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©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
CHAPTER 8
Incorporation
THEME
Chapter 8 focuses on the formation of the cor-
poration, from preincorporation matters
through the organizational meeting.
CHAPTER GOAL
The goal of this chapter is for students to
• Articles of incorporation and certificate of
incorporation
• Business corporation incorporation re-
quirements
• Factors to consider prior to incorporating a
business corporation
• Procedures for properly incorporating a
business, from preincorporation matters
through the organizational meeting
• The role of corporate paralegals in the in-
corporation process
• Resources available to corporate parale-
gals who may be assisting with the for-
mation of a corporation
SUGGESTED APPROACH
Because paralegal students may eventually
become responsible for incorporating busi-
nesses in their home states, state requirements
for incorporating may be the focus of this
chapter. Students should become familiar with
the statutory requirements of their home state
and also with the procedures for filing incor-
poration documents with the appropriate state
authority of the students’ home state.
LECTURE NOTES
Introduction to Incorporating
1. The corporation does not exist until it is
properly incorporated.
2. Articles of incorporation, or a certificate
of incorporation, are typically filed with
the secretary of state or other appropriate
state official to form a corporation.
3. The individuals who form the corporation
and sign the incorporation documents are
referred to as the incorporators.
4. Exact requirements for incorporating are
established by state statute and rules of
Preincorporation Matters
5. Preincorporation matters include all steps
that must be taken by the incorporators or
promoters of a corporation prior to its in-
corporation, including deciding on the
best form of business organization and
choosing the state of domicile for the
corporation.
6. Before a final decision is made to incor-
porate a business, all other forms of busi-
ness organization should be considered.
The following items must be taken into
consideration to determine whether to in-
corporate or form another type of busi-
ness entity:
• Income tax implications
• Capital requirements
• Applicable statutory requirements
• Desired management structure
• The importance of limited liability
• Transferability of ownership
• Ease of forming and dissolving the
business entity
7. Incorporators may choose the state or ju-
risdiction in which they will incorporate
their business. For each state being con-
sidered, the following factors must be
taken into consideration:
• The nature of the business corporation
act of that state
56 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
• The costs associated with incorporation
in that state
• The state’s judicial policy toward cor-
porations
• The availability of the corporation’s
name in that state
• The state’s law with regard to share-
holder meetings being held out of state
• The state’s law with regard to share-
holder and director liability
• The state’s law with regard to require-
ments for keeping corporate records in
that state
• The annual reporting requirements of
the state
8. The state of Delaware, also known as the
“incorporation state,” is the state of dom-
icile for more than 850,000 corporations.
Delaware has attracted corporations by
adopting corporate laws that are among
the most liberal in the country. In addi-
tion, the user-friendly Delaware Depart-
ment of State, Division of Corporations,
has been set up to handle incorporations
in an easy and efficient manner.
9. Under certain circumstances, the found-
ers of a corporation may set forth their
understanding and agreement concerning
the proposed corporation in a preincorpo-
ration agreement.
10. A stock subscription is an agreement to
purchase a stated number of shares of a
corporation or a future corporation at a
stated price.
11. Attorneys, and often paralegals, will meet
with a client prior to incorporation to
gather the necessary information to form
the corporation. The information obtained
from a client at a preincorporation meet-
ing will also be useful in providing future
services to the corporate client.
Promoters
12. The formation of some corporations in-
volves a promoter, an individual who as-
sists in creating, promoting, and organiz-
ing a corporation. The promoter often ob-
tains stock subscriptions for a proposed
corporation.
13. Any actions taken on by the promoter on
behalf of a corporation prior to its incor-
poration are considered to be preincorpo-
ration transactions and, to be valid, must
be ratified and approved by the corpora-
tion after it is formed.
Incorporators
14. The incorportor is the individual who
signs the articles of incorporation or cer-
tificate of incorporation on behalf of the
corporation. The incorporator has no
formal duties as such after the corpora-
tion has been successfully formed.
Corporate Name
15. The name chosen for the corporation must
include words indicating that the organiza-
tion is a corporation as required by state
statute. Often, statutes require the use of
the words incorporated, corporation, lim-
ited, or the initials inc., corp., or ltd.
16. The name chosen for the corporation
must not already be in use in that state,
and it must not be deceptively similar to
the name of another corporation already
in use or registered by a corporation in
that state.
