Small Law Firms, Solo Practitioners

Starting A Corporation

How do you form a corporation? Attorney Gary J. Ross explains.

By  
on

legal-pen-paperI’ve been writing about going from Biglaw peon to SmallLaw kingfish for over two years now. Starting this week, I will be alternating posts between Biglaw/SmallLaw ruminations and posts about the venture capital/emerging companies practice area (“emerging companies” being a fancy term for “startups”). I’m looking forward to it, and hopefully those who aren’t particularly interested in this practice area will stick with me.

Today, I’m going to write about forming a corporation. In Biglaw, much of the basic nuts and bolts of this is skipped over. New grads go right from law school into practicing a niche of law such as securitization, and at the Biglaw firm there are already paralegals and staff attorneys in place who take care of all the technical corporate stuff that actually get companies off the ground. From the firm’s point of view, they want the associate to bill hours as soon as possible, so there’s really no use in spending time giving instructions as to what something like an Action of Incorporator is, since the associate is never going to draft one and will thus forget it in a year or two.

I won’t dwell on it too much here since it warrants its own column, but just to state quickly, the decision of whether a business should be a corporation or a limited liability company (or either one and then file for S-corporation status), and where it should be domiciled, is not one to be taken lightly. Not every business needs to be a Delaware corporation, in spite of what a junior Silicon Valley associate might tell you.

But for now, on to the Articles of Incorporation.

This document is filed with the state secretary of state and is what actually forms the corporation. Whether it’s called Certificate of Incorporation or Articles of Incorporation is state-dependent, but they are the same thing. I will call it the latter here, since I first practiced in Georgia and old habits die hard. I’m sure everyone reading this has seen many of these. From a practice perspective, there are two items in this document to pay super-close attention to, and then several others to be aware of.

First, the Articles of Incorporation authorizes the number of shares, which can only be later increased or decreased by filing an amended Articles of Incorporation. You don’t have to say who gets the shares (and “authorized” is different than “issued”), though of course check your local state law and don’t go by what I say unless you’re actually paying me for legal advice. (Clicking on ATL ads doesn’t count, but is appreciated.) If two classes of stock are being authorized, such as common and preferred, then this needs to be set out, along with the number of shares of each. In a later column, I will explain why you may only want to authorize common stock at first.

If you’re authorizing a large number of shares, such as a million or so, then you need to make sure you have a very low par value or your client may get hit with a large franchise tax bill the next year. There’s a reason you see a lot of par values set at $0.0001. Some corporations will start out with 5,000 authorized shares so they will be assured of paying the minimum franchise tax.

Sponsored

The second important item is the indemnification provision. You probably want to make sure the indemnification covers just about everything under the sun. Use whatever imagination you have left to conjure up the most outlandish scenario, and then make sure the indemnification provision covers it (or doesn’t cover it, according to what’s best for the client). There is also an indemnification provision in the bylaws, and your state law may say “unless as otherwise provided in the bylaws,” but since the Articles of Incorporation are publicly available, my preference has always been to have the indemnification provisions in the bylaws and Articles mirror each other (or at the very least, not conflict). Do your fellow lawyers a favor and provide for expenses to be advanced, so legal bills are paid timely.

Other items:

Registered agent.  The registered agent has to be in the state and is appointed only to accept court docs in case the corporation gets sued. If your client lives in state and the state allows it, then your client can be the registered agent, but the agent’s address has to be listed in the Articles so if your client is the agent then you’ll have to file an amended Articles every time they move. So try to discourage it if your client is a 22-year-old who just moved to town and is subletting a friend’s basement week-to-week. In regard to registered agents, Corporation Service Company and CT Corporation are expensive options, that might be suitable to Biglaw but probably not to anyone else. Look around.

Purpose clause.  Make this broad unless there’s some reason to do otherwise. I’ve had clients want to have something about their business here (“the purpose is to disrupt [said industry]”), but this isn’t the place for it.

Directors.  In most states, the Articles do not have to list the directors of a company, and in fact, I don’t recommend they do, since the directors will likely change over the life of a company. It’s never a good thing to have inaccurate information out there for others to see.

Sponsored

Signature.  Attorneys can sign the Articles of Incorporation as the “Incorporator,” so you don’t need to get a signature from your client.

I’ve mentioned a couple of times that Articles are publicly available. In a few states, the Articles for any company can be pulled up and viewed for free on the state’s website. In most states, a company’s Articles have to be ordered for a small fee ($10 or so). But anyone can do this, including competitors or those who wish your client (or you) ill will.

While in the eyes of the state, this and the filing fee are all that is needed for a corporation to be formed, in my next practice-oriented column, I will discuss some of the documents that go along with forming a corporation, such as the bylaws, initial resolutions, and the aforementioned Action of Incorporator.

Gary J. Ross founded Jackson Ross PLLC in 2013 after several years in Biglaw and the federal government. Gary handles corporate and securities law matters for venture capital funds, startups, and other large and small businesses, as well as investors in each. You can reach Gary by email at Gary.Ross@JacksonRossLaw.com.

Topics

, , , , , ,