Forming
a Delaware Corporationby Heather Jefferson,
Esq., Judy Kaiser and Denise Annunciata |
Standard Delaware Certificate of Incorporation provisions under 8 Del. C. § 102 include:
The statute sets forth other provisions that may be included. See 8 Del. C. § 102(b). Following the filing of the Certificate of Incorporation, information contained in the Certificate may be amended and/or restated. More information regarding charters, amendments, changes and corrections may be found at LeapLaw's Charter Best Practice Summary. Filing the Certificate of Incorporation Need assistance? Virtual Paralegal Services provides services that include appointing a registered agent and filing services in all 50 states. For more information contact us at [email protected]. |
Incorporator's Statement
The incorporator takes the following actions
in lieu of an organizational meeting:
Bylaws
Bylaws
prescribe provisions that govern a corporation's internal affairs in a manner
that is not otherwise inconsistent with Delaware law or the Certificate of Incorporation.
Initial bylaws may be adopted by the incorporator. Typical provisions contained
in the bylaws are:
For more information about Bylaws see LeapLaw's Bylaws Best Practice Summary.
Delaware Bylaws |
Directors
Organizational Consent
Following the organizational meeting of the
incorporator(s), the initial board of directors, (which shall consist of 1
or more directors) holds an organizational meeting to further set up fundamental
business matters. The organizational consent of the initial board of directors
will:
Organizational Consent of Directors |
Federal Identification Number
The Internal Revenue Service issues
federal identification numbers (FIN) also known as an Employer Identification
Number (EIN) to new corporations. To apply for an FIN, an IRS Form
SS-4 (pdf) must be filed with the IRS. As of January 2, 2002, Form 2848, Power
of Attorney is no longer necessary for third-party designees. Completing the the
new "Third Party Designee" section on the Form SS-4 will suffice.
Tax identification numbers may be provided:
LeapLaw's
Federal
Identification Number Checklist provides a list of information for completing
the Form SS-4. LeapLaw's Federal
Identification Number Best Practice Summary provides more information regarding
federal identification numbers.
S Corporation Election
The federal government and nearly
all states impose double taxation on corporations by taxing the corporation's
income and then stockholders' profits/dividends. Double taxation may be avoided
if a corporation qualifies for and elects to become an S Corporation under the
Internal Revenue Code ("IRC"), Section
1361.
To qualify, the corporation must:
(a) have no more than 100 stockholders (members of the same family - up to 6 generations, their spouses and former spouses may be treated as one stockholder. Each person who may receive a distribution from an ESBT "Electing Small Business Trust" is counted as one stockholder) (first effective for taxable years after December 31, 2004);
(b) have as its only shareholders individuals, estates, exempt organizations described in section 401(a) or 501(c)(3), or certain trusts described in section 1361(c)(2)(A);
(c) have only one class of stock meaning that all outstanding stock has identical rights to distributions and liquidation proceeds;
(d) be a U.S. corporation;
(e) have no non-resident alien stockholders;
(f) not be a bank, insurance company, domestic international sales corporation ("DISC") or a corporation that has elected to be treated as a corporation under IRC Section 936;
(g) obtain the consent of all stockholders on Form 2553.
The Organizational Consent of Directors authorizes the corporation to become an S Corporation. IRS Form 2553 (Election of Small Business Corporation) (pdf) must be filed with the IRS via certified mail, return receipt requested within 2 1/2 months of incorporation or the first issuance of stock (with some other exceptions) at the IRS Service Center where the taxpayer will be filing tax returns.
TENTH: Stock
Stock Issuance
A corporation authorizes stock
in its Certificate of Incorporation and issues stock as soon as practicable following
incorporation. All authorized stock may, but need not be, issued. The total authorized
stock, however, must always be equal to or greater than the amount of issued stock.
Best Practice Tip: Until stock is issued to a stockholder, the incorporator holds the role of stockholders and will vote to amend the Certificate or in any other matters that would otherwise be reserved for stockholders.
Stock issuance is authorized in the organizational consent of directors and is issued in exchange for some consideration, which may be cash, any tangible or intangible property or any benefit to the corporation, or any combination thereof. Stock issuance may also be conditional upon the stockholder entering a stockholders agreement, stock subscription agreement, a stock transfer restriction agreement or some other restrictive agreement. Once stock is issued pursuant to the conditions listed above, it is said to be "issued and outstanding" stock. The stockholder then holds authorized, issued and outstanding" stock.
