Chapter 8 – Formation of Corporations

• What is a Promoter
  • Promoter:  One involved in forming a corporation and organizing its structure (also called incorporator)
• Preincorporation Contracts
  • Agreements entered into by promoters on behalf of a yet-to-be formed corporation
• Preincorporation Share Subscriptions
  • Offers to purchase shares in a corporation before its formation
• Formation of Corporations
  • Things to consider when forming a corporation include:
    • Preincorporation activities by promoters
    • Selection of jurisdiction in which to incorporate
    • The corporate name
    • Articles of incorporation
    • Post-incorporation activities:  bylaws, corporate supplies, organizational meetings
• Delaware Incorporation
  • Delaware is well known for having liberal and permissive corporations statutes.
  • For example, Delaware provides significant protection to corporations against hostile takeovers.
  • This is no accident but rather the result of a carefully planned strategy to attract business and capital to the state of Delaware.
  • In fact, Delaware takes great pride in referring to itself as being the “Incorporating Capital of the World.”
• Factors in Selecting a Jurisdiction
  • Incorporating in one state and doing business in another will subject the corporation to filing and reporting requirements and fees in both states.
  • Some states favor their own domestic corporations by awarding public contracts to their own domestic corporations rather than corporations formed outside the state.
• Factors in selecting a jurisdiction
  
  • States that are attractive to corporations often have substantial case law to serve as a guideline in the event of later problems or disputes. Such a well-developed body of law lends predictability to businesses.
  • Under the internal affairs doctrine, the laws of the jurisdiction of incorporation apply to a corporation’s internal affairs and governance.
  • The costs of incorporation should be considered as well as annual reporting requirements and taxes.
• The Corporate Name
  • Promoters must select a name for the new legal “person” or entity they are creating
  • Determine if name is available in the state of incorporation
  • Reserve the name for the prospective corporation while articles of incorporation are being prepared
  • Register the name, to reserve it in a foreign jurisdiction
  • Apply for any assumed names
• Elements of Articles of Incorporation
  • Name
  • Registered address
  • Agent for service of process
  • Purposes
  • Description of stock
  • Incorporators
• Description of Stock
  • Authorized shares: the number of shares set forth in a corporation’s articles that the corporation has authority to issue
  • Par value:  the minimum amount for which a corporation’s stock can be sold
• Types of stock
  • Common stock:  stock of a corporation having no special privileges
  • Preferred stock:  stock of a corporation issued with desirable privileges
• Elements required to be Included in Articles of Incorporation
  • The corporate name (which includes a signal showing corporate status )
  • Registered address
  • Agent for service of process
  • Purposes; in most states, can be in the form of a broad purpose clause
  • Description of stock
  • Names and addresses of incorporators
• Information Needed to Prepare Articles of Incorporation
  • Determine the identity of incorporators
  • Determine the principal address of corporation within the state of incorporation
  • Identify registered agent
  • Identify initial shareholders
  • Identify initial directors
  • Identify stock of company
    • Common or preferred stock
    • Number of authorized shares
    • Par value or no par value
• Preemptive right
  • Right of shareholders to buy pro rata share of newly issued stock before it is offered to nonshareholders
• bylaws
  • Internal rules governing corporate procedures and operation
• Corporate supplies
  • Corporate seal:  instrument used to emboss documents to verify authenticity
  • Minute book:  binder or book used to maintain minutes of corporate meetings and other records
  • Stock certificate book:  book containing stock certificates to be issued to stockholders
• Agenda for First Organizational Meeting
  • Election of directors
  • Appointment of officers
  • Adoption of bylaws
  • Acceptance of preincorporation stock subscriptions
  • Acceptance of preincorporation contracts
  • Approval of corporate seal and form of stock certificate
  • Banking and accounting information
  • Issuance of stock
• Incorporation Checklist
  • Select jurisdiction in which to incorporate. Consider whether business will be local in nature or whether extraterritorial expansion is planned.
  • Identify corporate name (and possible alternatives). Research required “signals” in state of incorporation.
  • Determine name availability by checking with secretary of state.
  • If business will be conducted nationally or expansion is planned, consider a full-scope nationwide name search.
  • If name is available, reserve name, and docket period of name reservation.
• Incorporation Checklist
  
  • Gather the following information so articles of incorporation can be prepared:
    • Determine identity of incorporators
    • Determine principal address of corporation within the state of incorporation
    • Identify registered agent (or make arrangement with attorneys’ service company to serve as registered agent) Identify initial shareholders
    • Identify initial directors
    • Identify stock of company:
      • Common or preferred stock (if preferred, identify preferences  and special rights)
      • Number of authorized shares
      • Par value or no par value
• Incorporation Checklist
  • Gather incorporation forms and schedule of filing fees from secretary of state.
  • Prepare articles of incorporation, have them signed and filed or submitted electronically.
  • Order corporate kit and supplies.
  • Prepare bylaws and provide them to proposed directors for review and comment.
  • Confirm incorporation to client, and schedule first organizational meeting. Prepare notice of meeting or waivers of notice.
• Prepare agenda for first organizational meeting. Items should include:
  • Election of directors
  • Appointment of officers
  • Approval of bylaws
  • Ratification or adoption of preincorporation contracts or actions, including legal and incorporation fees
  • Acceptance of preincorporation stock subscriptions
  • Discussion of applying for status as S corporation
• Items should include (continued):
  
  • Confirmation of Section 1244 stock
  • Review of articles, seal, and form of stock certificate
  • Authorization of issuance of shares
  • Authorization of application for employer identification number
  • Review of miscellaneous matters, if not in bylaws (selection of fiscal year, selection of bankers and accountants, and discussion of qualifying in foreign jurisdictions)
• Prepare minutes of first organizational meeting, and send to client for signature by secretary of corporation and placement in minute book.
• Docket date for next meeting.
• Docket date for submission of annual report to secretary of state.
• Key Features in Forming Corporations
  • Corporations are planned and organized by promoters. Agreements made by promoters bind the promoters until they are released from liability thereon.
  • Interested investors often offer or subscribe to purchase stock when the corporation is later formed. The offer is irrevocable for some period of time.
• Key Features in Forming Corporations
  • Consideration should be given as to the jurisdiction in which to incorporate. Some states have laws that are more flexible and permissive than others.
  • The corporate name must usually include a signal showing the entity is a corporation.  The name should be reserved prior to the time of incorporation.
• Key Features in Forming Corporations
  • The document that creates a corporation is called the articles of incorporation.  It must comply with state statutes.
  • Bylaws must be prepared for the corporation.  Bylaws provide internal rules for the operation of a corporation.
  • Corporations must hold a first meeting, called the organizational meeting, to commence the corporation’s business.