Chapter 1

Corporate Documents and Laws

Organize Your Corporate Records............................................................. 4

Articles of Incorporation........................................................................... 4

Bylaws......................................................................................................... 6

Minutes of Your First Directors’ Meeting............................................... 7

Records Showing Stock Was Issued.................................................... 7

Minutes of Meetings and Written Consents......................................... 8

Your State Corporate Filing Office............................................................. 8

Looking Up the Law Yourself..................................................................... 8

Finding Your State Corporation Laws................................................... 9

Look Up Relevant Corporate Statutes................................................. 10

Checking Other Laws............................................................................ 10

When to Consult a Professional.......................................................... 10

Calling, providing notice for, holding, and voting at meetings of your directors and shareholders necessarily means becoming familiar with a bucketful of new terminology and procedures. While mastering this material isn’t difficult, it does require atten­tion to detail. In this chapter, we provide legal and practical background information about basic corporate documents and the state corporation laws on which they are based.

If you are well organized and feel you under­stand the purpose of your articles, bylaws, and minutes, much of the material in this chapter may seem like old hat. If so, you may wish to skip ahead to the next chapter where we present an overview of the common methods of corporate decision making, including corporate meetings and written consents.

Organize Your Corporate Records

Anyone who sets up a corporation needs to be able to quickly locate key organizational documents. Because these are really the constitution of your corporation, you’ll refer to them again and again. When using this book to produce corporate minute and consent forms, we will often refer you to these documents.

If you have not already done so, the best approach is to set up a corporate records book that contains the key documents. You can do this on your own with a three-ring binder or by using a customized corporate kit designed for the purpose.

Your corporate records book should contain:

• articles of incorporation

• bylaws

• minutes of the first directors’ meeting

• stock certificate stubs or a stock transfer ledger showing the names and addresses of your shareholders, as well as the number and types of shares owned by each

• minutes of annual and special meetings of directors or shareholders, if any, and

• written consents.

If someone helped you incorporate, such as a lawyer, accountant, paralegal, or financial planner, you probably received copies of these documents in a corporate records book, commonly called a corporate kit. However, some lawyers attempt to hold on to corporate records in the hope that you will have them take care of all ongoing technicalities. If so, you will need to request a copy of all corporate documents in your client file. (This is your property, so don’t take “No” for an answer.)

If you can’t locate a copy of your articles, write your secretary of state’s corporate filing office and request a certified or file-stamped copy of your articles. (See Appendix B for contact information.) It’s a good idea to call first so you can include the correct fee, which should be just a few dollars or so.

Articles of Incorporation

The first key organizing document all small business corporations must have is their articles of incorporation. (While most states use the term articles of incorporation to refer to the basic document creating the corporation, some states, including Connecticut, Delaware, New York, and Oklahoma, use the term certificate of incorporation. Washington calls the document a certificate of formation, and Tennessee calls it a charter.) A corporation comes into existence when its articles of incorporation are filed with the state corporate filing office. The articles normally contain fundamental structural information, such as the name of the corporation, names and addresses of its directors, its registered agent and his or her office address, and the corporation’s capital stock structure.

For the majority of small corporations, there is no other important information in this document. However, larger corporations sometimes adopt articles containing special provisions that impact future decision-making processes of the corporation.

Example:

The Equity Investors Capital Corporation adopts articles that contain a multiclass stock structure consisting of Class A voting shares and Class B nonvoting shares. A special article requires a vote of two-thirds of each class of stock for the approval of amendments (future changes) to the corporation’s articles or bylaws.

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Bylaws

The bylaws of a corporation are its second-most important document. You do not file bylaws with the state—they are an internal document that contains rules for holding corporate meetings and other formalities according to state corporate laws.

Bylaws typically specify the frequency of regular meetings of directors and shareholders and the call, notice, quorum, and voting rules for each type of meeting. They usually contain the rules for setting up and delegating authority to special committees of the board, the rights of directors and shareholders to inspect the corporate records and books, the rights of directors and officers to insurance coverage or indemnification (reimbursement by the corporation for legal fees and judgments) in the event of lawsuits, plus a number of other standard legal provisions.

