Avoid legal issues—by meeting government standards
The prospect of creating a corporation may seem challenging at the outset, with the possibility of forms and paperwork beyond both tedium and your understanding of business regulations. Unless you’re a business lawyer, it’s overwhelming and even discouraging to think of forming a corporation for your new business without help. While corporations can be complicated, they’re also necessary for many businesses, and easier to understand with some knowledge.
Large corporations vs closely-held corporations
Most entrepreneurs starting out won’t have to worry about forming a large corporation and the regulatory requirements entailed. Large corporations are those that are publicly traded—not something your startup or small business will likely have to worry about for some time. For smaller corporations, ownership can be classified as closely-held, which means that over 50% of the ownership stake is held by five or fewer people. While a closely-held corporation does have the advantage of lesser reporting and regulatory burdens, it may be harder to sell share equity to raise funds or divest from the corporation.
What’s required vs needed
It might seem like an arbitrary distinction, but the incorporation process has some documents that are “required” and some that are “needed”. Those documents labeled “required” are those mandated by state laws to be provided to the requisite governing body in order for your corporation to be registered and recognized. These documents considered “needed” may not be necessary to transmit, but they are equally vital to have and retain in your records in case of any future issues or questions about your corporation.
Required: Certificate of Incorporation & Articles of Incorporation
Your corporation requires a Certificate of Incorporation to verify its existence and is provided by the state once you’ve completed the process of filing the required paperwork, including your Articles of Incorporation.
Your Articles of Incorporation include the corporation name, as well as the purpose of the corporation and its named agent and address. The agent is the person responsible for any legal documents sent to the corporation. The articles also need any information about the company’s stock: the number and type of shares, as well as their value, as well as how those shares can be issued. They also include the name and address of the incorporators—the person or people who sign and file the articles of incorporation.
Your state will most likely have a standard Articles of Incorporation form to fill out and file, but certain corporations may have more complexities and different requirements that require extra paperwork and consideration. With something as important as incorporation, it’s best to seek help from an attorney to ensure everything is done correctly.
Needed: Bylaws
The bylaws describe corporate office functions, how shareholders’ and directors’ meetings are called and conducted, shareholder voting, director qualifications, board committee functions, and procedures for and limits on issuing and transferring shares. Many bylaws contain provisions to protect the directors, the officers, or both, as well as a clause that allows bylaws to be enforced even if a particular provision is held as invalid. The bylaws must be consistent with the Articles of Incorporation. If discrepancies arise, the Articles will be used. The bylaws may be amended as needed and should specify the necessary procedures for amendment.
Needed: Minutes of Meetings
Corporations are required to have annual shareholders’ and director’s meetings, and can on occasion call for a special meeting, and each of these meetings requires a record of the activities and proceedings. While it’s important to capture what happens at the meetings, it’s not necessary to compile a word by word transcript of the event; a higher-level overview of what was discussed works as the official record. Remember to keep all these important documents in one place.
Code of Ethics/Conduct
An equally important part of corporate governance is setting expectations for every member of the business as to acceptable behavior and conduct. In today’s business environment, corporations of all sizes should devise a code of ethics for its officers and directors as well as a code of conduct for its employees as to their obligations in their roles. While there may be no differentiation for small corporations between directors and officers and employees, it’s still important for every member of the team to understand what their duties entail and what’s demanded of them.
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