If you are interested in forming an S corp or C corp, you will not get far without filing articles of incorporation. Sometimes referred to as a corporate charter, this critical document establishes your business as an official corporate entity. Valid articles of incorporation outline essential information such as the company's name, where it is based, and how many shares are authorized.
Once approved, articles of incorporation become a matter of public record. Unfortunately, some companies struggle to make it this far, often due to avoidable errors. These mistakes can range from simple (such as using the wrong name) to complex (such as issues with the number of shares or how they are authorized). Below, we outline a few of the most common errors seen in proposed articles of incorporation and how they can be avoided or fixed.
Requirements for articles of incorporation vary slightly in each state. Articles of incorporation that are valid in one state may not meet basic requirements in another. It is therefore crucial to complete state-specific forms. The manner of filing must also be considered. Many states now allow for electronic filing, but others require articles to be filed through the mail.
In addition to following requirements for filing, it is important for companies to use similar verbiage to the Secretary of State or Commissioner of Commerce in the state of desired filing. Some states use considerably different terminology; failure to use the same phrases could cause confusion or even alter the meaning of some designations. Use of professional business formation services may reduce the risk of using incorrect terminology.
The corporation's full name should be clearly identified in the articles of incorporation. In most states, the official name must also include one of the following words:
Corporate names included in articles of incorporation cannot include words or phrases that imply a purpose other than that identified in the document.
Occasionally, businesses in similar industries, and those in the same geographic region, will attempt to file articles of incorporation under the same name. Often, the newly formed business is entirely unaware of the existing corporation's existence.
Secretaries of State may reject articles of incorporation featuring names already in use, or those with names that are 'deceptively similar.' When in doubt, conduct a preliminary name search to ensure that the desired corporate name is available. Several states offer easily accessible databases with the names of all incorporated companies. This simple step can prevent corporate charter rejection.
One of the key components of a corporate charter is the name and contact information of the registered agent. This designated party is responsible for receiving official government notifications, such as tax forms or notices, from the Secretary of State. The registered agent may also be served with papers in the event of a lawsuit. The agent should be consistently available during business hours.
The registered agent can be an individual or a commercial entity. If the agent is an individual, he or she must reside in the state in which the articles are filed. Additional steps may be required for commercial registered agents. In Utah, for example, commercial agents must register with the Division of Corporations and Commercial Code.
When submitting names and contact information, registered agents should be aware that approved articles of incorporation are a matter of public record. It is therefore important to avoid including any sensitive information in this document. For this reason, many corporations opt for registered agent services, in which a commercial entity agrees to accept official correspondence and pass it on to the appropriate party.
Articles of incorporation should include both a registered agent and a registered office. The registered office does not need to be the same location as the primary place of business, but it should be an actual office location. Aspiring entrepreneurs who lack commercial business space sometimes attempt to list post office boxes as their registered office; this approach is not acceptable in most states. Instead, the registered office should have a valid street address. Ideally, the registered office will be easily accessible so that the registered agent consistently receives correspondence from the Secretary of State.
Articles of incorporation are specifically designed for corporations such as S corps or C corps. The articles should highlight authorized shares, which is a key distinguishing factor between corporations and different types of entities. If, instead of a corporation, you wish to form a limited liability company (LLC), you will need to file articles of organization. In some states, this document is known as a certificate of organization, often with the intent of minimizing confusion between the two types of legal forms.
In some states, corporations must indicate their intended duration. For most corporations, the answer will be perpetual: there is no deadline on which the corporation will suddenly no longer exist. Some corporations, however, may select a specific duration, such as a fixed date or a certain number of years. In most cases, it behooves corporations to select 'perpetual' when asked to list the entity's intended duration.
Shares play a critical role in articles of incorporation. The corporate charter should list how many shares of stock the entity will be authorized to issue.