17. The name of a corporation must not be
misleading to the public. For example, it
must not include words indicating that it
is a corporation formed for a purpose
other than its actual purpose.
18. An incorporator may reserve the exclu-
sive use of a corporate name by filing an
application for name reservation with the
secretary of state, along with the proper
filing fee. It may be advisable to reserve
the corporate name when the incorpora-
tion will take several days, or if there is
any doubt that the name will be accepta-
ble when the articles of incorporation are
filed.
CHAPTER 8 Incorporation 57
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
Articles of Incorporation
19. In most states, the articles of incorpora-
tion must include the following infor-
mation:
• The corporation’s name in compliance
with all name requirements
• The number of shares the corporation
is authorized to issue
• The street address of the corpora-
tion’s initial registered office and reg-
istered agent
• The name and address of each incor-
porator
20. The articles of incorporation must set
forth the number of shares authorized for
each class of shares. Additional infor-
mation may be required by state statute,
including the par value of the stock and
the rights and preferences of the stock.
21. If the corporation issues only one class of
stock, it is common stock.
22. The articles of incorporation must set
forth the registered office address and the
registered agent at that address. The reg-
istered agent is the individual who will be
responsible for receiving service of pro-
cess on behalf of the corporation in that
state. The office address may not be a
post office box; it must be a physical lo-
cation where an individual may be served
in person.
23. The name and address of the incorpora-
tors must be included in the articles of
incorporation, and the articles must be
signed by the incorporators. Notarization
and witnessing may be required in some
states.
24. Under the Model Business Corporation
Act, the following optional provisions
may be included in the articles of incor-
poration:
• The names and addresses of the indi-
viduals who are to serve as the initial
directors
• The purpose or purposes for which
the corporation is organized
• Provisions regarding the management
of the business and regulation of the
affairs of the corporation
• Provisions defining, limiting, and
regulating the powers of the corpora-
tion, its board of directors, and its
shareholders
• Provisions setting a par value for au-
thorized shares or classes of shares
• Provisions imposing personal liability
on shareholders for the debts of the
corporation to a specified extent and
upon specified conditions
• Any provision that is required or
permitted by statute to be set forth in
the bylaws
• Provisions limiting the directors’ per-
sonal liability, except under certain
circumstances
25. State statutes often include several de-
fault provisions that are applicable to the
corporation unless otherwise provided in
the corporation’s articles of incorpora-
tion. Common default provisions that
may be amended in the articles of incor-
poration include the following:
• Shareholders do not have a right to
cumulate their votes for directors.
• Shareholders may remove one or
more directors with or without cause.
• All shares of the corporation are of
one class with identical rights.
• Shareholders have no preemptive
rights to acquire unissued shares.
• A corporation has perpetual existence.
• The board of directors has the power
to adopt, amend, or repeal the bylaws.
• The affirmative vote of a majority of
directors present is required for an ac-
tion of the board.
• A written action by the board taken
without a meeting must be signed by
all directors.
58 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
• The affirmative vote of the holders of
a majority of the voting power of the
shares present and entitled to vote at a
duly held meeting is required for an
action of the shareholders, except
where state statutes require otherwise.
26. The secretary of state or other appropriate
state authority often provides articles of
incorporation (or certificate of incorpora-
tion) forms that may be completed to form
a corporation in that state. These forms
usually ask for only the minimum re-
quirements for incorporating in that state.
27. The articles of incorporation are effec-
tive, and the corporation’s life begins,
when the articles are filed with the secre-
tary of state or other appropriate state au-
thority—unless a later effective date is
provided for in the articles.
28. Some states have requirements for filing the
articles at the local level or publishing no-
tice of incorporation in a legal newspaper.
The Organizational Meeting
29. After the articles of incorporation are
filed, an organizational meeting is held.
The incorporators, initial shareholders,
and board of directors are usually in at-
tendance.
30. When the first board of directors is not
named in the articles of incorporation, the
incorporators may hold the organization-
al meeting. The primary purpose of the
meeting will be to appoint the board of
directors.
31. The following actions are usually taken
at the organizational meeting or the first
meeting of the board of directors and
shareholders:
• The incorporators elect the initial
board of directors (if they are not
named in the articles of incorpora-
tion).
• The articles of incorporation are ap-
proved and accepted by the corpora-
tion.
• The acts of the incorporators are rati-
fied and approved.
• The board of directors accepts stock
subscriptions for shares of the corpo-
ration’s stock, and stock is issued.
