Corporate
Charters
Best Practice Summary
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A corporation's "charter"
is the document initiating the legal existence of the corporation and setting
forth certain basic parameters regarding its structure and operation. The charter
must be approved by the directors and stockholders and is filed with the secretary
of state of the state of incorporation of the corporation. The official title
of the charter varies from state to state. In Delaware, "Certificate of Incorporation"
is used; the terms "Articles of Organization", "Articles of Incorporation"
and others are used in other states. State
laws vary as to the information required or permitted to be contained in a
charter. At a minimum, the charter will usually state the following:
- Exact corporate name
- Purpose of the business
- A description
of each class or series of authorized stock and the number of authorized shares
of each
- Language describing the liability of directors of the corporation
- Name
and address of the resident agent of the corporation
- Name and address
of the incorporator of the corporation
Following the
initial filing of the charter, the information contained in a corporation's charter
generally may be amended or restated with the consent of the directors and stockholders
of the corporation. More detail is found below under "Amendments, Changes
and Corrections". The state
corporate law of the state of incorporation governs the name that may be chosen
by a corporation. A selected corporate name may not be identical or deceptively
similar to the names of other businesses currently on file in the state of incorporation
Checking name availability in the state of incorporation (and
all other states in which the corporation will be qualified to do business) prior
to filing incorporation documents can be a time-saving measure. For
more information on name reservations and name conflict checks and solutions,
as well as other restrictions on corporate names, see LeapLaw's Selecting
a Business Name Best Practice Summary. For trademark issues involved in selecting
a corporate name, see LeapLaw's
Trademark and Service Mark Best Practice Summary. Changing
a corporate name after incorporation requires an amendment to the charter and
to the corporation's qualifications to do business in other states, if any. A
corporation is authorized to perform only those acts that fall within the scope
of the purposes stated in its charter. Some states (e.g. Delaware) allow a general
purpose clause to permit any and all acts allowed by law, while other states require
a specific statement of purpose in addition to a general clause. Any
revision to the corporate purpose requires an amendment to the charter. In some
cases, the corporation's qualification to do business as a foreign corporation
in other states must be amended as well. LeapLaw's Foreign
Qualification Amendment Chart can help determine which states will require
amendments of their foreign qualification certificates in the event of a change
to the corporate purpose in the charter. It is important to note
that certain corporate activities such as banking, insurance, professional services,
telecommunications, utilities, education and transportation are regulated by government
agencies. When a corporation is to engage in such regulated activities, extra
steps are usually required in order to incorporate or amend its charter. For instance,
professional corporations require approval from the regulatory or licensing board
governing the professional services to be provided. Nonprofit corporations organizing
as hospitals or educational facilities may require the approval of the attorney
general or a court in addition to the state's Department of Health or Department
of Education. Searchable
Business Purposes NOTE:
In some states, the corporate purpose may need to specifically include the power
to become a partner in a limited partnership in order for the corporation to do
so. Authorized
stock is the total number of shares (regardless of class or series) that the corporation
may issue. The classes of authorized stock and the number of shares in each class
are determined by the directors and stockholders of the company depending upon
anticipated capital requirements. All corporations must authorize
at least one class of stock, usually called Common Stock, which may be divided
into different classes (generally named with letters: Class A, Class B etc.) with
differing voting or other rights. Various classes and series of preferred stock
(see Preferred Stock below) may also be authorized. The total amount of authorized
stock need not be issued to stockholders. Increasing or decreasing the amount
of authorized stock requires an amendment to the charter. Maximum
Stock for the Minimum Price
"Max for the minimum" refers to
the maximum number of shares of stock a company can have authorized in its charter
for the minimum filing fee or franchise tax. This amount varies from state to
state. In Delaware, the annual franchise tax is based on the total par value of
the authorized shares. The "max for the minimum" in Delaware is 3,000
shares of stock at $.01 par value because this is the greatest number of shares
that may be authorized for the minimum franchise tax. In Massachusetts, on the
other hand, the charter filing fee is determined by the number of authorized shares.
