Creating a Corporation Chapter 8

Creation of the Corporation When considering the creation of a corporation, first you need to decide where to locate it. If it is a small corporation, the best choice is where a majority of the stockholders or business property will be located. If the corporation is large and will be doing business in many states, the individuals who form the corporation might investigate some of the state laws that are designed to be corporate- friendly.

Next you must find out who can carry out the incorporation. Review state statutes to see who has the authority to create a corporation. For example, individuals who lack the ability to enter into a contract are forbidden to create corporations.

Contractual ability is a prerequisite to organizing a corporation, and all of the following would be barred from creating one: Infants (under the age of 18) Intoxicated persons Mentally incompetent persons

There are other issues that must be addressed in creating a corporation. For example, the corporate founders must comply with state law on all issues related to corporate structure.

The rules that govern a corporation come from the following sources: State's constitution State statutes authorizing the creation of corporations Articles of incorporation Certificate of incorporation (Lurie v. Arizona Fertilizer & Chemical Co., 421 P.2d 330, 101 Ariz. 482 (1966)).

De Facto Corporations What is the status of the business that behaves as though it is a corporation, when it has failed to meet all of the requirements of the state's corporation laws? In such a situation, the corporation would be referred to as a "de facto" corporation.

A de facto corporation has not met all of the requirements set out by state statute but operates as though it has. Courts may grant it temporary status as a corporation. The rules about articles of incorporation are simple and straightforward: If they contain a fatal defect, a corporation is not authorized under the law.

Corporate Purpose A corporation must be formed for a legal purpose. Most state statutes provide that a corporation be established for any purpose "not contrary to law” (Guptill Holding Corp. v. State, 3 Dept., 307 N.Y.S.2d 970, 33 A.D.2d 362 (1970)). Among the accepted reasons for creating a corporation is an individual's desire to avoid personal liability, favorable tax treatment, or some other type of financial advantage (C.J.S. Corporations § 28).

Corporations can be established for any of the following reasons: To acquire the assets of another corporation To run the farm To conduct a lobbying business To conduct a profession, such as the practice of law or medicine (C.J.S. Corporations § 28).

The Role of the State Secretary of State’s Office When a business wishes to become a corporation, it must file appropriate documentation with the state’s secretary of state’s office.

This office has many different responsibilities which include: Supervising state-based elections Maintaining the state archives Registering charitable organizations Maintaining records related to corporations and other business structures

Name Selection One of the first issues that a proposed corporation will consider is the selection of a corporate name. The secretary of state’s office maintains a complete list of all corporations formed in the state and the names used by each. They are authorized to accept any name selected by the parties, as long as the name is not already in use.

Reserving a Corporate Name When a company is considering filing as a corporation, most states allow the company to reserve a name that it intends to use. Corporations must apply for and receive permission from the secretary of state’s office before they can use a particular name.

The Corporate Charter The corporate charter refers to all of the laws that bind a corporation. A corporation's charter is composed of its articles of incorporation and the state laws that govern the creation and activities of the corporation.

The corporate charter also consists of any agreements that were created while the corporation was being formed. This class of agreements is referred to as preincorporation agreements.

Preincorporation Agreements A preincorporation agreement is a general term that refers to any type of contract related to the business structure or agreements that are created before the business is incorporated under state law.

Preincorporation agreements are important because they fall into a different classification of contracts. Because the corporation has not yet been formed, these agreements are not yet binding on the corporation. The corporation usually ratifies or adopts the contract after it has been officially created.

Promoters In corporation law, a promoter is an individual who: Comes up with the idea of creating a corporation Investigates the laws Brings together the individuals Seeks funding for the new business enterprise.

Working as a promoter can be a risky undertaking because since there is no corporation formed yet, a promoter is not protected by limited liability. However, a promoter can be paid quite lucratively for bringing together the ingredients to form a corporation.

Promoters fall into an unusual classification. Promoters are fiduciaries, which means that they have ethical and legal obligations to the new company, even though it has not come into official form yet. Therefore, promoters must deal honestly and fairly with the corporation, keeping the best interests of the corporation foremost in their minds.

Articles of Incorporation One of the most important steps in creating a corporation is the drafting of the articles of incorporation. This document creates the rights, duties, and obligations of all parties involved in the new corporate venture, from shareholders and officers to the board of directors.

It is required that the individuals involved show evidence that they intended to take advantage of the corporate structure as authorized by statute (Nedeau v. United Petroleum, 232 N.W. 202, 251 Mich. 673 (1930)). They must indicate their clear intention to create a corporation that will be recognized by state law and receive the benefit of limited liability protection. The articles must comply with state law.

There are three or four mandatory provisions that must be contained in all articles of incorporation filed with the state secretary of State's office. They include: The name of the corporation The number of shares issued by the new corporation The registered office of incorporation and the name and address of the registered agent The names and addresses of the incorporators

Errors or Omissions in the Articles of Incorporation Errors or omissions in the articles of incorporation can have an effect on the state filing requirements. The states, however, often do not take drastic measures as long as the corporation can show substantial compliance with state law.

