per share, as stated in the AOI.

Question 43: According to Section 14, what is the consequence of an AOI not substantially complying with the prescribed form?

The corporation will be fined.
The SEC will reject the AOI.
The incorporators must attend a hearing.
The corporation will be given a provisional license.

Explanation:

The purpose of the prescribed form is to ensure all legally required information is present and standardized. Failure to substantially comply means the AOI is incomplete and will be rejected by the SEC.

Question 44: What is the purpose of the "Treasurer's Affidavit" included in the Ninth clause of the AOI form?

To declare the corporation's annual income.
To swear that the treasurer is a resident of the Philippines.
To have the treasurer swear under oath that the required capital has been subscribed and paid-up.
To list all the assets of the corporation.

Explanation:

The Treasurer's Affidavit is a sworn statement confirming that the initial capital requirements (both subscribed and paid-up amounts) as stated in the AOI are true and correct.

Question 45: The "Undertaking to Change Name" (Tenth clause) is a sworn promise to do what?

To change the corporate name every 10 years.
To change the name if the SEC determines it is not distinguishable from another registered name.
To change the name if the corporation changes its primary purpose.
To change the name upon a majority vote of the stockholders.

Explanation:

This clause is a standard SEC requirement to ensure that if a name conflict is discovered, the corporation is already legally bound to select a new, distinguishable name.

Question 46: In which clause of the AOI form are the names and addresses of the original founders of the corporation listed?

First Clause (Corporate Name)
Fifth Clause (Incorporators' Details)
Sixth Clause (Directors'/Trustees' Details)
Eighth Clause (Subscription Information)

Explanation:

The Fifth clause is specifically for identifying the incorporators, requiring their names, nationalities, and residence addresses.

Question 47: What does the term "substantial compliance" mean in the context of the AOI form?

The AOI must be an exact, word-for-word copy of the form.
The AOI can omit up to two clauses.
The AOI must contain all the required information, even if the wording is slightly different.
The AOI must be notarized by a specific lawyer.

Explanation:

Substantial compliance means that all essential elements and information required by the form are present, ensuring the legal and regulatory objectives are met, even without being a verbatim copy.

Question 48: The default term of existence in the Fourth clause of the AOI form is:

50 years
100 years
Perpetual
Subject to annual renewal

Explanation:

Under the Revised Corporation Code, the standard term of existence is perpetual, unless the incorporators choose to specify a fixed term in this clause.

Question 49: What is the function of the "Nationality Restriction Clause" (Eleventh clause)?

To prevent any foreign ownership in the corporation.
To ensure the corporation complies with foreign ownership limits in nationalized industries.
To require all directors to be Filipino citizens.
To state the nationality of all employees.

Explanation:

This clause is vital for businesses in sectors where the Philippine Constitution or special laws limit foreign ownership, creating a mechanism to enforce those limits at the corporate level.

Question 50: Which clause of the AOI form establishes the corporation's legal residence for purposes of legal venue?

Second Clause (Purpose)
Third Clause (Principal Office)
Fifth Clause (Incorporators)
Sixth Clause (Directors)

Explanation:

The Third Clause specifies the city or municipality of the principal office, which is legally considered the corporation's residence for determining where lawsuits can be filed.

Question 51: The details of the initial investments made by the original owners, including how many shares they bought and how much they paid, are found in the:

Second Clause (Purpose)
Seventh Clause (Capital Structure)
Eighth Clause (Subscription Information)
Ninth Clause (Treasurer)

Explanation:

The Eighth clause provides a detailed table of the initial subscriptions, showing the commitment of each original subscriber to the corporation's capital.

Question 52: When might a corporation be allowed to use a different form for its Articles of Incorporation?

If the corporation is a non-profit.
If the incorporators unanimously agree to a different form.
If a special law governing the corporation's industry prescribes a different form.
If the corporation has foreign owners.

Explanation:

The prescribed form in Section 14 is the general rule. However, if a special law (e.g., for banks or educational institutions) requires a specific, different AOI format, that special law takes precedence.

Question 53: The Sixth Clause of the AOI form identifies the first directors. For how long do these initial directors serve?

