The Law of Corporations and Other Business Organizations

Lecture Notes

Introduction to Incorporating

1. The corporation does not exist until it is
properly incorporated.
2. Articles of incorporation, or a certificate
of incorporation, are typically filed with
the secretary of state or other appropriate
state official to form a corporation.
3. The individuals who form the corporation
and sign the incorporation documents are
referred to as the incorporators.
4. Exact requirements for incorporating are
established by state statute and rules of
the appropriate state authority.
Preincorporation Matters
5. Preincorporation matters include all steps
that must be taken by the incorporators or
promoters of a corporation prior to its incorporation,
including deciding on the
best form of business organization and
choosing the state of domicile for the
corporation.
6. Before a final decision is made to incorporate
a business, all other forms of business
organization should be considered.
The following items must be taken into
consideration to determine whether to incorporate
or form another type of business
entity:
• Income tax implications
• Capital requirements
• Applicable statutory requirements
• Desired management structure
• The importance of limited liability
• Transferability of ownership
• Ease of forming and dissolving the
business entity
7. Incorporators may choose the state or jurisdiction
in which they will incorporate
their business. For each state being considered,
the following factors must be
taken into consideration:
• The nature of the business corporation
act of that state
• The costs associated with incorporation
in that state
• The state’s judicial policy toward corporations
• The availability of the corporation’s
name in that state
• The state’s law with regard to shareholder
meetings being held out of state
• The state’s law with regard to shareholder
and director liability
• The state’s law with regard to requirements
for keeping corporate records in
that state
• The annual reporting requirements of
the state
8. The state of Delaware, also known as the
“incorporation state,” is the state of domicile
for more than 850,000 corporations.
Delaware has attracted corporations by
adopting corporate laws that are among
the most liberal in the country. In addition,
the user-friendly Delaware Department
of State, Division of Corporations,
has been set up to handle incorporations
in an easy and efficient manner.
9. Under certain circumstances, the founders
of a corporation may set forth their
understanding and agreement concerning
the proposed corporation in a preincorporation
agreement.
10. A stock subscription is an agreement to
purchase a stated number of shares of a
corporation or a future corporation at a
stated price.
11. Attorneys, and often paralegals, will meet
with a client prior to incorporation to
gather the necessary information to form
the corporation. The information obtained
from a client at a preincorporation meeting
will also be useful in providing future
services to the corporate client.
Promoters
12. The formation of some corporations involves
a promoter, an individual who assists
in creating, promoting, and organizing
a corporation. The promoter often obtains
stock subscriptions for a proposed
corporation.
13. Any actions taken on by the promoter on
behalf of a corporation prior to its incorporation
are considered to be preincorporation
transactions and, to be valid, must
be ratified and approved by the corporation
after it is formed.
Incorporators
14. The incorportor is the individual who
signs the articles of incorporation or certificate
of incorporation on behalf of the
corporation. The incorporator has no
formal duties as such after the corporation
has been successfully formed.
Corporate Name
15. The name chosen for the corporation must
include words indicating that the organization
is a corporation as required by state
statute. Often, statutes require the use of
the words incorporated, corporation, limited,
or the initials inc., corp., or ltd.
16. The name chosen for the corporation
must not already be in use in that state,
and it must not be deceptively similar to
the name of another corporation already
in use or registered by a corporation in
that state.
17. The name of a corporation must not be
misleading to the public. For example, it
must not include words indicating that it
is a corporation formed for a purpose
other than its actual purpose.
18. An incorporator may reserve the exclusive
use of a corporate name by filing an
application for name reservation with the
secretary of state, along with the proper
filing fee. It may be advisable to reserve
the corporate name when the incorporation
will take several days, or if there is
any doubt that the name will be acceptable
when the articles of incorporation are
filed.
Articles of Incorporation
19. In most states, the articles of incorporation
must include the following information:
• The corporation’s name in compliance
with all name requirements
• The number of shares the corporation
is authorized to issue
• The street address of the corporation’s
initial registered office and registered
agent
• The name and address of each incorporator
20. The articles of incorporation must set
forth the number of shares authorized for
each class of shares. Additional information
may be required by state statute,
including the par value of the stock and
the rights and preferences of the stock.
21. If the corporation issues only one class of
stock, it is common stock.
