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What is a Corporation? (back to top)
A corporation is a separate legal entity existing under authority granted by state law. It has its own identity separate and apart from its shareholders/owners. A corporation is capable of continuing indefinitely. Its existence is not affected by the death or incapacity of shareholders, directors, or officers of the corporation.

Every state has laws governing companies incorporated in that state, and some have statutes pertaining to all corporations doing business within their boundaries. State law generally governs the process of incorporating. In addition, all states have "blue sky laws" which specifically cover securities offered by companies incorporated or doing business in the state. A corporation can be created only by compliance with General Corporation Law of the state of incorporation. This usually requires filing of Articles of Incorporation with the appropriate state entity (usually the Secretary of State) and payment of the requisite state fees and taxes. A corporation is required to have a board of directors, corporate officers, annual shareholders meetings, and to maintain separate books and records. Failure to observe such formalities may result in the personal liability of shareholders for corporate debts. However, where the corporation has only one shareholder, many states allow that one shareholder to act as director and all officers (President, Secretary, and Treasurer). A corporation has a broad range of powers to act in any way permitted by law and by its own corporate charter. For example, a corporation can enter into contracts, buy and sell both real and personal property, sue and be sued, and can even be responsible for breaking the law (i.e. committing a crime).

How do I Incorporate? (back to top)

Check for name availability (internet, phone, walk-in or, sometimes, mail only).
Request State Form for Articles of Incorporation (where available).
Wait for Articles of Incorporation to be returned to you, (ranges from 24 hours to 12 weeks)
After Articles of Incorporation are returned, stamped to show the date of filing, purchase a corporate kit. Prices range from $20 to $150 depending on the quality of the package.
Execute the Incorporator's Action, draft Corporate Bylaws, complete Share Certificates.
Hold the Initial Organizational Meeting for the corporation and shares to stockholders.
Complete all information in the Corporate Bylaws.
Optional: Obtain a Corporate Seal from a local stationer.
Optional: File IRS Form SS-4 to obtain a corporate Federal Employer Identification Number.
Optional: File IRS Form 2553 to elect S-Corporation Status and pass-through tax-treatment.

What are Articles of Incorporation and ByLaws? (back to top)
A Corporation's "Articles of Incorporation" is the main filing document which begins the corporation's existence under state law. Once filed, the corporation comes into existence. The level of complexity for a corporation's Articles of Incorporation can range from very simple to extremely complex. Generally, most jurisdictions require Articles of incorporation to contain, at a minimum, information about the Corporate Name, the Registered Agent, and the Corporation's business address. Requirements vary by state. Any changes to the corporation's Articles of Incorporation or Bylaws must be approved by BOTH the Shareholders and Directors. Amendments to the Articles of Incorporation must then be filed with the Secretary of State in the state of incorporation for the amendments to become effective. Some states also require corporations to file a notarized affidavit, which verifies the number of outstanding shares at the time of the vote. Bylaws serve as the internal operating document for the corporation. Generally, Bylaws detail the responsibilities, rights, and duties of directors, shareholders and officers. Currently states generally do not require that Bylaws be filed

What is an LLC? (back to top)
Corporations are formed pursuant to state law and have shareholders, are managed by a board of directors, and the daily affairs are administered by officers. Similarly, a limited liability company (LLC) has members and may be managed by one or more managers. Most often, both entities must pay franchise taxes, but may have different federal tax liabilities. Generally, most people form corporations or limited liability companies in order to shield the shareholders or members and officers or managers from personal liability for the debts and obligations of the entity. There may also be various tax advantages to forming these entities which may not be available for sole proprietorships and general partnerships.
What are "C" and "S" Corporations? (back to top)
The IRS, not the state, classifies corporations according to how they want to be taxed. There are two types of corporations according to the IRS, either "C" corporations, named after Subchapter C of the tax code, or "S" corporations, named after Subchapter S of the tax code. "C" corporations have their own tax identification number and pay their own taxes. "S" corporations, sometimes called small business corporations, are taxed as if they were not a corporation. Taxed like a partnership, an "S" corporation "passes through" its income or losses to the shareholder's personal tax return, and is not liable for Federal income taxes itself. The shareholders of an "S" corporation will pay personal income taxes based on the income of the "S" corporation, whether or not the shareholder received any of the income. Conversely, the "S" corporation shareholders will be able to personally enjoy any losses the corporation may have. You need to discuss this with your CPA.

What is a Corporate Resolution? (back to top)
Corporate Resolutions record the major decisions taken by the corporation's Shareholders or Board of Directors during a meeting. While not always required, it is a good idea to record your actions in the form of Corporate Resolutions because Resolutions show third parties that the actions were taken by and on behalf of the corporation. Some Corporate Resolution may be passed only by the Shareholders; others, only by the Board of Directors. Some must be passed by both groups.