For a term of 5 years.
Until the corporation is dissolved.
Until their successors are elected and qualified in the first regular election.
For one year, after which they must resign.

Explanation:

The directors named in the AOI are a provisional governing body. Their term lasts only until the first official meeting of stockholders where a new board is elected.

Question 54: The Seventh Clause details the authorized capital stock, number of shares, and par value. What is the primary purpose of this information?

To calculate annual taxes.
To set the initial stock market price.
To define the corporation's financial limits and the value of its ownership units.
To list the corporation's physical assets.

Explanation:

This clause establishes the ceiling for share issuance (authorized capital) and defines the basic structure of ownership (number of shares and their nominal value).

Question 55: According to the "Notice and Correct" principle in Section 16, what is the SEC's primary action when it finds a correctible defect in an AOI?

Immediately disapprove the application.
Fine the incorporators.
Provide the incorporators with a reasonable opportunity to fix the defect.
Approve the application with a "pending correction" status.

Explanation:

The law requires the SEC to first notify the applicants of any deficiencies and give them a chance to make corrections before a final disapproval is issued.

Question 56: An AOI is filed with the principal office listed only as "Mindanao". On what primary ground will the SEC likely flag this application?

Unlawful Purpose
Not in the Prescribed Form
False Certification of Capital
Non-Compliance with Filipino Ownership

Explanation:

The prescribed form requires a specific city or municipality for the principal office to determine legal venue. Listing a large geographical region like "Mindanao" fails to meet this formal requirement.

Question 57: A corporation's purpose is "to provide investment advice by promising guaranteed high returns through a secret algorithm." This may be rejected as:

Patently unconstitutional and illegal.
Contrary to government rules and regulations on investment schemes.
Not in the prescribed form.
A violation of ownership requirements.

Explanation:

Promising guaranteed high returns often characterizes fraudulent investment schemes (like Ponzi schemes), which are contrary to SEC regulations. This makes the purpose unlawful.

Question 58: A Treasurer signs an affidavit stating ₱1M was paid up. An investigation reveals the money was borrowed, deposited for one day, and withdrawn immediately after. This constitutes:

A correctable error under the "Notice and Correct" principle.
A valid form of creative financing.
A false certification regarding paid-up capital.
An issue with the corporate purpose.

Explanation:

This is a classic example of creating a simulated paid-up capital. The certification is false because the capital was not genuinely and permanently paid into the corporate treasury, which is a clear ground for disapproval.

Question 59: An application for a construction company shows 50% foreign ownership. Why would the SEC approve this, while rejecting a 50% foreign-owned advertising agency?

Because construction is not a real business.
Because the law allows up to 100% foreign ownership in construction, but not in advertising.
Because the Treasurer's Affidavit for the construction firm was correct.
Because the construction firm's purpose was lawful.

Explanation:

This tests the "Non-Compliance with Filipino Ownership" ground. Construction is not a nationalized industry, so full foreign ownership is generally allowed. Advertising, however, is constitutionally limited to a lower percentage of foreign ownership.

Question 60: To legally form a new insurance company, the incorporators must submit their AOI to the SEC along with:

A list of their first 100 clients.
A business forecast certified by an independent auditor.
A favorable recommendation from the Insurance Commission.
Proof of deposit from at least three different banks.

Explanation:

Insurance is a highly regulated industry. The SEC will not process the incorporation documents without the endorsement of the primary regulatory body, the Insurance Commission.

Question 61: Which of the following defects is LEAST likely to be correctible under the "Notice and Correct" principle?

An AOI that omits the corporate by-laws.
A proposed corporate name that is confusingly similar to another.
A primary purpose that is patently illegal, such as smuggling.
A Treasurer's Affidavit that was not properly notarized.

Explanation:

While most formal defects can be corrected, a purpose that is fundamentally illegal is a substantive, non-negotiable flaw that cannot be "corrected" without completely changing the nature of the proposed business.

Question 62: An AOI is submitted where the number of directors is listed as "between 5 and 7". This would be disapproved because the AOI is:

Not in the prescribed form.
Containing an unlawful purpose.
Falsely certifying its capital.
Violating ownership rules.

