Overview

Most States have a general corporation code that lists certain requirements, and anyone who satisfies these requirements and files the necessary papers with the government may automatically become a corporation.  In 1950, the American Bar Association published a Model Business Corporation Act (MBCA) to assist State Legislatures in modernizing State corporation laws.  In 1984, a revision of this Model Act was published (RMBCA).  All states have adopted various versions of the MBCA or the RMBCA with only slight variations.

One or more natural persons or corporations may act as incorporators of a corporation by signing and filing Articles of Incorporation with the designated state government official (usually the Secretary of State).  These Articles are often filed in duplicate, and the Secretary of State, when satisfied that the Articles conform to the State’s corporation statutes, stamps filed and the date on each copy.  The Secretary of State then retains one copy and returns the other copy, along with a filing fee receipt, to the corporation.

The Articles of Incorporation must contain the following:

  • The name of the corporation;
  • The number of shares of stock the corporation is authorized to issue;
  • The street address of the corporation’s initial registered office and the name of its initial registered agent; and
  • The name and address of each incorporator.

The Articles may contain optional provisions such as the purpose for which the corporation is organized.  However, if the Articles contain no purpose clause, the corporation will automatically have the purpose of engaging in any lawful business.  Also, if no reference is made to the duration of the corporation in the Articles, it will automatically have a perpetual duration. Under the RMBCA, corporate existence begins when the Articles are filed with the Secretary of State.  Under the older practice still followed by many States, corporate existence begins upon the issuance of a Certificate of Incorporation by the Secretary of State.

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.

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

The bylaws of a corporation are the internal rules and guidelines for the day-to-day operation of a corporation, such as when and where the corporation will hold directors’ and shareholders’ meetings and what the shareholders’ and directors’ voting requirements are.  Typically, the bylaws are adopted by the corporation’s directors at their first board meeting. They may specify the rights and duties of the officers, shareholders and directors, and may deal, for example, with how the company may enter into contracts, transfer shares, hold meetings, pay dividends and make amendments to corporate documents. They generally will identify a fiscal year for 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.

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).

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 must qualify to do business in a foreign State.

A corporation whose shares are held by a single shareholder or a closely-knit group of shareholders (such as a family) is known as a close corporation.  The shares of stock are not traded publicly.  Many of these types of corporations are small firms that in the past would have been operated as a sole proprietorship or partner­ship, but have been incorporated in order to obtain the advantages of limited liability or a tax benefit or both.

A corporation may be organized for the business of conducting a profession.  These are known as professional corporations .  Doctors, attorneys, engineers, and CPAs are the types of profes­sionals who may form a professional corporation.  Usually there is a designation P.A. or P.C. after the corporate name in order to show that this is a professional association or professional corporation.

A nonprofit corporation is one that is organized for chari­table or benevolent purposes.  These corporations include certain hospitals, universities, churches, and other religious organiza­tions.  A nonprofit entity does not have to be a nonprofit corporation, however.  Nonprofit corporations do not have shareholders, but have members or a perpetual board of directors or board of trustees.

A Subchapter S corporation is a corporation in which the shareholders elect to be treated as partners for income tax purposes.  Shareholders still have limited liability protection of a corporation, but income is treated like partnership income.  Subchapter S refers to a particular subdivision of the Internal Revenue Code.  The number of shareholders is limited and neither corporations nor partnerships can be shareholders in a Subchapter S corporation.  Also, shareholders must be U.S. citizens or resident aliens.

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.

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.

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 a 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.

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.

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.


Inside Overview