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".

Corporate Name, Availability and Reservations

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.

Corporate Purpose

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

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..

Miscellaneous Charter Provisions

Director Liability and Indemnification

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

Duration

Corporate 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.

Resident Agent

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.

Business Combinations

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

Incorporators

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.

Charter Amendments

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.

Certificates of Change

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

Certificates of Correction

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.

Restatements

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".

State Forms

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.

Professional Corporations

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".

LeapLaw's
Related Best Practice Summaries

Bylaws
Filing Mechanics
Selecting a Business Name
Incorporations

Delaware Incorporations
Massachusetts Incorporations
Nonprofit Corporations
Foreign Qualifications
Public Searches
Service Companies

 
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