Explanation:

The prescribed form and the Corporation Code require a specific, fixed number of directors to be stated in the AOI, not a range. This is a formal defect.

Question 63: A group files an AOI for a pawnshop but does not include an endorsement from the Bangko Sentral ng Pilipinas (BSP). What will happen?

The SEC will approve it provisionally, pending BSP approval.
The SEC will disapprove the application or refuse to process it.
The SEC will approve it, as BSP approval is only for banks.
The SEC will give them 60 days to operate before requiring the endorsement.

Explanation:

Pawnshops are financial intermediaries that require a favorable recommendation from the BSP. Without this key document, the SEC is barred from approving the AOI.

Question 64: The ground of "False Certification of Capital" specifically refers to a misstatement in the:

Corporate By-Laws.
Treasurer's Affidavit.
Primary Purpose Clause.
List of Incorporators.

Explanation:

The Treasurer's Affidavit is the sworn document where the treasurer certifies the amount of capital subscribed and paid up. A false statement in this specific document is the basis for this ground of disapproval.

Question 65: A proposed corporation, "XYZ Universal Bank Inc.", submits an AOI to the SEC without any other attached documents. The SEC will most likely:

Approve the AOI because it is in the correct form.
Disapprove it for having an unlawful purpose.
Refuse to accept the filing until a favorable recommendation from the BSP is attached.
Approve it and then forward it to the BSP for review.

Explanation:

For regulated industries like banking, the favorable recommendation from the appropriate agency (BSP) is a prerequisite for the SEC to even process the application.

Question 66: The primary objective of Section 16, which gives the SEC power to disapprove an AOI, is to:

Generate revenue for the government through filing fees.
Protect the public from fraudulent, illegal, or non-compliant corporations.
Limit the number of new corporations being formed.
Ensure that all corporate names are creative and unique.

Explanation:

The grounds for disapproval are designed to act as a safeguard, ensuring that newly formed corporations adhere to legal, financial, and constitutional standards, thereby protecting public interest and maintaining corporate integrity.

Question 67: Which of the following proposed names is distinguishable from "Global Exports, Inc."?

Global Exports Corporation
Global Exports OPC
Global-Exports, Inc.
Philippine Global Exports, Inc.

Explanation:

Adding a distinctive word like "Philippine" makes the name distinguishable. Changing the corporate suffix, adding punctuation, or changing minor words does not.

Question 68: A new company wants to register as "Manila Investments, Inc.". Why will the SEC most likely reject this name on its own?

The name is not creative enough.
It uses the word "Manila," which is a protected name.
It uses the restricted word "Investments" without the required license for an investment company.
It should be "Manila Investment," not "Investments."

Explanation:

Words like "Investment," "Capital," and "Asset Management" are restricted. They can only be used by entities that have the appropriate license from the SEC or other governing bodies.

Question 69: According to the rules, which of the following is NOT a valid ground for the SEC to reject a corporate name?

The name is not distinguishable from a name already reserved with the SEC.
The name is the same as a registered trademark owned by another company.
The name is considered offensive or contrary to public morals.
The name is too long and contains more than five words.

Explanation:

There is no rule against long corporate names. The key grounds for rejection are distinguishability, being protected by law (like trademarks), or being contrary to law or morals.

Question 70: Which of the following pairs of names would the SEC consider NOT distinguishable?

"Island Adventures Inc." and "Island Adventures Travel Inc."
"J. Santos & Sons Corp." and "J Santos and Sons Corp."
"Prime Builders OPC" and "Mega Builders OPC"
"Cebu Traders Inc." and "Mactan Traders Inc."

Explanation:

Adding or removing punctuation marks (like the period after "J") and changing conjunctions ("&" to "and") does not make a name distinguishable.

Question 71: An entrepreneur wants to name their new corporation after themselves, "Juan dela Cruz Inc.". What is required for this to be approved?

Nothing, as anyone can use their own name.
Juan dela Cruz must be the CEO of the corporation.
Juan dela Cruz must be a stockholder and must provide written consent.
The name must be published in a newspaper first.

Explanation:

Using a person's full name or surname as a corporate name is allowed only if that person is a stockholder and has given their express written consent.

