Articles of Incorporation Information

Reprinted with permission from
Incorporating in Oregon Without a Lawyer, W. Dean Brown,
Consumer Publishing, 1995-1996. Chapter 5, pages 33-38.

INCORPORATION QUESTIONS
In this section, you will find many of the most commonly asked questions people have about incorporating. When I wrote my first book, Incorporating in Tennessee Without A Lawyer, it was about half the size of this book. Needless to say, it didn't include nearly as much information. Accordingly, my office received a lot of questions from readers. The answers to many of these questions have been included throughout this book. However, some questions can be answered in a few sentences, and don't require a whole chapter. These questions are found on the next few pages.

What are the Articles of Incorporation?
The articles of incorporation, sometimes called the certificate of incorporation, or charter, declares the desire of an individual or group of individuals to become a corporation. It spells out certain minimum information about the corporation that is required by the laws of the state. It may also contain specific information about the corporation that needs to be made public record, items like restriction on the transfer of corporate stock.

What is an Assumed Name?
An assumed name, sometimes called a fictitious name, is a feature of some state corporation laws that allows a corporation to operate under more than one name. For the details on the mechanics of this option, ask the state corporations division. This can be quite convenient to the small business person who sells different products but does not wish to have several corporations. Many people initially name the corporation their last name like Jones, Inc. They might then name their different companies to be more descriptive of separate product lines, like Quantum Computers, Inc., and Standard Computer Software Corporation. All of these would simply be different names, or aliases for the same corporation, that has only one set of books, and the same shareholders.

What are Authorized Shares?
State law specifies that shares of stock in the corporation will be issued under the direction of the board of directors. But, since the corporation is set up to benefit the shareholders, the shareholders set, or limit, the number of shares the directors are "authorized", or allowed, to issue. Since the directors are not allowed to issue shares without authorization from the shareholders, the number of authorized shares is equal to the number of total shares.

What's the Difference Between Issued and Authorized Shares?
The board of directors control the issuance of stock. Authorized shares is the total number of shares of stock that the board of directors are "authorized" to issue to shareholders. The board may issue all the shares now, or issue some now, and some later. Authorized shares become issued shares when "issued" or distributed to a stockholder. Shares that are not issued are usually called authorized but UN-issued shares. UN-issued shares belong to the corporation and are not considered for shareholders' ownership percentages.

What is the Board of Directors?
The board of directors is the body of people specified by state law to direct and oversee the business affairs of the corporation, and is usually headed by a chairperson. The board usually meets infrequently, and hires officers to manage the day to day business operations. However, since directors of the corporation have certain immunities from lawsuits against the corporation, all important business decisions like entering long term contracts, should be approved by the corporation's board of directors. It is important to remember to have a corporation's "directors" approve all major corporate actions. In the case of a small corporation, you must simply put on your director's hat, and put the word director after your signature. This should be done because at some point in the future someone may try to sue you personally instead of your corporation. If you, and not your "director" or "officer" has signed all corporate paperwork, it will make it easier for the person bringing suit to prove the corporation is a sham.This is a procedure that you need to be aware of. It's called "piercing the corporate veil" In some cases, when they realize that suing your corporation will get them nothing, people will try to sue you instead. That is, they will try to avoid your personal liability protection by going through the corporation, straight to you. Piercing the corporate veil is an expression used to suggest the action of penetrating the invisible wall of protection between you and your corporation.To lower the success rate of these attempts, you as a shareholder should not "run" your corporation. You should put on the appropriate "hat" and let your "officers" and "directors" do this for you. If you are your own officers and directors, you must simply wear your officer or director's hat when performing these official functions. It sounds silly, but you must remember that most corporation laws were drawn up for big corporations and adapted to small ones.

What are Bylaws?
Just as a city or state government has laws for its citizens, the corporation has rules for its shareholders, officers, and directors. These rules are called the bylaws. They specify things like the number of votes required to pass a matter put before the corporation, and the requirements to be met before a shareholder can sell their stock.

What Is a C Corporation?
The IRS, not the state, classifies corporations according to how they want to be taxed. There are two types of corporations according to the IRS, either "C" corporations, named after Subchapter C of the tax code, or "S" corporations, named after Subchapter S of the tax code. C corporations have their own tax identification number and pay their own taxes.Just the opposite, S corporations, sometimes called small business corporations, are taxed as if they were not a corporation. Taxed like a partnership, an S corporation "passes through" its income or losses to the shareholder's personal tax return, and is not liable for Federal income taxes itself. The shareholders of an S corporation will pay personal income taxes based on the income of the S corporation, whether or not the shareholder received any of the income. Conversely, the S corporation shareholders will be able to personally enjoy any losses the corporation may have. You need to discuss this with your CPA.

What does Capitalization Mean?
Capitalization is a term that requires a knowledge of accounting to understand, and can have different meanings. With a new corporation, the term generally refers to the amount of money that a corporation has in its "kitty" when operations begin. Some states have minimum capitalization requirements to insure that corporations have a bare minimum of assets before starting operations. Since shareholders are somewhat insulated from lawsuits against a corporation, these assets provide a means to pay any potential lawsuit winners. Minimum capitalization requirements also make it a little more difficult to start a corporation, and was probably started to help to keep out the "riff raff " Today, only a few states have minimum capitalization requirements.