• The initial officers of the corporation
are elected.
• The bylaws are adopted by the board
of directors and shareholders.
• The accounting method of the corpo-
ration is approved.
• The form of stock certificate that will
be used by the corporation is ap-
proved.
• Any required securities filings are
approved.
• A corporate seal is adopted, or it is
agreed that no seal will be used.
• A corporate bank account is estab-
lished.
• If desired, election to become an
S Corporation is approved.
• Employee benefit plans may be
adopted.
• Shareholders approve the election of
the board of directors and establish
their term of office.
32. Actions taken at an organizational meet-
ing may be documented by minutes of the
meeting, or by a unanimous written con-
sent of all individuals entitled to attend
the meeting.
Bylaws
33. The corporation’s bylaws are the rules
and guidelines for internal government
and control of the corporation. The Mod-
el Business Corporation Act provides that
bylaws may contain any provisions for
managing the business and regulating the
affairs of the corporation, so long as those
provisions are not inconsistent with law
or the articles of incorporation.
CHAPTER 8 Incorporation 59
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
34. The following information is usually con-
tained in the corporation’s bylaws:
• The address of the principal office of
the corporation and any other im-
portant locations
• Requirements for annual and special
shareholder meetings
• The number and terms of the direc-
tors on the board of directors
• Requirements for annual and special
board of director meetings
• Procedures for removing directors
• The means for determining director
compensation
• Limitations on the liability of the
board of directors and officers
• The titles of the corporate officers
and the powers and duties those of-
ficers will have
• The corporation’s policy for payment
of dividends
• A description of the corporate records
that will be kept and the location of
those records
• A description of the form of stock
certificate the corporation will have
• A description of the corporation’s
corporate seal (if one is to be used)
• The fiscal year of the corporation
Formation of Special Types of Corpora-
tions
35. There are additional and slightly different
requirements for incorporating special
types of corporations, such as statutory
close corporations, professional corpora-
tions, and nonprofit corporations.
The Paralegal’s Role
36. Corporate paralegals are often involved in
all aspects of the incorporation process.
Resources
37. Resources useful to paralegals who are
incorporating businesses include the fol-
lowing:
• State statutes
• Information available from the secre-
tary of state or other state authority
• Forms and form books
• Incorporation services
CASE BRIEFS
Moneywatch Companies v. Wilbers, 665 N.E.
2d 689 (Ohio Ct. App. 1995)
Purpose: This case illustrates that the acts of
the promoter are not the acts of the corpora-
tion and shows how important it is for the cor-
poration to adopt and ratify the acts of the
promoter after incorporation.
Cause of Action: Breach of contract
Facts: In December 1992, Jeffrey Wilbers
(“Defendant”) negotiated a lease agreement for
commercial space with Moneywatch Compa-
nies (“Plaintiff”) through its property manager,
Rebecca Reed. The Defendant indicated that he
intended to create a corporation and needed the
space for a golfing business he wanted to open.
Reed claimed that she told the Defendant that
he would have to remain personally liable on
the lease, even if a corporation was subsequent-
ly created. Defendant testified that he never
intended to assume personal liability on the
lease and that Plaintiff never advised him that
he would have to be personally liable under the
lease. At Plaintiff ’s request, Defendant submit-
ted a personal financial statement and business
plan.
On December 23, 1992, a lease agree-
ment was signed. The Plaintiff was named as
landlord and “Jeff Wilbers, dba Golfing Ad-
ventures” as tenant. The lease agreement
provided that rent would not be due until
March 1, 1993. On January 11, 1993, articles
of incorporation for “J & J Adventures, Inc.”
were signed by “Jeff Wilbers, Incorporator.”
On February 3, 1993, a trade name registration
was signed for “Golfing Adventures” to be
used by J & J Adventures, Incorporated.
Defendant notified Plaintiff of the in-
corporation of J & J Adventures, Inc. and
60 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
asked that the name of the tenant on the lease
be changed from “Jeff Wilbers, dba Golfing
Adventures” to “J & J Adventures, Inc., dba
Golfing Adventures.” Plaintiff informed De-
fendant that the change would be made.
Later that year the corporation default-
ed and vacated the premises. Plaintiff brought
a breach of contract action against Defendant
in his personal capacity. The trial court en-
tered judgment ordering Defendant to pay
Plaintiff the sum of $13,922.67 plus interest
and costs.