The minimum filing fee for a Massachusetts charter is $275.00 and the maximum
number of shares that may be authorized for the minimum fee is 275,000 shares.
Virtual Paralegal Services ([email protected]) can provide the "max for the minimum" for the proposed
state of incorporation.
Best
Practice Tip: Charter amendments increasing the number of authorized shares
may incur considerable filing fees and/or franchise fees and taxes. It is wise
to check the filing fee with Virtual Paralegal Services ([email protected]) or secretary of state early in
the process to warn clients of any excessive expenses.
Par
Value Par value is the arbitrary "stated value" of corporate
stock. The par value (or a statement that the stock has no par value) will be
set forth in the charter. The par value is used in several ways:
- Preparation of financial statements. If the stock has par value, the stated
capital of the company is the par value per share multiplied by the total number
of issued shares. If the stock has no par value, the stated capital is the amount
paid for the stock multiplied by the number of shares issued or some other amount
established by the board.
- In some states (including Delaware) to
determine the annual franchise tax and/or filing fees payable to the state. For
these purposes, a low par value may be preferred.
When par
value is stated, the stock may be sold by the corporation for more than, but never
less than, the par value unless the stock has become treasury stock. In modern
corporate practice, the concept of par value has diminished in significance.
Classes and Series of Stock The characteristics of different series
and classes of stock of a corporation are stated in the designations, rights and
preferences of each class. These may include liquidation rights, voting rights,
rights of first refusal, preemptive rights and others. Some designations,
rights and preferences may be provided by state
law while others are granted or denied in the charter. Following the filing
of the charter, additional designations or preferences may be authorized by resolutions
of the stockholders and directors of the corporation and put into effect by filing
an amendment to the charter. Preferred Stock Preferred
stock is designed to attract investors to invest in a corporation. The basic feature
common to all types of preferred stock is a "liquidation preference"
- the right to receive certain assets of the corporation upon its liquidation
in preference to the holders of common stock. Typical preferred stock has a number
of additional special rights in addition to the liquidation preference, such as
dividend preferences, special voting rights and redemption rights. See LeapLaw's
Preferred
Stock Best Practice Summary for more details. Blank Check
Preferred Stock "Blank check" preferred stock, available in Delaware and
certain other states, is authorized but unissued preferred stock that leaves the
definition, terms, preferences and voting rights of such stock to be later determined
by the directors. The directors may then set the terms of the preferred stock
at their discretion and without a stockholder vote by authorizing the filing of
a Certificate of Designation with the secretary of state. Once filed, a Certificate
of Designation becomes part of the charter and can be changed only through an
amendment to the charter. Authorizing blank check preferred stock
provides the board with flexibility to meet fluctuating financial conditions,
and can also be used for defensive purposes, such as a private placement with
a friendly investor or initiating a "poison pill" to block a takeover
attempt. Specific state
laws of the state of incorporation should be checked to verify the availability
of, and rules governing, blank check preferred stock. Once authorized, reference
to blank check provisions in the charter should be made in a legend on the back
of each outstanding stock certificate. NOTE:
The issuance of a second class of stock of any kind automatically terminates a
corporation's subchapter S status with the IRS. Preemptive
Rights Some state laws provide that all stockholders have preemptive rights
unless specifically provided otherwise in the charter. See LeapLaw's Miscellaneous
Charter Provisions for sample language granting or denying preemptive rights.
Restrictions on Transfer of Stock Restrictions on the
transfer of stock may be imposed in the charter, the bylaws or under a separate
stockholders' agreement. The most common restriction on stock transfer is a prohibition
on transfer to any person who is not already a stockholder without first offering
to sell the shares to the corporation or to other stockholders. This is called
a "right of first refusal" or a "right of first offer" depending
on how it is structured. Many other types of restrictions are possible, such as
a requirement to offer shares to the other existing stockholders upon the death
or bankruptcy of a stockholder, leaving the employment of the company and other
circumstances Permanent restrictions essential to the corporation
as a whole, such as "poison pill" provisions designed to prevent hostile
takeovers, should be inserted in the charter. The benefit to placing restrictions
in the bylaws or in a separate stockholders' agreement is that they are easier
to amend if desired, since no filing with the state is needed to make the change.