What is an Assumed Name? (back to top)
An assumed name, sometimes called a fictitious name, is a feature of some state corporation laws that allows a corporation to operate under more than one name. For the details on the mechanics of this option, ask the state corporations division. This can be quite convenient to the small business person who sells different products but does not wish to have several corporations. Many people initially name the corporation their last name like Jones, Inc. They might then name their different companies to be more descriptive of separate product lines, like Quantum Computers, Inc., and Standard Computer Software Corporation. All of these would simply be different names, or aliases for the same corporation that has only one set of books, and the same shareholders.
Is the Corporation Required to Register Stock with the SEC? (back to top)
A business corporation must sell and issue shares of stock in order to capitalize the corporation, that is, provide the corporation with its own capital, separate from the money of its owners. This separation provides part of the support for shielding the shareholders from personal liability for the debts and obligations of the corporation. When a new corporation offers its securities to the public, or when an older corporation makes a public offering, their securities are often required to be registered with the SEC under the Securities Act of 1933. The act also requires that the company distribute a prospectus to actual or potential securities purchasers. Some securities, such as those issued by federal, state and local governments, and many bank securities, are exempted from registration by virtue of their nature. Other offerings, such as those made to such a small number of investors that they are not considered to be public offerings, are also exempted from the registration requirements. Whether an initial public offering of securities is registered with the SEC or not, the corporation must meet the reporting requirements of the Securities Exchange Act of 1934 if:

its securities are traded in interstate commerce
it has 500 or more shareholders of a single class of equity securities
it has more than $1 million of assets.

Under these circumstances, the corporation must file certain information with the SEC including annual and periodic reports and other filings concerning such corporate events as proxy solicitations, mergers, tender offers, or "going private" transactions. Finally, all transactions in securities, regardless of whether they are required to be registered with the SEC, may be subject to the federal securities laws if there is fraud involved in the purchase or sale of the securities. Private individuals may sue the perpetrators of such fraud under the federal securities laws.

What is Capitalization? (back to top)
Capitalization is a term that requires a knowledge of accounting to understand, and can have different meanings. With a new corporation, the term generally refers to the amount of money that a corporation has when operations begin. Some states have minimum capitalization requirements to insure that corporations have a bare minimum of assets before starting operations. Since shareholders are somewhat insulated from lawsuits against a corporation, these assets provide a means to pay any potential lawsuit winners. Minimum capitalization requirements also make it a little more difficult to start a corporation. Today, only a few states have minimum capitalization requirements.

What Does The Board of Directors Do? (back to top)
The Board of Directors is essentially the management body for the corporation. Responsibilities of the Board of Directors include establishing all business policies and approving major contracts and undertakings. In addition, the Board may also elect the President. Ordinary business practices of the corporation are carried out by the Officers and employees under the directives and supervision of these Directors. The Directors must act collectively for their votes and decisions to be valid. That's why Directors may only act at a Board of Directors meeting. This, however, requires certain formalities. One such formality is that the Directors must all be notified of a forthcoming meeting in a prescribed manner, although this can be waived or provided for in the corporation's Articles of Incorporation or Bylaws. For a Directors' meeting to be valid, there must also be a Quorum of Directors present. A Quorum is usually a majority of the Directors then serving on the Board; however, the Bylaws may specify another minimum number or percentage. The Board of Directors must meet on a regular basis (monthly or quarterly), but in no case less than annually. These are the regular Board meetings. The Board may also call Special Meetings for matters that may arise between regular meetings. In addition, boards may call a special shareholders' meeting by adopting a resolution stating where and when the meeting is to be held and what business is to be transacted. The first meeting of the Board of Directors is important because the Bylaws, the Corporate Seal, Stock Certificates and Record Books are adopted. Board members, like officers, have a fiduciary duty to act in the best interests of the corporation and cannot put their own interests ahead of the corporation's. The Board must also act prudently and not negligently manage the affairs of the corporation. Finally, the Board must make certain that it properly exercises its authority in managing the corporation and does not abrogate its responsibilities to others. This means that the board must be very careful to document that each Board action was reasonable, lawful and in the best interests of the corporation. This is particularly true with matters involving compensation, dividends and dealings involving Officers, Directors and Stockholders. The record or Corporate Minutes of the meeting must include the arguments or statements to support the Board action and why must detail why the action was proper

What are Shareholders or Stockholders? (back to top)
The term stockholders and shareholders are the same and are the people for whom the corporation was organized. In large corporations, shareholders are merely investors who put money into the business in return for future dividends. In a small corporation, they are the people who actually start and run the corporation providing jobs for themselves. Because Shareholders are the owners of the corporation, the corporation's Officers and Directors must ultimately serve the interests of the Shareholders. While a Shareholder's role is not typically managerial, shareholders are not powerless concerning the affairs of their corporation. The rights of the Shareholders are governed by the Bylaws of the corporation as well as by prevailing state laws. The shareholders vote on appointing the President, elect the Board of Directors and on Major changes in the basic organization of the corporation. Shareholders, like Directors, cannot act unilaterally. They must act either at a regular Shareholders' Meeting (ordinarily held annually after the end of the fiscal year) or at a Special Meeting of the Shareholders (ordinarily called at the request of the Board of Directors). There must be notice of the meeting and notice of the agenda (items to be discussed and voted upon). Most states require 10 days' notice and not more than 50 or 60 days' notice be provided. You can specify a time period in the corporation's Articles of Incorporation. Waivers of notice are allowed if the Board fails to notify Shareholders of the meeting or an emergency prevents adequate notice.