Although not a common phenomenon, articles of incorporation could be rejected if shares are not listed at all. For example, the Wisconsin Department of Financial Institutions states that "some quantity of shares must be authorized" in articles of incorporation. Beyond mere acceptance of the document, it is important to authorize enough shares to cover issuances for founders, as well as the potential for future growth. The goal, generally, is to authorize just enough to prevent amending the corporate charter at a later date. There is a distinct difference between authorizing and issuing shares; most companies authorize far more than they issue at the outset.
Also worth noting is that some entities may seek status as 'close' corporations. These corporations prefer to limit their scope to a smaller number of shareholders, typically fewer than ten. Designation as a close corporation should be included in the articles of incorporation. Some states (such as Nevada) provide specific instructions for close corporations, as opposed to other entities filing articles of incorporation.
What, exactly, constitutes 'too many' shares can vary from one corporation to the next. The problem with issuing excessive shares may not necessarily be acceptance of the articles of incorporation but, rather, hefty fees. This is particularly true in Delaware, where franchise taxes can add up quickly for entities with tens or hundreds of thousands of authorized shares.
In addition to detailing the number of authorized shares, articles of incorporation in most states must also note whether there are multiple classes of shares. Furthermore, corporations with several classes should outline shareholder rights and preferences. Articles should also list limitations for shares from each class. For example, certain shares may be designated as voting shares, in which the shareholder is granted the right to vote on members for the board of directors. Those with voting shares may also be allowed to vote on corporate policies.
Some corporate charters outline categories such as common or preferred stock. Preferred stockholders are typically not granted voting rights, but they may be granted a greater claim in the corporation's assets. Most shareholders, however, receive common stock. Exact figures regarding common and preferred stock may be included in the articles of incorporation.
While all corporations must state their purpose in the articles of incorporation, this step is particularly important for those forming a nonprofit. These entities must include a statement that abides by section 501(c)(3) of the Internal Revenue Code (IRC). Depending on the situation, this statement may outline the nonprofit's general purpose or get into specifics. In some states, a specific purpose statement is required for nonprofits seeking tax-exempt status.
While a specific purpose statement may favor some nonprofits, it is rarely prudent to get too specific. After all, a nonprofit's purpose or approach may evolve over time. If, eventually, the true purpose becomes too different from the purpose outlined in the articles of incorporation, an amendment may be required.
Typically, articles of incorporation are filed with the Secretary of State for the state in which the corporation intends to do business. In select situations, another entity may be allowed. In Minnesota, for example, some corporations can file articles with the Commissioner of Commerce.
It might seem ridiculous, but aspiring entrepreneurs have, in fact, made the mistake of completing the articles of incorporation but never actually filing them with the Secretary of State. Articles of incorporation do not go into effect until they are appropriately filed and until the mandated filing fee is paid in full.
Articles of incorporation must include a signature from at least one of the identified incorporators. This is a key element of the document, and yet it is one left out on a shockingly regular basis. Articles could also be rejected if they include signatures from those not authorized to serve as incorporator. In Alaska, for example, the incorporator must be a "natural person of the age of 18 years or more."
In signing the articles of incorporation, the incorporator is required to verify that all information outlined in the document is accurate. In some states, signing while knowing that the article is false 'in material respects' could result in misdemeanor charges.
Thankfully, in some cases it is possible to fix incorrect articles of incorporation after they have been filed. To make changes, you will need either the articles of amendment or the certificate of amendment from your Secretary of State. You will also need a copy of the original articles of incorporation.
Your corporation's board of directors must agree on all changes made to the articles of incorporation. These updates can be proposed during a regular board meeting or during a special meeting convened for the sole purpose of amendment. Board members should vote on the resolution.
In some states, both the board of directors and the shareholders must agree to resolutions involving changes to the articles of incorporation. To accomplish this, the resolution can be submitted for a vote at the regular shareholder meetings. The types of changes that require shareholder approval vary from state to state. Check with your Secretary of State to determine whether shareholder input is actually required in your situation.
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