Forming the Corporation

• Pages: 15-35
• Author: Stephen M. Bainbridge

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Chapter 2

FORMING THE CORPORATION

§ 2.1 Introduction

Until the middle of the nineteenth century, incorporating a

business required one to persuade the state legislature to pass a

special law granting the company a corporate charter. The steadily

increasing number of corporations caused an increase in applications

for a charter and for amendments to existing charters, which

constituted a considerable legislative burden. The process also

invited corruption, because influential legislators frequently received

under the table payments for their support.

As the nineteenth century progressed, states began adopting so-

called enabling corporate laws. These statutes created the modern

process of incorporating a business. Under the enabling laws, a

corporation was formed simply by jumping through certain statutory

hoops, the most important of which were preparing articles of

incorporation conforming to the statute’s requirements and filing

them with the appropriate state official. Today, all states have

enabling statutes and creating a corporation has become a

straightforward process.

§ 2.2 Forming the Corporation

Incorporating a business is an astonishingly simple process.

Articles of incorporation meeting certain minimal statutory

requirements are drafted. One or more incorporators sign the articles

and deliver them to the state of incorporation’s secretary of state’s

office, along with a check for any applicable fees or taxes. The

secretary of state retains the original articles and returns a copy to

the incorporator with a receipt for the fee. Unless the articles provide

to the contrary, the corporation comes into existence at the moment

the secretary of state’s office accepts the articles for filing.

Some states impose additional requirements, usually additional

filings. Some require filing of the articles with the county in which

the corporation’s registered office or principal place of business is

located. A few require newspaper publication of the articles or a

notice of incorporation. Several require newly formed corporations to

receive payment for shares meeting some minimum amount of

capital (typically $1,000) before transacting business or incurring

debt.

After the articles of incorporation are filed with the secretary of

state, an organizational meeting is held. If the articles name the

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FORMING THE CORPORATION

Ch. 2

initial directors, the incorporator’s role is finished and the directors

will run the organizational meeting. At the organizational meeting,

the directors appoint officers, adopt bylaws, and carry out any other

business necessary to complete the organization of the corporation. If

the articles do not name the initial directors, the incorporator runs

the organizational meeting. The incorporator may elect a board of

directors, appoint officers, adopt bylaws, and otherwise complete the

corporation’s organization. Alternatively, the incorporator may

simply elect a board of directors and leave those tasks to the new

board. The option of using the incorporator to conduct the

organizational meeting permits one to avoid naming the initial

directors in the articles in cases where confidentiality is important.

Minutes of the organizational meeting and, indeed, of all board

and shareholder meetings should be kept. The minutes serve three

purposes: (1) they are one of the formalities relevant to ensuring that

the corporation’s shareholders will get the benefit of limited liability;

(2) the minutes provide a record of actions authorized by the board of

directors (such a record is sometimes needed as proof that a corporate

agent is authorized to enter into a contract); and (3) a director who

disagrees with some proposed corporate action, and causes his

dissent to be recorded in the minutes, may not be held personally

liable in connection with the action.

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§ 2.3 Drafting the Organic Documents

A corporation’s articles and bylaws set out the firm’s basic

internal organization and governance rules.

A. Articles of Incorporation

Modern articles of incorporation usually are bare -bones

documents, containing little more than the statutorily mandated

terms. MBCA § 2.02(a), for example, only requires the articles to

contain four items:

• Name: A corporation’s name may not be the same or

confusingly similar to that of another corporation

incorporated or qualified to do business in the state of

incorporation. The name must also include some word

or abbreviation indicating that the business is

incorporated, such as corporation, company, “Inc.” or

the like.

• Authorized shares: The articles must state the

maximum number of shares the corporation is

authorized to issue.

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MBCA § 8.24(d).