Articles of Incorporation FAQ - United States

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Contents

What is a corporation and how do I incorporate?

What is a corporation?

A corporation is a distinct legal entity that can own property, borrow money, pay taxes, hire employees, sue or be sued. The shareholders are the owners of the corporation and participate in the corporate profits through the payment of dividends. The shareholders are not personally liable for the actions of the corporation.

What are the advantages and disadvantages of a corporation when compared to other business entities?

The biggest advantage of incorporation is limited liability for shareholders. Under law, a corporation is considered to be a legal person that is distinct from the shareholders who own it. This means that individual shareholders are not personally liable for the debts and obligations of the corporation. If a corporation fails then the shareholders will only lose the amount of the purchase price of their original shares. One disadvantage of a corporation is that income is taxed at two levels: first on income for the corporate entity, and then at the shareholder level where shareholders pay income tax on any dividends they have received.

How do I incorporate?

To incorporate you must first file the Articles of Incorporation with your corporate regulatory body, usually the Secretary of State. In some states this may be referred to as the Certificate of Incorporation. Additional forms may also be required such as the Resident Agent Acceptance. Subsequent to the initial filing an Initial Report or Statement of Information may be required. In addition, a name search will be required to ensure that your corporate name will not be confused with any company already in business.

What are Articles of Incorporation?

The Articles of Incorporation is a document that is filed with the Secretary of State by the individuals organizing the corporation. The state then issues a Certificate of Incorporation that legally entitles a corporation to operate as a business within the state. The Articles of Incorporation describe the purpose of the corporation as well as the share structure. The Articles will also list the names of the individuals who are acting as incorporators for the corporation and may also list the names of the individuals acting as initial directors for the corporation. The actual rules governing the management of the corporation would be contained in a separate document called the Bylaws. You do not need to file your bylaws with the Secretary of State because bylaws are for the internal use of the corporation only.

What is an annual report?

All corporations must file an annual report. This keeps the Secretary of State informed with changes in officers, directors and addresses.

What is an Incorporator?

The incorporator is the person or persons who organize the corporation and file the Articles of Incorporation. Once the filing is complete the incorporator's function is complete. After that the management of the corporation is performed by the directors subject to ratification by the shareholders.

So all I have to do to form a corporation is file the Articles of Incorporation?

No. Many states require further documentation and they will send the appropriate forms to you. Many states will require an initial annual report. These must be filled out and returned promptly with any required fees. Pay attention to any deadlines that are indicated. The corporation will also need to file a tax return and report any income.

Other issues to be resolved include obtaining a Federal Tax ID number and if necessary, a Sub Chapter-S Filing.

What is a Sub Chapter-S (S-corporation) filing?

Normally a corporation is double-taxed on income earned. This happens where the corporation is taxed on its income and then the shareholders are taxed on any dividends they receive from the corporation's net after tax income. If your corporation qualifies however you can make a federal filing as a Sub-Chapter “S” corporation and possibly obtain single level or pass through taxation similar to a partnership. You should consult a qualified tax accountant to decide how this option may affect your situation.

How do I get S-corporation status for my corporation?

S-corporation status is a federal application and is not part of the Articles of Incorporation filing that you send to your state government. If you meet certain requirements you may apply for federal S-corporation status. For more detailed instructions review the following links on the IRS website:


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Types of Corporations

What is a Private Corporation?

A Private Corporation is owned by a small number of people through a limited issue of shares in the corporation. The shareholders may also participate in the management of the corporation. There is no public issue of shares and as a result there is no public market to trade shares.

What is a Public Company?

A Public Company is owned by the general public and the shares are publicly traded through a listing on a stock exchange. Under the Securities Exchange Act of 1934 securities may not need to be registered with the SEC where the investor is sufficiently knowledgeable and would not need to rely on the disclosure provided through registration. As a result the Securities Exchange Act of 1934 provided a few exemptions to registration.

What is a Closed Corporation?

A Closed Corporation is owned by a small number of people. All or most of the shareholders may also participate in the management of the corporation. There are very few if any outside investors and as a result there is no public market for the exchange of shares. It may also be referred to as a Private Corporation or a Privately-Held Corporation.

What is a Closely Held Corporation?

A Closely Held Corporation is owned by a small number of people. All or most of the shareholders may also participate in the management of the corporation. There are enough outside investors to support a public trade of the corporate shares.

What is a Publicly Held Corporation?

A Publicly Held Corporation is owned and freely traded by many persons including the general public. A Publicly Held Corporation will also have to comply with additional securities laws and regulations.

What is an S-Corporation?

An S-Corporation is a corporation that has successfully applied to be taxed under subchapter S of the federal Internal Revenue Code. This means that the corporation will be taxed similar to a partnership where the corporation does not pay income tax. Instead, the income will pass through to the shareholders and the shareholders must report the corporate income on their personal tax returns.

Does this document work for Not-For-Profit corporations?

No. The LawDept Articles of Incorporation is intended to be used by for-profit corporations only.

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Registered/Resident Agent

What is a Registered or Resident Agent?

The state requires that each corporation be represented by a registered agent. This will ensure reliable communication between the corporation and the state. The agent must have a physical office within the state. The registered agent may also be referred to as an Agent for Service of Process.

What is the registered office?

The registered office is the physical street address within the state where the registered agent can be contacted during normal business hours for service of process.

How do I change my Resident/Registered Agent?

In most cases the Secretary of State will provide a standard form specific for this purpose. It is important to report any change in agent or agent address promptly.