Defendant appealed the decision, con-
tending that he was not personally liable under
the lease agreement because the corporation “J
& J Adventures, Inc., dba Golfing Adven-
tures” was substituted in the lease for him. De-
fendant also claimed that he was not personal-
ly liable because he executed the lease as a
corporate promoter on behalf of a future cor-
the lease.
Reasoning: Promoters are not personally lia-
ble on contracts made prior to incorporation
when (1) contracts are made in the name and
solely on the credit of the future corporation,
(2) the contract provides that performance is
to be the obligation of the corporation, and (3)
the corporation is ultimately formed and it
formally adopts the contract.
tion was substituted as the tenant. In fact, De-
fendant’s individual signature remained on the
lease agreement. In addition, there is no evi-
dence that the corporation, once formed, for-
mally adopted the lease agreement as executed
by the Defendant. In the absence of the neces-
sary steps that must be taken to ensure that
Defendant is not personally liable and the cor-
poration is solely liable under the lease, De-
fendant is personally liable under the lease.
REVIEW QUESTIONS
1. What are some of the factors that must be
taken into account when determining if a
corporation is the best type of business
organization for a particular business?
The importance of the following fac-
tors must be considered when deciding
which type of business organization to
form:
2. Discuss some of the factors that should
be considered when determining where to
incorporate a business. Why are those
factors important?
When deciding where to incorporate a
business, the incorporators can choose
from the states that best suits the needs
of the corporation and its owners. In-
corporators should consider:
CHAPTER 8 Incorporation 61
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
• Is the proposed corporate name
available in the state being consid-
ered?
3. Under what circumstances are corpora-
tions bound to contracts made by the
promoter prior to incorporation?
Corporations are bound to preincorpo-
ration contracts only if they are ratified
the majority of their business in Florida,
what is their state of domicile?
New York
6. In addition to filing articles of incorpora-
tion, what incorporation formalities are
imposed by some states before the incor-
poration process is complete?
Some states require that notice of in-
corporation be published and/or that a
a corporation?
Yes, but it is generally not required.
8. What required provisions must be includ-
ed in the articles of incorporation in a
state following the Model Business Cor-
poration Act?
• The name of the corporation
• A description of the authorized
stock of the corporation
provides that the information could be in
either document?
Information included in articles and
bylaws is often subject to change. It is
generally easier to amend the bylaws
10. Would the name “Johnson Brothers Fur-
niture Store” be a valid corporate name in
a state following the Model Business
Corporation Act?
No
Why or why not?
The name of a corporation in a state
following the Model Business
Corporation Act must include the
SUGGESTED ANSWERS TO
PRACTICAL PROBLEMS
The Practical Problems in this chapter ask stu-
dents to research the statutory requirements
for incorporating in their home state. Students
62 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
are also asked to identify the state agency that
accepts incorporation documents and to an-
swer some basic questions about the proce-
dures for filing documents with that agency.
Resources for answering the Practical
Problems include the following:
• State statutes (See text, Exhibit 7-
8; links to the state business corpo-
ration acts can be found on the
CourseMate website that accompa-
nies this text at
http://www.cengagebrain.com.)
• Office of the secretary of state or
other appropriate state authority
(See Appendix A to the text and
the CourseMate website that ac-
companies this text at
http://www.cengagebrain.com.)
EXERCISE IN CRITICAL
THINKING
Why is it so important for the organizers of
a corporation to make sure that corporate
formalities are followed with regard to
preincoropration and incorporation
matters? If formalities are not followed,
what are some possible consequences to the
promoters? incorporators? shareholders?
board of directors?
SUGGESTIONS AND SAMPLE
DOCUMENTS FOR THE WORK-
PLACE SCENARIO
The Workplace Scenario at the end of this
chapter asks students to incorporate their
fictitious corporation, Cutting Edge Computer
Repair, Inc., by preparing articles of
incorporation and any other documents that
may be required for filing along with a cover
letter filing the documents with the
appropriate state authority.
Students should be asked to research
the incorporation statute of their home state
and to contact the secretary of state or other
state authority, either online or by telephone,
to inquire about specific procedures that must
be followed and any additional documents that
may be required.
Appendix I is a sample articles of in-
corporation document for Cutting Edge Com-
puter Repair, Inc. that could be filed in states
that follow requirements for articles of incor-
poration of the Model Business Corporation
Act. Appendix I also includes a sample cover
letter for filing the articles.