Sample Stock Subscription Agreement
Stock Certificates
Stock
must be represented by a certificate unless the the bylaws or the directors consent
to provide for uncertificated stock. If stock is uncertificated, ownership is
tracked and recorded in the stock ledger but shares are not evidenced by a stock
certificate. Stockholder rights are not impacted whether or not shares are represented
by a certificate.
Best Practice Tip: Stock certificates have an inventory control number at the bottom left hand corner, such as GOES 352. This number identifies the certificate so that ordering the certificates using this number will render the exact type and color certificate needed. Stock certificates may be ordered via Lawyer's Stationery.
Stock certificates may be produced manually by using Microsoft Word. Getting a stock certificate in the correct format in Microsoft Word can be very time consuming. LeapLaw has certain stock certificates formats prepared. The easiest stock certificate to prepare in our opinion is GOES 740.
Need assistance? Contact Virtual Paralegal Services at [email protected]. Learn more about Virtual Paralegal Services
Legends
Legends are stock restrictions placed
on the back side of stock certificates to notify potential transferees of any
restrictions on transfer. These might be restrictions based on S corporation regulation,
a certain stockholder agreement, restrictions related to class and many other
matters.
Restrictions are placed on stock certificates in compliance with Section 8-204 of the Uniform Commercial Code which states, in part, that "unless there is a conspicuous notation of the restriction application to the stock transfer or unless the transferee has actual knowledge of the restriction, the purchase of stock will be free from restrictions." Therefore, in order to be sure that stockholders will not violate an agreement or some other restriction and provide stock free from restrictions on transfer, legends must be conspicuously placed on each certificate.
At the very least, common practice dictates that the following legend appear on stock issued for new companies:
"The shares of stock represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold, assigned, pledged or otherwise transferred in the absence of an effective registration statement under the Securities Act of 1933 covering the transfer or an opinion of counsel satisfactory to the issuer that registration under the Securities Act of 1933 is not required."
Stock
Receipt
A company may maintain the original stock certificate or a stockholder
may choose to possess the stock certificate. If the stockholder opts for possession,
a copy should be made of both sides of the certificate and kept with the stock
records of the company together with a receipt evidencing the stockholder has
received the stock certificate. The receipt may be the stub of the certificate
or a separate stock
receipt.
Stock Ledger
All issued stock is tracked
manually on a stock
ledger or electronically using software programs such as Corporate
Compliance Manager that manages all company records including stock, options
and warrants tracking.
Additional information on stock issuance may be
found at LeapLaw's Stock
Issuance Best Practice Summary.
ELEVENTH: Qualifications
A corporation is initially recognized as a legal entity only in its state
of incorporation or formation. State
laws of each state provide that business entities wishing to do business
in that state and are not incorporated in that state to"qualify" by
filing a foreign corporation certificate or the equivalent thereof with the secretary
of state.
State laws regarding foreign qualifications vary and should be checked. Generally, however, a company does not need to qualify in a state in order to carry on any of the following activities in that state:
(a) hold a meeting of directors
(b) maintain a bank account
(c) sell and/or distribute products without a binding contract
(d) maintain offices for transfer, exchange or registration of securities
Generally, a company should qualify when it plans to have:
(a) an office
(b) employees
(c) owns real estate or
(d) desires to be a general partner of a domestic partnership in a foreign state.
Companies doing business without proper qualification or registration are subject to statutory penalties. State laws vary as to what constitutes doing business, responsibilities of qualified companies and penalties for not qualifying. A vote authorizing the qualification in each state should be included on the director's organizational consent.
For additional information and steps in the qualification process, see LeapLaw's Qualification Best Practice Summary. Qualification forms may be found at LeapLaw's Corporate Connection or on LeapLaw's state pages.
TWELFTH: Minute Books
A corporate minute
book is the record book of corporations required by law and will contain:
More information on creating and maintaining minute books may be found at LeapLaw's Minute Book Best Practice Summary.
Need assistance? Virtual Paralegal Services provides services that include preparing PDF or hard copy minute books. For more information contact us at [email protected].
About
Heather Jefferson, Esq. and Judy Kaiser: Judy is a veteran corporate paralegal
and Heather is a partner at The Delaware Counsel Group, LLP ("DCG"),
a law firm located in Wilmington, Delaware. DCG routinely serves as Delaware counsel
providing Delaware opinions, advice and guidance on Delaware entities. Members
of the firm are appointees to the committees that recommend legislative changes
to the Delaware statutes. For more information about Judy, Heather or DCG, please
visit the firms web site at www.delawarecounselgroup.com
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