In addition to optional restrictions that may be adopted and placed
in a stockholders agreement, the bylaws or the charter, other restrictions on
the transfer of stock may be imposed by law, such as: - S
corporation status. Section
1361 of the Internal Revenue Code imposes certain restrictions on stock ownership
in order for the company to maintain S Corporation status.
- The
federal Securities
Act of 1933 generally prohibits sales of stock to the general public without
registration.
- Stock ownership in a professional corporation may
be restricted to licensed professionals under state law.
Such restrictions are generally not mentioned in the charter, bylaws or stockholder's
agreements if they are legal prohibitions. However, in the case of a subchapter
S corporation, the law does not prohibit the sale of stock but simply causes the
corporation to lose favorable tax treatment in the event of certain sales. Accordingly,
it is appropriate in the case of a subchapter S corporation to prohibit sales
of stock that would cause the corporation to lose its subchapter S status, whether
in the charter, the bylaws or in a separate stockholders' agreement.. The charter or bylaws of a corporation
usually includes language that eliminates or limits the personal liability of
directors of the corporation to the corporation for actions taken in their capacity
as directors. Pursuant to state
law, this provision generally may not, however, limit the liability of directors:
(a) for
breach of their duty of loyalty to the corporation; (b) for acts or omissions
not taken in good faith; (c) for improper stock redemption or dividend payments;
(d) to persons other than the corporation or its stockholders; or (e) for
actions taken as an officer (even if the officer also serves as director). Other
Lawful Provisions DurationCorporate
existence begins when the charter is filed with the secretary of state of the
state of incorporation. It will continue perpetually unless a period of duration
is specified on the charter or until it is sooner involuntarily or voluntarily
dissolved. A
corporation is required by law to appoint a resident agent residing in its state
of incorporation. A resident agent is a person or company appointed to accept
service of process or other legal documents such as state or tax notices in a
given state on behalf of a business entity. Nearly all state business statutes
require business entities to appoint a resident agent domiciled in the state,
although some states, such as New York, allow the secretary of state to be appointed
to serve as agent. Otherwise, any person over 18 years of age, whether or not
a company officer, or a company residing in the state, may serve as resident agent
for the corporation in that state. A corporation may be involuntarily dissolved
or have its qualification revoked by a state for failure to maintain a resident
agent in that state.
If a corporation is incorporated in the state in which it resides,
an officer of the corporation can be appointed as the resident agent, but appointing
a commercial resident agent is sometimes preferred despite the additional expense, because it lends accountability, continuity and
assurance that important time-sensitive documents will be expeditiously forwarded
to the appropriate person.
Contact Virtual Paralegal Services to learn how to access cost-efficient top-quality registered agent services.
Best
Practice Tip: In order to assist resident agents in assuring that information
is forwarded to the responsible employee of the corporation in a timely fashion,
it is important to complete the forwarding instructions requested by resident
agents upon incorporation or qualification. The forwarding instructions provide
the name and address of persons responsible for receiving service of process,
annual reports and tax notices and invoices and renewal notices from the commercial registered agent. It is much easier to supply this information when the corporation is
formed rather than as a separate action item at a later time.
Best
Practice Tip: Your firm or employer may prefer a particular commercial resident agent. A law firm dealing with many incorporations/qualifications
and company qualified to do business in several states may qualify for a group
discount by using the same resident agent in all states in which it and any of
its affiliates are qualified.Contact Virtual Paralegal Services to learn how to access cost-efficient top-quality registered agent services.