Question 72: A company named "Legacy Corp." was officially dissolved on January 1, 2020. Another group wants to use the name "Legacy Inc.". When is the earliest they can use this name without consent?

Immediately, because the suffix is different.
After one year, on January 1, 2021.
After three years, on January 1, 2023.
After five years, on January 1, 2025.

Explanation:

The name of a dissolved or revoked corporation is protected and cannot be used by another entity for a period of five years from the date of dissolution, unless consent is obtained from the former owners.

Question 73: What is the purpose of the "Affidavit of Undertaking" submitted during registration?

To swear that the company will be profitable.
To promise to change the name immediately if the SEC finds it non-distinguishable or illegal.
To declare the total assets of the corporation.
To confirm the identities of the incorporators.

Explanation:

This affidavit is a binding commitment from the incorporators to comply with an SEC order to change their name, streamlining the process if a name issue is discovered post-registration.

Question 74: A group of engineers wants to form a professional organization. Which of the following names would be permissible?

Philippine Engineering State Commission, Inc.
United Engineers Bank, Corp.
Philippine Association of Civil Engineers, Inc.
Engineering and Financing Solutions, OPC

Explanation:

Names of professionals can be used for professional associations. The other options use restricted words like "State Commission," "Bank," and "Financing" without proper authority.

Question 75: What does reserving a name with the SEC guarantee?

The name is permanently yours.
The name is approved for use upon full registration.
The name is temporarily held for your use, but it does not guarantee final approval.
The name can be used as a trademark.

Explanation:

Name reservation is only a preliminary step. The name still undergoes a final, more thorough examination during the actual registration process and can still be rejected.

Question 76: Which government agency's authorization is needed to use the word "Pawnshop" in a corporate name?

Securities and Exchange Commission (SEC)
Department of Trade and Industry (DTI)
Intellectual Property Office (IPO)
Bangko Sentral ng Pilipinas (BSP)

Explanation:

Pawnshops, like other financial institutions such as banks and lending companies, are regulated by the BSP. Their authorization is required before the SEC will allow the use of such restricted words.

Question 77: "Star Coffee Inc." has a registered trademark for its name and logo. A new group wants to form a corporation named "Star Coffee Corporation". Why will the SEC reject this?

The proposed name is contrary to law because it infringes on a name protected by the Intellectual Property Code.
The name is too common.
The name does not have three distinctive words.
The name should be "Star Coffee OPC" instead.

Explanation:

A name that is already a registered trademark is protected by law. Using it as a corporate name without the trademark owner's consent is prohibited.

Question 78: If a corporation is found to be using a name that is confusingly similar to another registered company, what can the SEC order it to do?

Pay a fine to the other company.
Merge with the other company.
Cease and desist from using the name and choose a new one.
Immediately dissolve the corporation.

Explanation:

The SEC has the power to issue a cease and desist order to stop the corporation from using the problematic name, and it can require the corporation to amend its Articles of Incorporation to adopt a new, distinguishable name.

Question 79: Why is "UN Global Services, Inc." a prohibited name for a private corporation?

It is not in English.
It implies a connection to the United Nations, an international body, which is not allowed without permission.
It is not distinguishable from "Global Services, Inc."
It does not specify the type of service.

Explanation:

Using names or acronyms of international organizations like "UN" (United Nations) is prohibited as it can mislead the public into thinking the private entity is affiliated with that organization.

Question 80: "ABC Corp." merges with "XYZ Inc.", and "XYZ Inc." is the surviving entity. Can a new group immediately register the name "ABC Corp."?

Yes, because ABC Corp. no longer exists.
Yes, but only after 5 years.
No, unless the surviving corporation, XYZ Inc., gives its consent.
No, the name is permanently retired.

Explanation:

In a merger, the name of the absorbed corporation is protected. It cannot be used by a new entity unless the surviving corporation explicitly permits it.

Question 81: Which of the following does NOT make a corporate name distinguishable?

Adding a distinctive word like "Premium" or "Enterprise".
Adding the word "The" at the beginning of the name.
Using a completely different set of words.
Adding a geographic location like "Visayas".

