Incorporation
Best Practice Summary

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A corporation is a legal entity created through and subject to the state laws of its state of incorporation. The separate legal existence of a corporation begins when the charter is filed with the state filing official of the state of incorporation. State laws vary regarding the documents required to organize a corporation and the management of its internal affairs and corporate powers.

Quick Reference:
LeapLaw 50 state pages provides a quick reference to laws, minimum directors, maximum stock for minimum filing fee and other state specific information, including a complete set of incorporation forms.

Checklist
Completing a checklist at the onset of the incorporation process may make completion of incorporation documents move faster. LeapLaw's Incorporation Checklist represents the majority of information typically required for incorporation.

Incorporation Steps

Statutes
Consult LeapLaw's Corporate Connection for incorporation statutes of the 50 states.

Name Reservation
It is strongly recommended to check name availability of a desired business name as soon as possible in all of the states where the company plans to be incorporated and qualified. Name availability may be determined by calling the secretary of state directly, checking online using LeapLaw's Corporate Connection or via Virtual Paralegal Services. When the name will be registered in several jurisdictions, using a service company is likely the most time-efficient solution.

If the name is available, reserving it may be wise if the filing will be made at some later date. It is also important to note that the reservation process in some states can take longer than the time it may take to file the incorporation or qualification documents.

Note: A secretary of state's acceptance of a business name does not mean the name is an available trademark or service mark. Other searches may be required if the company plans to determine any potential trademark or service mark issues. It is good practice to verify with the responsible attorney if the company will require a trademark search and/or domain name registration prior to reserving the name in any states.

A secretary of state may deem the proposed name to be unavailable due to a name conflict with a currently registered business name. Depending upon the state, certain steps may be taken to cure the name conflict. For more information regarding name conflicts, see LeapLaw's Name Reservation Best Practice Summary.

Preliminary Trademark Searches
Trademark searches may be performed to assure that a proposed corporate name is not deceptively similar to an existing mark. Preliminary searches for registered trademarks may be performed for free on the LeapLaw's Intellectual Property Connection.

Note: A trademark or service mark does not have to be registered to be protected. Simply using the mark in commerce gives rise to a claim.

The popular "full" trademark search provides a comprehensive search of a proposed trademark against current federal, state and common law trademarks and domain names. Full searches may be ordered from a trademark search company. The report provides extensive information regarding trademark availability. For more information on trademarks and service marks, see LeapLaw's Trademark Best Practice Summary.

Domain Names
Domain names are registered web site addresses or "URLs". When registering domain names it is best practice to reserve all possible applicable name indicators if the name will serve as the main corporate name. Domain names may be checked for availability and obtained at Network Solutions. Network Solutions WhoIs can assist in determining current owners of a domain name. Checking the availability of the domain name simultaneous with checking the corporate name availability and trade name status is good practice if the company name is to be a trade name for the business.

Charter
A corporation does not exist until the initial certificate or articles of incorporation or organization (state titles of documents vary) (the "charter") has been filed with the secretary of state. State laws vary as to the information that must be stated in the charter.

At a minimum, the charter will state:

• Exact corporate name
• Purpose of the business
• Number of authorized stock with any classes, series and/or designations
• Director liability
• Resident agent name and address
• Name and address of incorporator

Following the filing of the charter, information contained in the charter may be amended and/or restated by a resolution of directors and stockholders. More information regarding charters, amendments, changes and corrections may be found at LeapLaw's Corporate Charter Best Practice Summary.

Pre-printed forms can be found at LeapLaw's 50 state pages. If the state does not have pre-printed forms, the charter may be drafted using state statutes.

Incorporator Consent
State laws vary as to necessary actions by the incorporator. Some states require no further action by the incorporator other than completing and filing the charter. Other states may require the incorporator to take the following actions at an organizational meeting:

• Elect the initial directors (if not otherwise elected in the charter)
• Adopt the initial bylaws
• Elect certain initial officers
• Appoint resident agent

It is important to check the particular state laws to verify statutory requirements of the incorporator. Typically, the incorporator takes necessary actions (if any) by consent in lieu of an organizational meeting.

Sample Incorporator's Written Consent

Bylaws
Bylaws prescribe provisions that govern a corporation's internal affairs in a manner that is not otherwise inconsistent with state laws or the charter. Initial bylaws may be adopted by the incorporator and/or initial board of directors depending on state laws of the state of incorporation. Typical provisions contained in the bylaws are:

• Fixing the date of the annual meeting;
  
• Fixing the record date;
  
• Required quorum for voting purposes;
  
• Voting rights of stockholders and directors;
  
• Directors' authority;
  
• Titles and responsibilities of officers;
  
• Fiscal year end; and
  
• Power to amend.

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 holds an organizational meeting to further set up fundamental business matters. The organizational consent of the initial board of directors will:

• Ratify incorporator’s actions
• Elect the remaining officers (in addition to incorporator’s elections, if any)
• Adopt bylaws (if not otherwise adopted by incorporator)
• Authorize the opening of a bank account
• Authorize issuance of stock (including stock subscription agreements, if any)
• Adopt a stock certificate
• Authorize a lease
• Authorize the qualification of the company in any foreign states
• Authorize the election of an S Corporation (see below), if applicable
• Any other general business items.

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

Federal Identification Number
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:

• Online in just a few minutes.
  
  
• Via telephone to a third party by calling (866) 816-2065 Monday through Friday, 7:30 a.m. to 5:30 p.m. so long as the Third Party Designee section has been completed.
  
  
• Via fax to certain IRS Service Center. The number will be supplied within a few days via telephone.
  
  
• Via mailing Form SS-4 to the designated IRS Service Center.

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.

Stock Issuance
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.

Consent of Directors
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.

Stock Certificates
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.

Legends
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.

Browse legends

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 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.

Qualifications
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.

Minute Books
A corporate minute book is the record book of corporations required law and contains:

• Articles or certificate of incorporation and any amendments, changes or corrections thereto (the "charter").
  
  
• Bylaws and any amendments or restatements thereto.
  
  
• Directors', stockholders' and incorporators' consents or minutes to organizational, annual and special meetings.
  
  
• Stock certificates and stock ledgers (if not maintained in a separate binder and/or location such as a transfer agent).
  
  
• IRS filings such as Forms SS-4 or 2553.
  
  
• State qualification documents.
  
  
• Copies of annual report filings.

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.

LeapLaw's
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