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So You Think You Have a CorporationThe Perils of Do-It-Yourself Incorporations
It is simple to fill out state forms and get the Secretary of State or State Corporation Commission to tell you that you have a corporation. A ll you have to do is (1) find a name that is not already taken (2) fill out a form correctly (3) sign it in all the right places, and (4) file it with the required filing fee with the appropriate state agency. No difficult. Not rocket science.
But do you really have a corporation? If all you did was take those four simple steps, you do not yet have a fully formed corporation. Sure your state will say the corporation exists. Has it become operational? Has it issued you any stock? Are you the owner yet?
A corporation is more than approval of papers by the appropriate government official. I will endeavor to explain.
The person who signs the incorporation papers is the incorporator. At that point the incorporator has control of the corporation, but not necessarily ownership. The owner of a corporation is called a stockholder or shareholder, because the owner owns shares of stock in the corporation. “Stock” or “shares” are usually represented by certificates and represent fractional interests in the corporation. The fraction may be 100%.
Typically, buy not necessarily, the incorporator authorized the issuance of the initial shares. Sometimes the articles of incorporation (the initial filing) will name the first board of directors who may then authorize the corporation to issue and sell shares.
Officially shareholders do not manage the business of a corporation. A corporation is a representative form of governance. The shareholders meet and elect directors. The manner of electing directors can get complex, but those details. (such as cumulative versus non-cumulative voting) are beyond the scope of this article.
By statute, the board of directors is charged with the day-to-day management of the corporation. The board typically discharges its management duty by delegating responsibilities to officers, which it appoints. Most states, such as Ohio, require corporations that have at least the following officers: president, secretary, and treasurer, no more than two of which may be the same person. For a corporation with a single owner, most states allow the same person to occupy all three offices.
Statutes typically contain ongoing meetings and management requirements.
What if you have a do-it-yourself corporation; you filed the initial papers with filing fee, but did nothing after that? What problems can that cause?
ANSWER: (1) The IRS could disregard the corporation on audit and (2) you could have the unlimited liability of a sole proprietorship, i.e., an unincorporated business.
What should you do? Run, don’t walk, to a lawyer familiar with small, closely held corporations. The lawyer will prepare the documentation to complete to complete the corporate formalities and should educate you on what you need to do to keep your corporate protection and characteristics.
Remember that a corporation is a separate legal person. You must treat it as an entity with a separate existence, separate bank account, and separate and ongoing documentation.
For more information, email David W. T. Carroll
Carroll, Ucker & Hemmer LLC represents both businesses and individuals with legal needs.Home
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