State
law may govern certain aspects of business combinations. Section
203 of the Delaware General Corporation Law, for example, limits business
combinations between corporations and "interested stockholders" unless
the corporation elects in its charter to not be subject to the limitation. If
a corporation is, or is likely to become, subject to Section 203 (or a similar
statute in another state), consideration should be given to inserting an "opt-out"
clause in the charter, if permitted An "incorporator" is the person who initially establishes
a corporation by filing the charter with the secretary of state. State
laws vary as to the exact role and powers of the incorporator and who may
serve as one. However, typically an incorporator will: (a) authorize the initial
charter, (b) elect the initial directors of the corporation and (c) adopt the
initial bylaws. Generally, incorporators must be one or more persons
over legal age (18 years), who may or may not be officers or directors of the
corporation. Legal professionals may serve as incorporators, although it is important
to note that incorporators are exposed to potential liability. When signing documents
as an incorporator, an individual may obtain a certain measure of protection by
printing under the incorporator's name "c/o [the firm's name and address]".
This implies that the incorporator is acting on behalf of an employer and not
individually. In the event that the corporation's charter needs
to be amended or the corporation needs to be dissolved prior to the election of
directors (or the specification of the directors in the charter), such action
is taken by the incorporator. Amendments to a corporation's charter are effected
by the filing of an amendment with the secretary of state of the state of incorporation
of the corporation. Any such amendment must be approved by the stockholders and
directors. Generally, changes to any of the following information will require
a charter amendment: - Corporate Name
- Purpose
- Amount
of Authorized Stock
- Stock Restrictions
- Classes and Series of Stock
- Director
Liability
- Any other substantive provisions
Some
states allow directors to authorize and designate a new series of stock within
a previously authorized class without the approval of stockholders if so provided
in the charter (see "Blank Check Preferred" above). If so provided,
and the directors act to designate a new class or series of stock, the filing
(called a Certificate of Designation) is considered an amendment to the charter
and cannot be changed without a vote of stockholders. In some
cases, a super-majority vote of stockholders is required to amend the charter,
either under applicable state law or the terms of the charter itself. Accordingly,
applicable state law and the amendment provisions of the charter must be reviewed
before attempting an amendment. In some states, information contained in the charter
that is not considered to be "permanent information" can be changed
without an amendment by filing a certificate of change. Generally, a certificate
of change will require a resolution of directors only and not a stockholders'
vote (except in the case of changes to the board of directors). Examples of this
information are: - list of officers and directors
- principal
address of the corporation
- fiscal year end
- resident agent
State laws provide for certificates of correction
to be filed in order to correct errors, inaccuracies and typographical errors
contained in any document on file with the secretary of state.
No
director or stockholder action or charter amendments are necessary to fix obviously
erroneous statements. Certificates of correction are available online at the secretary
of state's web site that can be found at LeapLaw's Corporate
Connection. If you need assistance, contact Virtual Paralegal Services ([email protected]). Note:
Typographical errors in corporate names may not be accepted as correctable errors
by all secretaries of state. Filing
a certificate or articles of "restatement" of a charter combines the
charter and all subsequently filed amendments into a single document known as
a "restated charter". It is common practice to restate a charter when
a corporation has many amendments on file. Restatements do not change the substance
of the document and are done simply to make the charter as amended easier to read
and understand. However, a restatement may also contain new amendments, in which
case the resulting document is known as an "amended and restated charter".
Some states
require the use of pre-printed forms for the filing of charters and related documents
while others (including Delaware) do not. LeapLaw's state pages provide specific state procedures specific to each state.
A professional corporation is a corporation
established to facilitate the group practice of a licensed profession such as
law or medicine. The two basic distinctions between a professional corporation
and an ordinary business corporation are as follows: (a) a professional corporation
must be owned by licensed professionals in the field of activity of the corporation
and (b) the individual owners of the corporation are not protected against liability
for their own professional malpractice by the "corporate shield".
State laws differ, but generally a professional corporation is required by
law to: - Be subject to state licensing laws of the professionals
involved and must have its charter approved by the licensing board prior to filing
with the secretary of state.
- Require all stockholders to be licensed
professionals or other professional corporations or partnerships in good standing
with the licensing boards.
- Prohibit any transfers of its stock
to non-licensed individuals. The majority of directors and officers of the corporation
must be licensed professionals in good standing with the licensing boards.
- Specifically mention restrictions on stock, stockholders, directors
or officers in the bylaws.
- Distinguish the corporate name by ending
it with "P.C." or "professional corporation".
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