Creating a corporation has a number of benefits. It allows for streamlined pooling and transferring of assets. It provides limited liability protection for its corporate owners who, after incorporation, are generally not personally responsible for business debts. It also may bolster the venture’s credibility and, with it, the ability to raise money and reach new investors, customers, and partners.
In order to become a corporation, certain legal requirements must be met. The first is the filing of the company’s articles of incorporation — also called a certificate of incorporation or articles of association — with the Secretary of State where the company is registering. Unlike a sole proprietorship or a general partnership, both of which are formed once the owners begin conducting business, a corporation is not legally created until after these documents are filed.
Articles of incorporation provide the state with necessary information about the company, such as the company’s name, location, and duration. These requirements are discussed in more detail below.
Information Contained in the Articles of Incorporation
A corporation’s filing requirements vary greatly by state. However, the following are nearly universally required.
Corporate Name and Principal Place of Business
In order to incorporate, the company must include the name that it will be doing business under. The name must include a corporate identifier, such as the terms “Inc.” or “Incorporated,” in order to make the corporate structure clear.
The corporation’s principal place of business should also be included. Depending on the state, a street address may be required.
The Name and Address of the Registered Agent
The primary purpose of the registered agent for a corporation is to receive service of process (informally known as “getting served”) in the event the corporation is sued. The registered agent also receives important correspondence from the state related to the filing of corporate documents and tax notifications so that the corporation can stay in compliance with state laws.
The registered agent does not need to be an officer or employee of the company; often a third party, such as a lawyer, will act as the registered agent. No matter who is chosen, the individual should be reachable during regular business hours. In addition, the registered agent must be located in the state where the corporation is filed. The address given must be a physical address, not just a post office box.
The registered agent can change throughout the life of the corporation. The state must receive notice of this change, however, or the corporation will risk losing good standing, be fined for noncompliance, or even be administratively dissolved.
The articles of incorporation must clearly state the corporate structure. Types of corporate structure, depending on the state, may include:
- Nonprofit: A type of corporation that does not issue shares. Its purpose is to serve the public benefit, without the goal of making money for its owners or shareholders.
- Closely held: A type of corporation where only a few individuals hold the majority of shares.
- Professional: A type of corporation composed of specific types of professionals, as allowed by state law. Typically, these professions include attorneys, accountants, and people in the performing arts, among others.
- Stock: A type of for-profit corporation that issues stock to shareholders to raise capital, with each share of stock representing an ownership interest in the corporation.
- Non-stock: A type of corporation that does not issue stock. Often, these corporations are non-profits, but they do not need to be.
Number of Authorized Shares
Stock corporations need to specify the maximum number of authorized shares that the corporation is legally permitted to issue.
The number of authorized shares is different from the number of issued and outstanding shares. Authorized shares refers to the total number of all shares that can be issued, whether they have been issued or not. Issued and outstanding shares refers to the number of shares that have already been issued. The number of issued shares cannot be greater than the number of authorized shares.
Some states may also require that the corporation specify whether it is authorized to issue more than one class of stock. Different classes of stock carry different rights for shareholders. For instance, Class A shares may carry different or additional voting rights compared to Class B shares. Not all corporations issue different classes of shares.
The corporation’s purpose must also be included in the articles of incorporation; however, in most states, the purpose need not be listed with any sort of specificity. Because a corporation’s purpose can develop and change, it is best practice to keep the corporate purpose general. In many states, it is sufficient to include language such as, “The purpose of the corporation is to engage in any lawful activity for which corporations may be incorporated in this state.”
The duration of a corporation is the length of time it will operate. If the corporation is being incorporated for a limited duration, this should be specified, but absent setting a fixed time period, a corporation will exist in perpetuity. In that case, the duration should be set as “perpetual.” In many states, “perpetual” is the default duration.
Names, Addresses, and Signatures of the Corporation’s Directors
The corporation must form a board of directors, the group of individuals in charge of running the business. In some states, the board members or corporate officers must be listed in the articles of incorporation, along with their addresses and signatures.
The Name, Address, and Signature of the Incorporator
The incorporator is the person who actually files the articles of incorporation and is in charge of filing other corporate documents that are needed prior to the corporation being formally registered with the state. This is a limited-duration role. Once the company has been registered, the incorporator has no further formal duties.
When the company submits the articles of incorporation, it will need to pay a filing fee. The amount can vary widely among states and among business structures.
The Difference between Articles of Incorporation and Corporate Bylaws
The articles of incorporation, together with a corporation’s bylaws, form the backbone of the company. However, they are two legally distinct documents, and they achieve different purposes. As stated above, the articles of incorporation legally establish the corporation with the state and provide basic information about the corporation. Without them, there is no corporation.
Because the articles of incorporation do not define the relevant rules, responsibilities, and obligations the business owners must follow and abide by, a company also needs bylaws. Bylaws, by contrast, are generally not public and are not filed with the state. While some of the information in the bylaws may be duplicative of the article of incorporation — for instance, the corporation’s name and the type of corporation — they serve a different purpose. Bylaws provide the blueprint for the actual operation of the company, setting forth the key rules and regulations needed for successful day-to-day operations.
The Difference between Articles of Incorporation and Articles of Organization
Articles of incorporation and articles of organization are similar filings, with one key difference: articles of incorporation are used to create a corporation, whereas articles of organization are used to create a limited liability company (LLC).
Corporations and LLCs have different benefits and drawbacks. One key benefit of an LLC is that it protects the corporate owners from corporate liability more expansively than a corporation. However, unlike with a corporation, it is difficult for an LLC to transfer holdings, making it an undesirable corporate structure for entities looking to have outside investors. An individual seeking to start a corporation or LLC should carefully consider the desired corporate structure, and be sure to file the correct incorporation paperwork.
The articles of incorporation are an essential part of forming a corporation. Companies should carefully draft their articles, and make sure they are compliant with the law of the state of incorporation.