Follow the directions carefully.


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Bylaws

What are the bylaws of the organization?

The bylaws of the corporation describe the internal rules governing the management of the Corporation. They do not form a part of the Articles of Incorporation and do not have to be included with the initial corporate filing. They are for internal use only.


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Meetings and Minutes

What is an organizational meeting?

Once the Articles of Incorporation are filed and a Certificate of Incorporation is received from the Secretary of State the corporation should hold the organizational meetings. If directors are not yet appointed then the incorporators should hold an organizational meeting for the purpose of appointing directors and completing the formation of the corporation including drafting and adopting bylaws subject to ratification by the shareholders. If directors were named in the Articles of Incorporation then the directors should hold an organizational meeting and complete the formation of the corporation again subject to ratification by the shareholders.

The shareholders can then hold an organizational meeting to ratify any action taken by the incorporators or directors including adopting the articles of incorporation, adopting the corporate bylaws, electing or adopting the appointment officers and electing or adopting the appointment of directors.

What are corporate resolutions?

A corporate resolution is a written document describing the action taken by the directors of a corporation. Resolutions may describe action taken during a board meeting or may have been generated by agreement of the directors without a meeting.

What is cumulative voting?

Cumulative voting may be used when shareholders vote to elect a board of directors. Where cumulative voting is allowed, the number of votes allowed for each Shareholder will be calculated by taking the number of voting shares they are entitled to cast and multiply that by the number of Directors being elected. The Shareholder may cast his total votes for a single Director or may distribute them among two or more Directors, as the Shareholder sees fit. Cumulative voting prevents a majority Shareholder from being able to elect all the Directors of a corporation by allowing a minority shareholder to use all their votes on one Director.


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Shares and Stock

What are shares?

A share of stock is an ownership unit for the corporation. Shares are sold in exchange for cash or other considerations in order to raise capital to start or expand the corporation. There must be at least one class of share issued. Different classes of shares may be assigned different privileges such as right to vote on management issues as well as the right to participate in the sale of assets if the corporation is dissolved.

What is a shareholder?

A shareholder is a person, business entity or institution that owns at least one share in a corporation. Shareholders are the actual owners of the corporation. As an owner, the shareholder has the potential to profit if the corporation is doing well but also has the potential to lose their investment if the corporation goes broke. A shareholder is not personally liable for the debts and obligations of the corporation. If a corporation goes broke (worst case) the shareholder may get little or nothing as an equity holder in the corporation. Other secured creditors such as banks and bond holders would be paid first in the event of the liquidation of the assets of the corporation.

What are issued shares?

Issued shares are the authorized shares that have actually been issued or sold to shareholders. Un-issued shares do not represent an equity holding in the corporation. A shareholder's equity will be determined based on the total number of issued shares and will not include the remaining authorized but un-issued shares. Note also that a corporation may own or purchase its own shares but that this is different from un-issued shares.


What are authorized shares?

Authorized shares are the total number of shares that the corporation may distribute or issue. There is no requirement that all authorized shares must be issued. Authorized but un-issued shares are not included in any calculation corporate or shareholder equity.

I know how many shares I want to issue but how many should I authorize in total?

It is typical to authorize more shares than you plan to immediately issue. This gives the corporation flexibility to issue more in the future either to raise capital or as part of an employee incentive plan. Consider what you might possibly issue shares for in the future and include those plans in the number of shares authorized. In many states however you will pay a higher registration fee based on the number of shares authorized so make sure the number of shares you authorize is reasonable and not ridiculously high. If you do not provide for enough authorized shares then you will need to amend your Articles of Incorporation and re-file with the Secretary of State.

What is par value?

Par value is the nominal or face value assigned to a stock. Par value is often no longer required and does not necessarily reflect the amount paid for stock nor its market value. Par value does not represent the redemption amount for redeemable shares. It is still used by some states however as a method to calculate the capitalization (Par Value multiplied by number of shares issued) of the corporation.

What is an accredited investor?

An accredited investor is a sophisticated investor who has less need for the protection provided by regulation or statute. If all shareholders can be classified as accredited investors then it may not be necessary to register the corporate securities with the SEC. To qualify as an accredited investor an individual must have a sustained income over $200,000, or a net worth over $1 million, or hold a senior position such as director or officer for the company that is issuing securities.

U.S. Securities and Exchange Commission page on Accredited Investors

What is a Restricted Security?

Restricted securities are purchased with investment intent and have transfer restrictions attached. Restricted securities should bear a restrictive legend detailing the transfer restrictions.


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Officers

What does a president do?

The president is an executive officer of the corporation usually responsible for the day-to-day operations of the corporation. The president will report to the board of directors.

What does a treasurer do?

The treasurer is an executive officer of the corporation responsible for supervising the accounting functions of the corporation and for keeping accurate and current financial records for the corporation.

What does a secretary do?

The secretary is an executive officer of the corporation responsible for maintaining records of the corporation such as minutes of meetings, shareholders lists, etc.


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Miscellaneous

What is an Employer Identification Number (EIN)?

The EIN (also known as the Federal ID number or FID) is a number assigned to businesses for tax reporting purposes.

What is a Federal ID number (FID)?

The FID (also known as the Employer Identification Number (EIN)) is a number assigned to businesses for tax reporting purposes.

What is meant by principal executive offices for the corporation?

Principal Executive Office for the corporation is where the chief executive officer for the corporation has an office.

What is meant by principal business offices for the corporation?

Principal Business Office for the corporation is the main location where the corporation performs its primary business purpose.


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