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Because the corporation laws of all states are subject to change, it’s possible that bylaws that were valid when adopted will later go out of date. Fortunately, major changes to corporate laws happen only every decade or two, when states modernize their corporate statutes. Nonetheless, if your corporation has been in existence for a few years and you plan a major corporate decision such as the issuance of a new class of shares, declaration of a dividend, or purchase of shares from a shareholder, it’s wise to make sure your bylaw provisions are up-to-date by checking your state’s current business corporation act.

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Minutes of Your First Directors’ Meeting

When most businesses incorporate, they prepare minutes of the first meeting of the corpo­ration’s board of directors or of the incorpo­rators (the person or persons who signed and filed the articles on behalf of the corporation). This meeting is usually referred to as the organizational meeting of the corporation. Minutes are simply a formal record of the proceedings of a meeting. The organizational meeting is usually held to approve standard items of business necessary for a new corporation to begin doing business.

Look through the minutes of your organizational meeting. These minutes are designed to document the essential organizational actions taken by the board or the incorporators. They typically show:

• the beginning tax elections made by the corporation—for example, the selection of the corporation’s accounting period and tax year

• details of the corporation’s first stock issuance

• approval of stock certificates and a corporate seal, and

• approval of other beginning business of the corporation, such as the opening of a corporate bank account.

Knowing some of this information may be essential to making informed corporate decisions later.

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Records Showing Stock Was Issued

A new corporation almost always issues stock to record the ownership interests of the persons who invest in the corporation. Most smaller corporations issue stock for cash, property, or the performance of services that were rendered in forming the corporation. Many states prohibit the issuance of shares in return for a promise to pay for the shares later (in return for a promissory note) or for a promise to perform future services. If a small existing business is being incorporated, the business owners are normally issued shares in return for the transfer of business assets to the new corporation.

Example:

Just Friends, a partnership, incorporates as Just Friends, Inc. Each of the three prior business owners owned an equal one-third interest in the partnership. After the transfer of the partnership assets to the corporation, each owner is issued one-third of the shares issued by the corporation (3,000 shares are issued, so each owner receives 1,000 shares in the new corporation).

If you haven’t issued stock or didn’t keep written records showing who owns shares, you should do so now. Stock certificates and stock transfer ledgers are available in most office supply stores.

Once you’ve organized your corporate records book, remember that while a corporate records book makes it easy for you to keep all key documents in one place, it won’t work unless you consistently use it.

Minutes of Meetings and Written Consents

If your corporation has been in existence for some time, you may have records of annual and perhaps special corporate meetings. This is especially likely if a lawyer helped you incor­porate. Check your corporate records, or contact your attorney if you don’t have copies. Again, remember that you have a right to these records.

Your State Corporate Filing Office

Each state has a corporate filing office where you pay a fee and file paperwork for creating corporations, changing the corporate structure, and dissolving corporations.

Information on how to find your state corpo­rate filing office is provided in Appen­dix B. The 50 different states use slightly different names for the office where corporate filings are made. Most commonly, corporations are formed with and supervised by the secretary of state or department of state office. The depart­ment within this bureaucracy that handles corporate filings is commonly designated as the corporations division or corporations department.

Corporation filing offices are sometimes further divided into offices that oversee special areas of concern, such as corporate filings (for example, articles of incorporation or amend­ments to articles), corporate name availability, corporate fee information, and corporate legal counsel. Don’t be put off by this seeming structural complexity. If you need information, check your state’s corporate filing office website. Also, you’ll normally find there is one phone number at the corporate filing office devoted to hand­ling corporate inquiries from the public.

Throughout this book, we refer to the office that accepts corporate filings as the state corporate filing office, whether this office is formally designated as the secretary of state office or by some other title.

Looking Up the Law Yourself

In addition to the rules and procedures set out in corporate articles and bylaws, the organization and operation of a corporation are tightly regulated by a good-sized pile of laws adopted by each state. The primary source of laws that apply to your corporation will be found in your state’s corporation laws (statutes), often titled the Business Corporation Act or designated with a similar name. Legal citations to sections of a state’s business corporation laws are often listed in the following form: “Sec. 21.2 of the Business Corporation Act” or “Article 2-12, BCA.”

