US Corporate Law/Formation
Forming a corporation is generally considered a simple matter, however if it is done incorrectly this can have severe consequences for all involved. Many corporations are formed with the help of a lawyer (or several) - usually through a service company or directly through a business entity service company. The actual process of forming a corporation is usually a matter of filling in a few blanks on a form, but the process can sometimes be complex depending on what the persons or entities incorporating wish to accomplish. For example, some jurisdictions have statutes that grant liability protection to the officers and directors but these statutes need to be specifically invoked before they apply to the business entity and this is not always available on a generic form provided by the business entity filing agency in the jurisdiction where one is incorporating.
Chapter 2 of the MBCA and Subchapter I of the DGCL outline how a corporation is formed. There are three main steps in the process:
- An incorporator files articles of incorporation with the secretary of state's office. (Note that although the filing office in most United States jurisdictions for corporate filings is the Secretary of State, many United States jurisdictions use other agencies. Alaska, for instance, uses the Department of Commerce, Community and Economic Development and Michigan accepts new corporate filings through the Department of Labor & Economic Growth.)
- The corporation holds an organizational meeting to select a board of directors.
- The board of directors meets to adopt bylaws, appoint officers, and other tasks.
Considerations when incorporating[edit | edit source]
All of these things should be considered when choosing what entity type to use, what jurisdiction to incorporate in and how the articles should be drafted - or if a stock form should even be used. This is why this is a process and decision generally considered best left to an attorney or service company specializing in such matters - just as you would likely have a dentist to pull a tooth even though this is also considered a simple matter. Note that some jurisdictions require by statute that an official state form be used when filing a business entity, additional provisions can generally be attached.
- The laws of the individual state where the business entity is to be filed
- Whether or not the business entity may be ever conducting business in other jurisdictions
- The business entity type
- The business entity's projected revenue
- The business entity's number of shareholders
- The likelihood that the business entity will be sued (in the case of a high-risk business).
- Other variables
Articles of incorporation[edit | edit source]
The articles of incorporation can be very minimal. Many states provide a one or two-page form for the articles of incorporation: the incorporator can simply fill out the form, provide the filing fee, and their corporation will be chartered. MBCA § 2.02 only requires four elements:
- corporate name
- number of authorized shares
- name and address of the corporation’s registered agent
- name and address of each incorporator
DGCL § 102 also requires:
- a statement of the "nature of the business" of the corporation (Note that most jurisdictions allow the articles to simply state "Any Legal Purpose" or a variation of this statement).
- the par value of each share, or a statement that all shares are to be without par value (see the chapter on Securities)
- name and address of each director, if the incorporator's duties are to end upon filing
Corporate name[edit | edit source]
Under MBCA § 4.01, a corporate name must include the word “corporation,” “incorporated,” “company,” or “limited,” or an abbreviation or foreign equivalent thereof. DGCL § 102 allows the corporation to choose a number of other signifying terms, including "association," "society," and "syndicate." The point of this rule is to place other parties on notice that they are dealing with a limited liability entity.
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The registered agent[edit | edit source]
The registered agent (AKA "RA", "Resident Agent" or "Statutory Agent") is a person or company designated to receive service of process within the state of incorporation. (Service of process is the act of serving a defendant with court papers in the event of a lawsuit.) The registered agent must provide a physical address to which a process server may personally go to deliver the complaint. Some states require that the registered agent accept his or her appointment by signature, other states do not. The state Articles of Incorporation form will indicate whether the registered agent's signature is required.
Most commonly, a registered agent service company is the designated registered agent. In some cases, the entity's attorney is the designated registered agent. If there is no attorney, the entrepreneur him or herself may be the registered agent, however there are numerous very good reasons for the entrepreneur to NOT serve as the registered agent.
The incorporator[edit | edit source]
Traditionally, corporations had to have three individual incorporators, who had to meet a number of legal requirements, such as being residents of the state of incorporation. Nowadays, one is the norm. The incorporator is usually inconsequential to the company they incorporate. An incorporator might be a lawyer, a secretary, a bicycle messenger, or any other competent adult; other corporations are also allowed to be incorporators in many jurisdictions. Besides having to sign the articles, an incorporator may also (depending on local law):
- Receive the corporate charter in the mail from the secretary of state
- Call the first meeting of the board of directors
- Dissolve the corporation before the board meets
- Amend the articles of incorporation before the board meets
Purposes and the ultra vires doctrine[edit | edit source]
Traditionally, corporations had to list their purposes in the articles of incorporation. Some states, such as Delaware, retain this requirement, but those states which have such a requirement are very lax about it: the corporation can be formed for "any and all lawful purposes," or list a few primary purposes with the "any and all" clause tacked on the end. Before this was legally possible, corporate lawyers would load up articles of incorporation with every conceivable purpose for a corporation up to mining cheese on the moon.
Ultra vires, Latin for "beyond the powers," is a legal doctrine stating that corporations cannot act beyond the purposes for which they were incorporated. Many English common law courts applied a dramatic form of ultra vires: any such act of a corporation was legally void. Other courts applied an estoppel theory to force corporations to follow their contracts even if the deal was ultra vires: this is the approach taken by MBCA § 3.04, which provides that "the validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act." Compare NYBCL § 203.
Although ultra vires is rare due to the lack of fixed corporate purposes, the issue still comes up in states that restrict the powers of corporations by statute. In some jurisdictions, for instance, corporations cannot enter partnerships or make contributions to a non-profit organization. The MBCA comments suggest that ultra vires can be applied:
- When the corporation or its shareholders sue former directors, to recover damages
- When shareholders sue directors to get an injunction against an ultra vires act
- When the state's attorney general wants to dissolve the corporation
The birth of the corporation[edit | edit source]
While rules vary from place to place, the usual law is that the existence of the corporation begins at the time the articles are filed, even though they have not been reviewed or accepted by the government at that point. This means that a corporation can begin operations while its articles are pending approval. If something goes wrong during this period and the articles are later rejected by the state, the corporation's limited liability generally protects the shareholders and directors, so long as they were acting in good faith.
On the other hand, if they knew the corporation was invalid to begin with, they can be personally liable for anything the corporation does during its period of presumptive validity.
Organizational meeting[edit | edit source]
First board meeting[edit | edit source]
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