22. The articles of incorporation must set
forth the registered office address and the
registered agent at that address. The registered
agent is the individual who will be
responsible for receiving service of process
on behalf of the corporation in that
state. The office address may not be a
post office box; it must be a physical location
where an individual may be served
in person.
23. The name and address of the incorporators
must be included in the articles of
incorporation, and the articles must be
signed by the incorporators. Notarization
and witnessing may be required in some
states.
24. Under the Model Business Corporation
Act, the following optional provisions
may be included in the articles of incorporation:
• The names and addresses of the individuals
who are to serve as the initial
directors
• The purpose or purposes for which
the corporation is organized
• Provisions regarding the management
of the business and regulation of the
affairs of the corporation
• Provisions defining, limiting, and
regulating the powers of the corporation,
its board of directors, and its
shareholders
• Provisions setting a par value for authorized
shares or classes of shares
• Provisions imposing personal liability
on shareholders for the debts of the
corporation to a specified extent and
upon specified conditions
• Any provision that is required or
permitted by statute to be set forth in
the bylaws
• Provisions limiting the directors’ personal
liability, except under certain
circumstances
25. State statutes often include several default
provisions that are applicable to the
corporation unless otherwise provided in
the corporation’s articles of incorporation.
Common default provisions that
may be amended in the articles of incorporation
include the following:
• Shareholders do not have a right to
cumulate their votes for directors.
• Shareholders may remove one or
more directors with or without cause.
• All shares of the corporation are of
one class with identical rights.
• Shareholders have no preemptive
rights to acquire unissued shares.
• A corporation has perpetual existence.
• The board of directors has the power
to adopt, amend, or repeal the bylaws.
• The affirmative vote of a majority of
directors present is required for an action
of the board.
• A written action by the board taken
without a meeting must be signed by
all directors.
• The affirmative vote of the holders of
a majority of the voting power of the
shares present and entitled to vote at a
duly held meeting is required for an
action of the shareholders, except
where state statutes require otherwise.
26. The secretary of state or other appropriate
state authority often provides articles of
incorporation (or certificate of incorporation)
forms that may be completed to form
a corporation in that state. These forms
usually ask for only the minimum requirements
for incorporating in that state.
27. The articles of incorporation are effective,
and the corporation’s life begins,
when the articles are filed with the secretary
of state or other appropriate state authority—
unless a later effective date is
provided for in the articles.
28. Some states have requirements for filing the
articles at the local level or publishing notice
of incorporation in a legal newspaper.
The Organizational Meeting
29. After the articles of incorporation are
filed, an organizational meeting is held.
The incorporators, initial shareholders,
and board of directors are usually in attendance.
30. When the first board of directors is not
named in the articles of incorporation, the
incorporators may hold the organizational
meeting. The primary purpose of the
meeting will be to appoint the board of
directors.
31. The following actions are usually taken
at the organizational meeting or the first
meeting of the board of directors and
shareholders:
• The incorporators elect the initial
board of directors (if they are not
named in the articles of incorporation).
• The articles of incorporation are approved
and accepted by the corporation.
• The acts of the incorporators are ratified
and approved.
• The board of directors accepts stock
subscriptions for shares of the corporation’s
stock, and stock is issued.
• The initial officers of the corporation
are elected.
• The bylaws are adopted by the board
of directors and shareholders.
• The accounting method of the corporation
is approved.
• The form of stock certificate that will
be used by the corporation is approved.
• Any required securities filings are
approved.
• A corporate seal is adopted, or it is
agreed that no seal will be used.
• A corporate bank account is established.
• If desired, election to become an
S Corporation is approved.
• Employee benefit plans may be
adopted.
• Shareholders approve the election of
the board of directors and establish
their term of office.
32. Actions taken at an organizational meeting
may be documented by minutes of the
meeting, or by a unanimous written consent
of all individuals entitled to attend
the meeting.
Bylaws
33. The corporation’s bylaws are the rules
and guidelines for internal government
and control of the corporation. The Model
Business Corporation Act provides that
bylaws may contain any provisions for
managing the business and regulating the
affairs of the corporation, so long as those
provisions are not inconsistent with law
or the articles of incorporation.