What Board Resolutions Require Shareholder Approval? (back to top)
Resolutions adopted by the Board of Directors that generally do not require Shareholder approval involve everyday operations of the corporation, including leasing, purchases, hiring, banking, borrowing, investing, paying of dividends, salaries and bonuses, providing benefits for employees and changing the corporate status, such as obtaining "S-Corporation" status. As a general rule all records, resolutions and minutes of your corporation should be kept in your Corporate Minute Book for a period of no less than six years. This is a good idea because sometimes a Shareholder will want to inspect the corporate books and records to ensure the corporation is being run in its best interests. It is probably wise to retain these records for a longer period should anyone ever challenge the actions of the Board of Directors.

Why are Shareholders votes important? (back to top)
Shareholders may typically vote in person or vote by proxy. Voting by Proxy means having another person vote in the stockholder's place. It is important to remember that Shareholders vote their shares and the number of Shares voted decides a vote As with Directors, there must also be a complete and accurate record or Minutes of a Shareholders' Meeting. Some states allow certain actions, e.g., amending the Articles of Incorporation, to be taken without holding a Shareholders' meeting if (1) the corporation obtains a written consent to the action from ALL the Shareholders, AND (2) the written consent states what action the Shareholders have consented to. Check with your state to find out how many Shareholders must sign a consent for it to be valid. Occasionally, there will be a combined meeting of Shareholders and Directors. This is perfectly permissible; however, you still need complete Corporate Minutes for each of the meetings

What's the Difference Between Issued and Authorized Shares? (back to top)
The Board of Directors control the issuance of stock. Authorized shares is the total number of shares of stock that the board of directors are "authorized" to issue to shareholders. The board may issue all the shares now, or issue some now, and some later. Authorized shares become issued shares when "issued" or distributed to a stockholder. Shares that are not issued are usually called authorized but unissued shares. Unissued shares belong to the corporation and are not considered for shareholders' ownership percentages. There is no minimum number of shares that must be authorized in the articles of incorporation. One or more shares may be authorized. However, the corporation may not sell more shares than it is authorized to issue and it must receive consideration in exchange for its shares.

What is Par Value and No-Par Value Stock? (back to top)
Par value is simply an accounting or bookkeeping unit of measure used to keep track of the amounts given to the corporation when stock is issued. Par value means much the same as purchase price. If the stock has a $1000 par value, then the person wishing to purchase the stock must give something with at least a $1000 value for the stock. Amounts given for the stock in excess of par value are called "paid in capital in excess of par value" and again is simply a bookkeeping title. Par value is only meaningful when the stock is bought directly from the corporation and is not considered when stock is bought on the open market. When one buys stock on the market, they pay what the stock is actually worth, the "market" price. No par value stock is stock for which no fixed price is set. This is usually the case in small corporations where the owners issue themselves a number of shares and simply infuse money in the corporation when needed. Corporations issue no par stock for flexibility. If the corporation's stock has no par value, then there is no set "price" for the stock. In this case, the directors can raise the "price" of the stock when the corporation becomes more valuable. You see, with no par value stock, the directors decide how much must be paid for the stock each time it is issued to a shareholder.

What are Officers of the Corporation? (back to top)
The officers are usually employees of the corporation and manage the business on a daily basis. They are responsible for duties outlined by the corporate bylaws. In a small corporation, the officers are usually the directors and the shareholders, who merely "wear different hats". The owners of a small corporation do a lot of role playing because small corporations don't exactly fit the corporate mold envisioned by the laws of many states. The president is usually the chairperson of the board as well.

What is a Registered Agent? (back to top)
Although a corporation is a separate legal entity, it cannot physically receive documents, and therefore needs a real person to receive them on its behalf. A registered agent is needed is to make sure that the corporation will have an assigned representative at a known address in the state to receive all legal documents for the corporation. The registered agent will forward these documents to the corporation at its principal office address. Corporations that operate in different states, but don't maintain offices in these states, use agent service companies to act as registered agent for them

What is an Annual Meeting? (back to top)
The annual meeting is a special meeting held once a year to "review the results of corporate operations" with the shareholders. In larger corporations, shareholders do not generally participate in daily business operations. So, in order to make sure that shareholders are informed about their investment, corporations are required by most state laws to hold annual meetings for this purpose. Since officers and directors are usually appointed for terms of one year, annual meetings are also held to reappoint the officers and directors of the corporation. Although holding an annual meeting may sound complicated, the requirement of holding an annual meeting is usually satisfied by using a standard pre-written form called Minutes of Annual Shareholders Meeting included in chapter eight. If you read through the form, you'll see that it records that the actions described above are performed.

Do I need to hire a Transfer Agent? (back to top)
Yes. Either you can act as your own agent, or hire a commercial transfer agent to keep the records of your Registered shareholders. Click here, we can help.