What is a Certificate of Incorporation?
The certificate of incorporation is what some states issue to evidence that yours is a valid corporation and has met state incorporation requirements. In some states, however, certificate of incorporation means articles of incorporation, the document that you file to incorporate your business.

What is a Charter?
The terms Charter, Certificate of Incorporation, and Articles Of Incorporation are used interchangeably.

What are Directors?
Directors are the people who oversee the affairs of the corporation according to what they think is best for it. Directors are like politicians, hand picked by the shareholders, and subject to being removed by them. In a small corporation the directors are usually the shareholders who simply put on their director's "hat" when the need arises.

What is a Dividend?
A dividend is a special payment, usually paid at the end of each quarter, and is based on the profits made by the corporation during that quarter. Dividends are usually paid in cash or additional stock to the shareholders. This is a shareholder's reward for investing in the corporation. It is much the same as interest on a loan except that the dividend is based on the income of the corporation, and may or may not be a regular payment. Also, dividends are not deductible by the corporation while interest payments are. Some owners pay themselves a small salary to minimize FICA withholding, and pay themselves a quarterly dividend instead.

What is an Incorporator?
The incorporator is simply the person that files the articles of incorporation. The incorporator's duties and title end after incorporating. The incorporator must be old enough to legally enter into contracts. If a lawyer incorporates your business, he usually acts as the incorporator, allowing him to sign the required paperwork.

What are Issued Shares?
Issued shares are easily confused with authorized shares. Authorized shares is the maximum number of shares that the board of directors is "authorized", or allowed to issue. Issued shares, however, is the number of shares actually "issued", or given out to shareholders. Only issued shares are counted for ownership purposes.

How Many Shares of Stock are Required?
A corporation can't be a corporation without at least one share of stock. So you must have at least one shareholder, and one share of stock. You can have (authorize) as many shares of stock as you want, however, this may increase your filing fees in some cases.

What is Par Value?
Par value is simply an accounting or bookkeeping unit of measure used to keep track of the amounts given to the corporation when stock is issued. Par value means much the same as purchase price. If the stock has a $1000 par value, then the person wishing to purchase the stock must give something with at least a $1000 value for the stock. Amounts given for the stock in excess of par value are called "paid in capital in excess of par value" and again is simply a bookkeeping title. Par value is only meaningful when the stock is bought directly from the corporation and is not considered when stock is bought on the open market. When one buys stock on the market, they pay what the stock is actually worth, the "market" price.

What is no Par Value Stock?
Since par value more or less means the price to be paid for the shares when purchased from the corporation, no par value stock is stock for which no fixed price is set. This is usually the case in small corporations where the owners issue themselves a number of shares and simply infuse money in the corporation when needed. Corporations issue no par stock for flexibility. If the corporation's stock has no par value, then there is no set "price" for the stock. In this case, the directors can raise the "price" of the stock when the corporation becomes more valuable. You see, with no par value stock, the directors decide how much must be paid for the stock each time it is issued to a shareholder.

Must Stock Have a Par Value?
No. Most often in a small business corporation the stock is called "no par value stock" which simply means that there is no set amount of payment required to purchase the stock of the corporation. Each time stock is issued, the directors will decide how much must be received for the shares.

What are Officers?
The officers are usually employees of the corporation and manage the business on a daily basis. They are responsible for duties outlined by the corporate bylaws. In a small corporation, the officers are usually the directors and the shareholders, who merely "wear different hats". The owners of a small corporation do a lot of role playing because small corporations don't exactly fit the corporate mold envisioned by the laws of many states. The president is usually the chairperson of the board as well.

What is a Registered Agent?
Although a corporation is a separate legal entity, it cannot physically receive documents, and therefore needs a real person to receive them on its behalf. A registered agent is needed to make sure that the corporation will have an assigned representative at a known address in the state to receive all legal documents for the corporation. The registered agent will forward these documents to the corporation at its principal office address. Corporations that operate in different states, but don't maintain offices in these states, use agent service companies to act as registered agent for them. The terms registered agent, resident agent, and statutory agent all have the same meaning.

What is an Annual Meeting?
The annual meeting is a special meeting held once a year to "review the results of corporate operations" with the shareholders. In larger corporations, shareholders do not generally participate in daily business operations. So, in order to make sure that shareholders are informed about their investment, corporations are required by most state laws to hold annual meetings for this purpose. Since officers and directors are usually appointed for terms of one year, annual meetings are also held to re-appoint the officers and directors of the corporation. Although holding an annual meeting may sound complicated, the requirement of holding an annual meeting is usually satisfied by using a standard pre-written form called Minutes of Annual Shareholders Meeting included in chapter eight. If you read through the form, you'll see that it records that the actions described above are performed.

What are Stockholders or Shareholders?
The term stockholders and shareholders are usually used interchangeably, and are the people for whom the corporation was organized. In large corporations, shareholders are merely investors who put money into the business in return for future dividends. In a small corporation, they are the people who actually start and run the corporation providing jobs for themselves.

Corporation Division

Articles of Incorporation Information