978-1133019145 Chapter 8 Solution Manual

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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

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• 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

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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.

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• 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

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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

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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

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• 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?

Why or why not?

The name of a corporation in a state

following the Model Business

Corporation Act must include the