Explanation:

Adding, removing, or changing minor articles like "a," "an," and "the" is specifically listed as an element that does not create a distinguishable name.

Question 82: A corporation named "Legacy Ventures, Inc." had its term expire. The original owners want to re-register using the same name. What must they do?

They cannot use the name again.
They must wait 5 years before re-registering.
They can re-register by submitting a Board Resolution and an Affidavit attesting they are the original owners and no disputes exist.
They need to get consent from the SEC Director.

Explanation:

The original owners of an expired corporation are given the right to re-use their old name, provided they submit the required documents to prove their identity and that the old corporation has no outstanding unresolved issues.

Question 83: Which name is restricted and can only be used by a specific type of entity?

"Solutions"
"Innovations"
"Holdings"
"Bonded"

Explanation:

The word "Bonded" is restricted and can generally only be used by entities like warehouses that have secured a bond to guarantee their obligations, as required by law.

Question 84: "Bright Ideas OPC" and "Bright Ideas Inc." are considered:

Distinguishable because one is an OPC and one is a regular corporation.
Not distinguishable because changing the corporate suffix does not create a distinct name.
Legal only if they are in different cities.
Distinguishable because OPC is a special type of corporation.

Explanation:

The rules explicitly state that changing, adding, or removing the corporate suffix (e.g., "Inc.", "Corporation", "OPC") does not make a name distinguishable from another.

Question 85: What is the "birth certificate" of a corporation?

The Articles of Incorporation.
The Corporate By-Laws.
The Certificate of Incorporation issued by the SEC.
The official receipt for the name reservation fee.

Explanation:

The Certificate of Incorporation is the official document that marks the legal birth of the corporation, granting it juridical personality.

Question 86: A corporation gains its separate legal identity, known as juridical personality, on the date that:

The incorporators sign the Articles of Incorporation.
The SEC receives the application documents.
The corporate name is successfully reserved.
The SEC issues the Certificate of Incorporation.

Explanation:

Section 18 is clear that corporate existence and juridical personality commence upon the issuance of the Certificate of Incorporation by the SEC.

Question 87: What does it mean for a corporation to be a "de jure" corporation?

It exists in fact but has failed to meet some legal requirements.
It is a foreign corporation operating in the Philippines.
It is a corporation that exists in full compliance with the law.
It is a corporation that is about to be dissolved.

Explanation:

A de jure corporation is one that has been formed in strict conformity with all legal requirements, with its existence confirmed by the issuance of the Certificate of Incorporation.

Question 88: Before their corporation receives its Certificate of Incorporation, a group of five founders signs a one-year office lease. Who is liable for the rent payments?

The corporation, once it is formed.
The SEC, for delaying the certificate.
The five founders are personally and individually liable.
No one is liable, as the contract is void.

Explanation:

Until the corporation has juridical personality, it cannot enter into contracts. Therefore, the individuals who signed the lease are acting on their own behalf and are personally liable.

Question 89: Which of the following is NOT a power granted to a corporation upon acquiring juridical personality?

To sue and be sued in its own name.
To have its directors vote in national elections on its behalf.
To own and dispose of property under its own name.
To enter into contracts with other persons or entities.

Explanation:

Juridical personality grants a corporation civil rights, but not political rights like the right to vote in a national election. Only natural persons have the right of suffrage.

Question 90: The process where the SEC checks if a proposed corporate name is available and unique is called:

Name Registration
Name Verification
Document Submission
Certificate Issuance

Explanation:

Name verification is the initial step where the SEC checks the distinguishability and legality of the proposed corporate name against its database and legal rules.

Question 91: The principle of "limited liability" is a direct consequence of which corporate attribute?

Perpetual existence
Having a board of directors
Separate juridical personality
Having by-laws

Explanation:

Because the corporation is a separate legal person, its debts and obligations are its own, not those of its stockholders. This separation shields the personal assets of the owners.

Question 92: What is the conclusive evidence of a corporation's existence?

The notarized Articles of Incorporation.
A company bank account statement.
The Certificate of Incorporation.
A business permit from the city mayor's office.

Explanation:

The Certificate of Incorporation issued by the SEC is considered conclusive proof that all conditions for incorporation have been met and that the entity legally exists as a corporation.