Filing Issues To incorporate a business, you must file one or more copies of the corporation's articles of incorporation with the state secretary of state's office, along with the official form and a filing fee. If they are error free, they are stamped “filed,” which satisfies the conditions precedent for creating a corporation.

Once filed, the articles of incorporation become the central document in the day-to-day functioning of the business. They are the first document that a court will review if litigation arises about the corporation They are also important in establishing other rights and responsibilities.

Incorporators The incorporators are the people who form the corporation. The people who create the corporation must have the contractual capacity to do so. Contractual capacity refers to an individual’s ability to know and understand the obligations involved in creating a contract.

A person does not have contractual capacity if: They have an impediment, such as being under the influence of alcohol or drugs. They are mentally handicapped. They are under the legal age of 18. They are classed as “alien enemies,” residing in another country that is in open conflict with the United States.

Sidebar: Although minors may be barred from working as incorporators, there is generally no prohibition that prevents them from owning stock in a corporation.

Number and Type of Authorized Shares Shares are ownership interests in a company. There are different types of shares, and these different classifications give rise to different levels of participation in the company.

The articles of incorporation are where the company decides on the type and variety of shares that it will issue. The articles must also specify any limitations on the shares, including voting rights.

Registered Office Most states require that the company identify its principal place of business, or at least where the company records will be located. A corporation is not a citizen of a particular state but may have a base of operations in a particular place (People v. Barker, 39 N.Y.S. 88, 16 Misc. 252 (1896)).

Registered Agent The corporation must also have a registered agent. This is the person on whom lawsuits and other official notices will be filed. Service on this person equates to service on the corporation and triggers the time periods in civil suits.

The Final Steps in Organizing the Corporation Once the articles of incorporation have been filed, there are some additional steps that must be followed to complete proper organization of the newly formed corporation. They include: Initial organizational meeting Creation and adoption of corporate bylaws Election of corporate officers (con’t)

Approval of shareholders agreements Election of directors not named in the articles of incorporation Banking resolution and fiscal year provisions Issuance of shares Annual reports The Final Steps in Organizing the Corporation (con’t)

Organizational Meeting The organizational meeting, or initial meeting, is the first official business of the newly formed corporation. The purpose of this meeting is to bring together the various members of the corporation and adopt bylaws, vote on officers, and take care of the other clerical work that must be done to officially launch the corporation.

Corporate Bylaws Bylaws contain guidelines for how the business will be run and should make provisions for the following: Date and place of the annual shareholder meeting The number of directors The authority, duties, and titles of corporate officers

The bylaws must be consistent with the articles of incorporation. Many courts have defined bylaws as the essential contract between shareholders and the corporation.

Emergency Bylaw Provisions Corporations are authorized to create emergency bylaws vesting power in a single individual to conduct business on behalf of the entire corporation if necessary.

Election of Corporate Officers Members of the corporation who have shares entitling them to vote can decide among themselves who they would like to elect to the board of directors. These directors will set the policies for the corporation and handle many other important decisions, including the payment of taxes, franchise fees, and changes in corporate procedures.

Approval of Shareholder Agreements An agreement between the members of a corporation setting out issues such as who can own shares and how these shares affect rights within the corporation.

Banking Resolutions Banking resolutions authorize the creation and maintenance of corporate bank accounts. These resolutions will limit who has access to the accounts, who is permitted to sign corporate checks, who is allowed to oversee the accounts, and how account reports will be made to the shareholders.

Issuance of Shares The organizational meeting is also the point where the company shares are officially distributed to the various members.

Annual Reports Corporations are required to file an annual report with the secretary of state's office listing the names and addresses of the officers and directors. Corporations are also obligated to follow tax laws on both the state and federal levels.

Corporate “Seals” In the past, corporations adopted official seals that officers and directors would then use to sign official documents. Corporate seals are no longer required in most states. Instead, the officer authorized to sign on behalf of the corporation (usually the president) can simply write the word “seal” beside his or her signature (Avery v. Kane Gas Light & Heating Co., 403 F. Supp. 14 (D.C. Pa.)).

Summary Creating a corporation involves critical attention to detail. Corporations are creatures of state statutes, and these laws must be complied with in order to create a corporation. Statutes dictate the steps involved in creating a corporation.

When a corporation fails to meet all of the statutory obligations, it may be classified as a de facto corporation. A corporation that fails to meet its statutory obligations may also have its charter revoked. Summary

The secretary of state's office maintains records on each corporation organized within the state. When a business wishes to incorporate, it files appropriate paperwork in the state secretary of state's office. Summary

The most important document that must be filed in the secretary of state’s office is the articles of incorporation. The articles of incorporation provide basic information about corporations, including the principal office address, the identity of the registered agent, and the number and quality of shares issued by the corporation. Summary

The final steps in creating a corporation consist of conducting the organizational meeting where corporate bylaws are adopted and directors and officers are elected. Following the organizational meeting, corporations are required to submit annual reports to their secretary of state's office. Summary