Frequently Asked Questions

When does a corporation’s existence begin?

Under the corporate laws of some states, corporate existence begins when the Articles are filed with the secretary of state.  Under an older practice still followed by many states, corporate existence begins upon the issuance of a Certificate of Incorporation by the secretary of state.

How is the business of a corporation carried out or managed?

The owners of a corporation are its shareholders.  The shareholders elect a board of directors to oversee the major policies and decisions.  The board of directors elects the officers and is responsible for the management and policy decisions of the corporation.  The dealings of the corporation are carried out by the officers and employees of the corporation under the authority delegated by the directors of the corporation.

What are the general duties of directors?

Each director must attend meetings of the board, which must be held no less than once a year.  Each director on the board is given one vote. Usually the vote of a majority of the directors is sufficient to approve a decision of the board.  Directors must make sure that major corporate actions are recorded (e.g., minutes of meetings) and were taken behalf of the corporation.  Corporate officers are elected by the Board of Directors and are responsible for conducting the day-to-day operational activities of the corporation.  Terms of directors often are for more than one year and are staggered to provide continuity.  Shareholders can elect themselves to be on the board of directors.

What officers are elected by the directors?

Corporate officers usually consist of the following: a President, Vice-President, Secretary, and Treasurer, though one person may hold more than one office.

Who actually owns the property of a corporation?

A corporation is an artificial person that is created by governmental action.  The corporation exists in the eyes of the law as a person, separate and distinct from the persons who own the corporation (stockholders).  This means that the property of the corporation is not owned by the stockholders, but by the corporation.  Debts of the corporation are debts of this artificial person, and not of the persons running the corporation or owning shares of stock in it.

How do the initial shareholders fit into the ownership of the corporation?

Shares must be issued to those individuals who will be owners of the corporation. This is also the case even if only one individual will own the corporation. Ownership of a corporation can be transferred by sale of all or a portion of the stock. Additional owners can be added either by selling stock directly from the corporation or by having the current owners sell some of their stock.  Small businesses that are corporations are often owned by a small group of shareholders who all work in the business.  Often these shareholders formally agree to certain restrictions on the sale of their shares, so they can control who owns the corporation.

What are security laws?

Securities laws are meant to protect investors from unscrupulous business owners.  These laws require corporations to follow certain procedures before accepting investments in exchange for shares of stock (the “securities”).  Technically, a corporation is required to register the sale of shares with the federal Securities and Exchange Commission (SEC) and its state securities agency before granting stock to the initial corporate owners (shareholders).  Many small corporations are exempted from the registration process under federal and state laws.  For example, SEC rules don’t require a corporation to register a “private offering,” which is a non-advertised sale of stock to a limited number of people (generally 35 or fewer).

What do the designations domestic corporation and foreign corporation mean?

A corporation is called a domestic corporation with respect to the State under whose law it has been incorporated.  Any other corporation going into that State is called a foreign corporation. For example, a corporation holding a Texas Charter is a domestic corporation in Texas, but a foreign corporation in all other States.  A foreign corporation may have to qualify to do business in a foreign State.

How does a foreign corporation qualify to do business in another state?

Before doing business in another State, a foreign corporation generally must register with the Secretary of State of that State, file copies of its Articles of Incorporation, pay certain taxes, and appoint a resident agent for service of process.

What is meant by the phrases doing or transacting business in another state by a foreign corporation?

There are many factors used to determine whether a foreign corporation is transacting business in a state and therefore must qualify to do business in that state. Some criteria evaluated include:

  • Whether the company has a physical presence in the state;
  • Whether the company has employees in the state;
  • Whether the company accepts orders in the state; and
  • Whether the company has a bank account in the state

This is not a complete list and different states may have different criteria. However, these are some common factors to consider when trying to determine whether it is necessary for a foreign corporation to register or qualify in another state.

I have heard that a corporation can be a citizen of a state. What does this mean?

For certain purposes, such as determining the right to bring a lawsuit in Federal Court, a corporation today is deemed a citizen of any State in which it has been incorporated and also of the State where it has its principal place of business.  Therefore, a corporation can be a citizen of more than one State.  For example, a corporation incorporated in New York is a New York corporation even though its shareholders are citizens of many other States.  A Delaware corporation having its principal place of business in New York is deemed to be a citizen of New York as well as of Delaware.

What does it mean to pierce the corporate veil?

Ordinarily, a corporation will be regarded and treated as a separate legal person, and the law will not look beyond a corpora­tion to see who owns it. However, a court may disregard the corporate entity and pierce the corporate veil in exceptional circum­stances.  The decision whether to disregard the corporate entity and go directly against the shareholders is made on case-by case basis, and courts generally will look to more than one factor. Factors that may lead to piercing the corporate veil are:

  • Failure to maintain adequate corporate records and the commingling of corporate and personal funds;
  • Grossly inadequate capitalization (debt/equity ratio too high);
  • The formation of a corporation to evade an existing obligation;
  • The formation of a corporation to perpetrate a fraud;
  • Improper diversion of corporate assets; and
  • Injustice and inequitable circumstances would result if the corporate entity were recognized.

A court will not go behind the corporate identity merely because a corporation has been formed to obtain tax savings or to obtain limited liability for its shareholders. One-person, family, and other closely-held corporations are permissible and fully entitled to all of the advantages of corporate existence.  However, factors that lead to piercing the corporate veil more commonly exist in these kinds of corporations. It is extremely difficult to pierce a corporate veil in most situations.  Some courts use different terminology when disre­garding the corporate entity.  The court may state that the corporation is the alter ego of the shareholders, and the share­holders should therefore be held liable.

What are mergers and acquisitions?

Mergers and acquisitions is a phrase used to describe certain types of financial activities in which corporations are bought and sold. A merger occurs when two corporations merge, in other words, one absorbs the other. One corporation preserves its original charter and identity and continues to exist.  The other corporation disappears, and its corporate existence terminates. Generally, the corporate entity which continues the business after a merger will succeed to all of the rights and property of the other entity and will also be subject to all of its debts and liabilities.

A corporation may merely purchase or acquire the assets of another corporation.  This would not be a merger  In an acquisition, the purchaser does not become liable for the obligations of the business whose assets are being purchased.

What is a holding company?

A holding company is a company, usually a corporation, which is created to own the stock of other corporations, often using the stock holdings to control the management and policies of the corporations.

What is an Annual Report?

A annual report is a report that must be filed with your state’s secretary of state each year. This report generally must indicate:

  • The corporation’s name and its state or country of incorporation;
  • The address of its registered office and the name of its registered agent at that office in this state;
  • The address of its principal office;
  • The names and business addresses of its directors and principal officers;
  • A brief description of the nature of its business;
  • The total number of authorized shares, itemized by class and series, if any, within each class; and
  • The total number of issued and outstanding shares, itemized by class and series, if any, within each class

How do I determine if the corporate name I want to use is available?

Your state’s secretary of state will make a determination of name availability for corporate entities in response to written requests. There is generally a small fee. If you wish to reserve a corporate name for a business entity, most states will allow you to after completion of and filing the appropriate form generally entitled “Application for Reservation of Name.”

If I incorporate, will anyone else be able to use my name?

Issuance of a name by the secretary of state does not necessarily give a person the exclusive right to use of that name.  Many businesses do not choose to incorporate. A secretary of state’s office generally has no record of these and thus cannot search names of unincorporated businesses.

Is there a minimum age for officers of a corporation?

Most states do not have a minimum age requirement but do require that members of the board of directors must be at least 18 years old.

 

View More Corporate or LLC Questions or Ask you own Question

 


Inside Frequently Asked Questions