Question 93: The term "Body Corporate" emphasizes that a corporation is:

A group of people working together.
A single, unified legal entity.
An entity that must have a physical office.
An organization with a large number of employees.

Explanation:

The term "Body Corporate" highlights that upon incorporation, the group of individuals legally transforms into a single, unified entity with its own rights and obligations, distinct from its members.

Question 94: After submitting all required documents, the SEC reviews them for compliance. What is the final step in the incorporation process if all documents are in order?

The incorporators must publish their AOI in a newspaper.
The SEC conducts a final interview with the directors.
The SEC issues the Certificate of Incorporation.
The corporation must register with the Bureau of Internal Revenue (BIR).

Explanation:

The issuance of the Certificate of Incorporation under the SEC's seal is the final, official act that brings the corporation into legal existence.

Question 95: What is the defining characteristic of a de facto corporation?

It is a corporation that has been officially dissolved by the SEC.
It exists "in fact" due to a good faith attempt to incorporate, but has a legal defect in its formation.
It is a foreign corporation that has not been licensed to do business in the Philippines.
It is another term for a shell corporation used for illegal activities.

Explanation:

A de facto corporation is one that is treated as a corporation because of a colorable, good faith attempt to comply with incorporation laws, despite a technical flaw preventing it from being a de jure corporation.

Question 96: Which of the following is NOT one of the four essential requirements for a de facto corporation to exist?

A valid law under which it could have been formed.
A good faith attempt to incorporate.
Proof of profitability within the first year.
Issuance of a Certificate of Incorporation by the SEC.

Explanation:

The four requirements are: a valid law, a good faith attempt, assumption of corporate powers, and issuance of a Certificate of Incorporation. Financial performance is not a factor in determining de facto status.

Question 97: A group files their AOI but forgets to get it notarized. The SEC, overlooking this, issues a Certificate of Incorporation. The entity operates as a business. What is its status?

A de jure corporation.
A de facto corporation.
A corporation by estoppel.
A general partnership.

Explanation:

The entity meets all four requirements: there's a valid law (RCC), a good faith attempt (they filed, just defectively), assumption of powers (operated as a business), and a Certificate of Incorporation was issued. The notary defect is the flaw that prevents it from being de jure.

Question 98: The legal existence of a de facto corporation can only be attacked through what method?

A collateral attack by a creditor in a collection suit.
A direct attack by a competitor in a case for damages.
A quo warranto proceeding initiated by the Solicitor General.
A resolution passed by the local city council.

Explanation:

The state is the only entity that can question the existence of a de facto corporation, and it must be done through a direct attack called a quo warranto proceeding.

Question 99: "Innovate Corp.," a de facto corporation, sues "Supplier Inc." for breach of contract. Supplier Inc.'s defense is that Innovate Corp. has no right to sue because it was not properly formed. Will this defense succeed?

Yes, because only de jure corporations can sue.
Yes, if Supplier Inc. can prove the defect in Innovate Corp.'s formation.
No, because this is a prohibited collateral attack on the corporation's existence.
No, but the court will suspend the case until Innovate Corp. fixes its formation documents.

Explanation:

A private party like Supplier Inc. cannot question the existence of a de facto corporation in a separate lawsuit. This is the essence of the rule against collateral attacks.

Question 100: What is the most critical element that distinguishes a de facto corporation from a corporation by estoppel?

The good faith of the incorporators.
The amount of capital invested.
The issuance of a Certificate of Incorporation by the SEC.
The number of years it has been in operation.

Explanation:

The issuance of a Certificate of Incorporation is an absolute requirement for de facto status. An entity that fails to obtain this certificate can never be a de facto corporation, though it might be treated as a corporation by estoppel.

Question 101: A "colorable attempt" to incorporate means:

The incorporators used colored paper for their AOI.
The attempt was fraudulent from the beginning.
There was a genuine, apparent effort to comply with the law, despite a defect.
The incorporators hired a lawyer to file the documents.

Explanation:

"Colorable" in this context means appearing to be genuine or valid. It signifies a bona fide effort to follow the incorporation process, which failed due to an unintentional mistake.