34. The following information is usually contained
in the corporation’s bylaws:
• The address of the principal office of
the corporation and any other important
locations
• Requirements for annual and special
shareholder meetings
• The number and terms of the directors
on the board of directors
• Requirements for annual and special
board of director meetings
• Procedures for removing directors
• The means for determining director
compensation
• Limitations on the liability of the
board of directors and officers
• The titles of the corporate officers
and the powers and duties those officers
will have
• The corporation’s policy for payment
of dividends
• A description of the corporate records
that will be kept and the location of
those records
• A description of the form of stock
certificate the corporation will have
• A description of the corporation’s
corporate seal (if one is to be used)
• The fiscal year of the corporation
Formation of Special Types of Corporations
35. There are additional and slightly different
requirements for incorporating special
types of corporations, such as statutory
close corporations, professional corporations,
and nonprofit corporations.
The Paralegal’s Role
36. Corporate paralegals are often involved in
all aspects of the incorporation process.
Resources
37. Resources useful to paralegals who are
incorporating businesses include the following:
• State statutes
• Information available from the secretary
of state or other state authority
• Forms and form books
• Incorporation services
CASE BRIEFS
Moneywatch Companies v. Wilbers, 665 N.E.
2d 689 (Ohio Ct. App. 1995)
Purpose: This case illustrates that the acts of
the promoter are not the acts of the corporation
and shows how important it is for the corporation
to adopt and ratify the acts of the
promoter after incorporation.
Cause of Action: Breach of contract
Facts: In December 1992, Jeffrey Wilbers
(“Defendant”) negotiated a lease agreement for
commercial space with Moneywatch Companies
(“Plaintiff”) through its property manager,
Rebecca Reed. The Defendant indicated that he
intended to create a corporation and needed the
space for a golfing business he wanted to open.
Reed claimed that she told the Defendant that
he would have to remain personally liable on
the lease, even if a corporation was subsequently
created. Defendant testified that he never
intended to assume personal liability on the
lease and that Plaintiff never advised him that
he would have to be personally liable under the
lease. At Plaintiff ’s request, Defendant submitted
a personal financial statement and business
plan.
On December 23, 1992, a lease agreement
was signed. The Plaintiff was named as
landlord and “Jeff Wilbers, dba Golfing Adventures”
as tenant. The lease agreement
provided that rent would not be due until
March 1, 1993. On January 11, 1993, articles
of incorporation for “J & J Adventures, Inc.”
were signed by “Jeff Wilbers, Incorporator.”
On February 3, 1993, a trade name registration
was signed for “Golfing Adventures” to be
used by J & J Adventures, Incorporated.
Defendant notified Plaintiff of the incorporation
of J & J Adventures, Inc. and
asked that the name of the tenant on the lease
be changed from “Jeff Wilbers, dba Golfing
Adventures” to “J & J Adventures, Inc., dba
Golfing Adventures.” Plaintiff informed Defendant
that the change would be made.
Later that year the corporation defaulted
and vacated the premises. Plaintiff brought
a breach of contract action against Defendant
in his personal capacity. The trial court entered
judgment ordering Defendant to pay
Plaintiff the sum of $13,922.67 plus interest
and costs.
Defendant appealed the decision, contending
that he was not personally liable under
the lease agreement because the corporation “J
& J Adventures, Inc., dba Golfing Adventures”
was substituted in the lease for him. Defendant
also claimed that he was not personally
liable because he executed the lease as a
corporate promoter on behalf of a future corporation.
Issue: Was “J & J Adventures, Inc.” properly
substituted as the tenant under the lease with
Moneywatch Companies, relieving Defendant
of personal liability?
Holding: No, in this case, the substitution of
tenant names on the lease did not constitute a
novation because there was no discharge of
Defendant from his original obligations under
the lease.
Reasoning: Promoters are not personally liable
on contracts made prior to incorporation
when (1) contracts are made in the name and
solely on the credit of the future corporation,
(2) the contract provides that performance is
to be the obligation of the corporation, and (3)
the corporation is ultimately formed and it
formally adopts the contract.
In this case, the contract was not entered
into based on the future corporation’s
credit. This is evidenced by the requirement
that Defendant submit his personal income
statement. The lease agreement did not provide
that the corporation would be exclusively
liable under its terms even though the corporation
was substituted as the tenant. In fact, Defendant’s
individual signature remained on the
lease agreement. In addition, there is no evidence
that the corporation, once formed, formally
adopted the lease agreement as executed
by the Defendant. In the absence of the necessary
steps that must be taken to ensure that
Defendant is not personally liable and the corporation
is solely liable under the lease, Defendant
is personally liable under the lease.