Directors Organizational Consent
Following the Organizational Meeting of the Incorporator(s), the initial board of directors holds an organizational meeting to further set up fundamental business matters. The organizational consent of the initial board of directors will:
Again, it is important to verify state laws regarding particular actions that must be taken by the initial directors. Absent any additional statutory requirements, the directors will vote on regular business matters such as those contained in the list above. Resolutions may be taken at a meeting or by written consent, provided that action by consent is authorized in the bylaws of the corporation and not otherwise prohibited by law. 50 State Consent Drafting Chart provides a quick reference to laws regarding action by consent.
|Organizational Consent of Directors|
The Internal Revenue Service issues federal identification numbers (FIN) (a/k/a 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. Since January 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 obtained:
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.
Organizational consent of directors authorizes the corporation to become an S Corporation. The 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 file tax returns.
A corporation authorizes stock in its charter. In order to provide statutory minimum paid-in capital (or to commence business if no statutory minimum paid-in capital is provided in applicable state laws), a corporation 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 Charter or in any other matters that would otherwise be reserved for stockholders.
Stock issuance is authorized in the organizational consent of directors (or at a special or annual meeting following incorporation) and is issued in exchange for some consideration, which may be cash, property, debt or service rendered. 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.
State laws provide that 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.
Stock certificates may be produced manually by using Microsoft Word for instance.
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Forms of stock certificate for each class and series of stock are authorized by a vote of directors and a specimen stock certificate is attached as an exhibit to the consent or minutes. If forms become obsolete or for some other reason a new form of certificate is being used, it needs to be authorized by a vote of directors.
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.
Section 8-204 of the Uniform Commercial Code 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."
State laws reflect the same standard. Therefore, in order to insure that stockholders will not violate an agreement and provide stock free from restrictions on transfer, legends must be conspicuously placed on each certificate.
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.
All issued stock is tracked manually on a stock ledger or electronically using various software programs 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.
A corporation is initially recognized as a legal entity only in its state of incorporation or formation. State laws provide that business entities "doing business in each state and are not incorporated in that state must "qualify" by filing a foreign corporation certificate or the equivalent thereof with the secretary of state.
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 via Virtual Paralegal Services.
A corporate minute book is the record book of corporations required law and contains:
Additional information on creating and maintaining a minute book may be found at LeapLaw's Minute Book Best Practice Summary.
Annual Reports; Franchise Tax
Applicable state law should be checked to determine whether an annual report or franchise tax filing is required. 50 State Periodic Reports Chart provides a quick reference to laws, as well as limited partnership name requirements, initial form requirements and the secretary of state link.
Federal Identification Number
Service Companies/Registered Agents
Trademarks and Service Marks
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