Question 102: Why does the law prohibit collateral attacks on a de facto corporation's existence?

To protect the SEC from lawsuits.
To encourage more people to form corporations.
To promote stability and protect the public who deal with the corporation in good faith.
To give the Solicitor General exclusive power to sue corporations.

Explanation:

The doctrine prevents parties from using a technicality to escape their obligations. It ensures that business transactions remain valid, protecting both the corporation and third parties who relied on its apparent legal status.

Question 103: A group of five starts a business, calling themselves "Future Tech." They draft an AOI but never file it with the SEC. They enter into contracts as "Future Tech." What is their legal status?

A de jure corporation.
A de facto corporation.
A general partnership, where the partners are personally liable.
A sole proprietorship under the leader's name.

Explanation:

Since no Certificate of Incorporation was issued by the SEC, they cannot be a de facto corporation. They are merely a group of individuals acting as partners and are personally liable for the business's obligations.

Question 104: A quo warranto proceeding is best described as:

A lawsuit filed by a corporation to collect a debt.
A criminal case against incorporators for fraud.
A direct legal action by the State to challenge an entity's right to exist as a corporation.
A private lawsuit between two competing corporations.

Explanation:

Quo warranto, meaning "by what authority," is the specific legal remedy used by the State, through the Solicitor General, to directly question and potentially revoke a corporation's franchise or right to exist.

Question 105: If a court declares, in a proper quo warranto proceeding, that a de facto corporation was not validly formed, what happens?

All its past contracts become void.
The corporation is dissolved, and the state proceeds with winding up its affairs.
The incorporators are automatically imprisoned.
The corporation is given 90 days to correct the defect and continue operations.

Explanation:

A successful quo warranto proceeding results in the ouster of the corporation from its corporate rights and its formal dissolution. However, this does not retroactively invalidate contracts made while it operated in good faith.

Question 106: A corporation's AOI failed to state its principal office. The SEC issued the certificate anyway. The corporation operated for 5 years. A customer now sues the corporation and argues it has no legal personality. What is the likely outcome?

The court will agree with the customer and void all contracts.
The court will recognize the entity as a de facto corporation and disallow the customer's collateral attack.
The court will dissolve the corporation on the spot.
The court will require the corporation to move its office to the customer's city.

Explanation:

The failure to state the principal office is a defect, but since a certificate was issued and the entity acted as a corporation, it qualifies as de facto. The customer's argument is a prohibited collateral attack.

Question 107: What is the primary purpose of the "corporation by estoppel" doctrine?

To legally create a new type of corporation.
To punish individuals who fail to register with the SEC.
To protect the public by preventing an un-registered entity from denying its corporate existence to escape liability.
To allow unregistered businesses to eventually become de jure corporations.

Explanation:

The doctrine is an equitable principle designed to ensure fairness and protect third parties who transact with a group that holds itself out as a corporation.

Question 108: What is the key difference between a de facto corporation and a corporation by estoppel?

A de facto corporation acted in bad faith, while an estoppel corporation acted in good faith.
A de facto corporation was issued a Certificate of Incorporation, while an estoppel corporation was not.
A de facto corporation has limited liability, while an estoppel corporation does not.
There is no difference; the terms are interchangeable.

Explanation:

The issuance of a Certificate of Incorporation by the SEC is the critical element that separates a de facto corporation (which has one, despite a flaw) from a corporation by estoppel (which has none).

Question 109: Three friends call themselves "Manila Techies, Inc." but never file documents with the SEC. They buy ₱500,000 worth of equipment on credit from a supplier. If they default, what is their liability?

They have no liability because "Manila Techies, Inc." does not legally exist.
They are liable only up to the amount of their initial investment.
They are liable as general partners, meaning their personal assets can be used to pay the debt.
The supplier is at fault for not checking their registration status.

Explanation:

According to Section 20, all persons who assume to act as a corporation without legal authority are held liable as general partners, which means their liability is personal, unlimited, and solidary.

Question 110: "Island Tours," an unregistered group, provides a tour service to a hotel. The hotel is satisfied with the service but then refuses to pay, arguing that "Island Tours" is not a legal entity. Can "Island Tours" successfully sue for payment?

No, because an unregistered entity has no legal personality to sue.
Yes, because the hotel, having benefited from the contract, is estopped from denying the entity's existence.
No, the contract is automatically void.
Yes, but only if they register with the SEC first.

Explanation:

A third party who knowingly deals with an ostensible corporation cannot use the entity's lack of registration as a defense to escape their own obligations after receiving a benefit from the transaction.

Question 111: An entity that is considered a "corporation by estoppel" is also known as:

A de jure corporation
An ostensible corporation
A de facto corporation
A close corporation

Explanation:

An ostensible corporation is another term for a corporation by estoppel, highlighting that it appears to be a corporation but lacks the legal substance of one.

Question 112: The members of "Quick Builders," an unregistered association, disagree on who should be the president. Can one member sue another member, invoking the doctrine of corporation by estoppel to enforce their internal election rules?

Yes, because they held themselves out as a corporation.
Yes, if they can prove a majority vote.
No, because the doctrine of estoppel applies only to dealings with third parties, not internal disputes.
No, unless they have more than 15 members.

Explanation:

The doctrine is meant to protect the public (external relationships). It cannot be used by the organizers against each other to settle internal power struggles, as they were all aware of the lack of legal incorporation.

Question 113: In a corporation by estoppel, what is the nature of the liability of the individuals involved?

Limited liability, similar to a real corporation.
No liability, as the entity is fictional.
General partnership liability.
Criminal liability.

Explanation:

The law explicitly states that those who assume to act as a corporation without authority shall be liable as general partners, meaning their liability is personal and unlimited.

Question 114: A supplier sells goods on credit to "Global Traders," an unregistered entity. When the supplier sues for payment, the individuals behind Global Traders use the defense that their "corporation" has no legal personality. What is this defense an example of?

A valid legal argument.
The very defense that the doctrine of estoppel is designed to prevent.
A basis for a countersuit against the supplier.
A direct attack on corporate existence.

Explanation:

The individuals are estopped (prevented) from using their own failure to incorporate as a shield to escape their liability to a third party they dealt with.

Question 115: Which of the following is an absolute requirement for a corporation by estoppel to exist?

The issuance of a flawed Certificate of Incorporation.
A group of people misrepresenting themselves as a corporation.
A minimum of five members.
Approval from the local government.

Explanation:

The entire concept is triggered when a group of individuals holds themselves out to the public and acts as if they are a corporation, even though they are not.

Question 116: Unlike a de facto corporation, a corporation by estoppel:

Can only be challenged by the Solicitor General.
Has a valid Certificate of Incorporation.
Does NOT have a Certificate of Incorporation.
Is protected from all lawsuits.

Explanation:

The absence of a Certificate of Incorporation is the defining feature that distinguishes a corporation by estoppel from a de facto corporation.

Question 117: A customer signs a 1-year service contract with "Service Pros," an unregistered group. After one month, the customer wants to cancel and get a full refund, claiming the contract is void because Service Pros is not a real corporation. Is the customer's argument valid?

Yes, because the contract is with a non-existent entity.
No, the customer is estopped from denying the corporate existence of "Service Pros" to escape their contractual obligations.
Yes, but they can only get a partial refund.
No, but "Service Pros" must register immediately to enforce the contract.

Explanation:

A third party who knowingly deals with an ostensible corporation is prevented from using the lack of legal personality as a defense to get out of a contract from which they have benefited or are benefiting.

Question 118: The doctrine of corporation by estoppel is primarily based on the principle of:

Corporate law formality.
Equity and fairness.
Criminal procedure.
Constitutional law.

Explanation:

The doctrine is not about strict legal compliance but about achieving a fair and just outcome by preventing parties from taking advantage of their own or another's misrepresentation.

Question 119: If the individuals in a corporation by estoppel are held liable as general partners, it means:

Their liability is limited to their investment.
Creditors can only go after the business assets.
Each individual is personally and fully liable for the entire debt of the group.
They must officially form a partnership.

Explanation:

General partnership liability is unlimited, meaning a creditor can collect the full amount of a debt from the personal assets of any one of the partners if the business assets are insufficient.