Some readers may be reluctant to venture into what they see as the musty or mysterious realm of corporate law research. To be sure, legal research of any type may seem daunting or dry, and corporate statutes are not always models of clear, concise (let alone friendly) language. Nonetheless, be reassured: Looking up corporate rules is not akin to doing your own appendectomy. Corporate statutes are organized by subject matter and are well indexed and cross-referenced. For the most part, the statutes themselves state a fairly simple rule or requirement that, despite the inevitable lawyer jargon, can be comprehended by the average reader.

Most small business people can’t afford to pay a lawyer upwards of $400 per hour every time they want access to basic legal information or help handling ongoing legal formalities and procedures. That’s why we explain the importance of locating an experienced small business lawyer who is willing to act more like a legal coach, rather than a legal representative. (See Chapter 20.) For now, it’s important to know that you can often look up the law yourself, without having to consult, and pay handsomely for, outside legal assistance.

Finding Your State Corporation Laws

Many routine state legal rules, such as those for holding and voting at meetings, obtaining director or shareholder written consent to action without a meeting, and conducting ongoing corporate business, are restated in your articles of incorporation and bylaws. Nevertheless, there may be times when you will want more detail on your state’s corporation statutes.

Once you locate your state’s corporate statutes, it usually takes only a minute or two to find a relevant corporate law requirement or procedure, or to satisfy yourself that one does not exist.

To find your state’s corporation laws, you can use any of these four easy methods:

• Check your state’s corporate filing office website. Many states provide an online version of their business corporation act (or similarly titled corporation laws). Appendix B provides information on how to find your state corporate filing office website.

• Look up your state’s corporations laws using Nolo’s State Law Resources page at www.nolo.com/legal-research/state-law.html (under “Legal Research,” then “State Law Resources”).

• Type “<your state’s name> Corporation Act” or “<your state’s name> corporation laws” into your browser’s search box. This usually leads to a link to your state’s business corporation act.

• Visit a local law library, a law school library that is open to the public, or a large public library with a substantial business collection. Ask the research librarian for help looking up your state’s business corporation act.

Look Up Relevant Corporate Statutes

To start, you can browse through the table of contents at the beginning of your state’s corporation act or the mini table of contents often located at the beginning of each section heading in the act. Each heading covers major areas of corporate operation or procedure (for example, Corporate Formation, Meetings, Stock Issuance, Corporate Officers, Records and Reports, and the like). Major headings are further broken down into subheadings and sections that treat specific matters, such as Articles of Incorporation, Bylaws, and Director and Shareholder Meetings.

Or, you can usually do a search to find the statute you’re interested in by entering a few key terms.

Checking Other Laws

In addition to a state’s Business Corporation Act, other state laws regulate special areas of corporate activity. These include:

Securities Act or Blue Sky Law. These laws contain each state’s rules and procedures for offering, issuing, selling, and transferring shares of corporate stock and other securities. (The term blue sky law was derived from the sometimes underhanded, and often colorful, practices of corporate con artists who, in return for a small investment in their latest get-rich-quick undertaking, would promise the blue sky to unsuspecting investors. The securities laws of each state attempt, through stock offering qualification and disclosure requirements, to tone down the picture painted by stock promoters to a more realistic hue.)

Tax or Revenue Code. If a state imposes a corporate income or franchise tax, the state’s tax or revenue code will typically contain these provisions.

Commercial Code. The state’s commercial code contains the rules for entering into and enforcing commercial contracts, promissory notes, and other standard commercial documents.

Other state and local laws. Various state laws may impact the activities and operations of all businesses, whether or not they are incorporated. For example, state and local building codes, professional and occupation licensing, and other laws and regulations may apply to your business and its operations. 

When to Consult a Professional

Holding corporate meetings and preparing standard resolutions and other corporate paperwork are usually routine tasks for corporations. However, if the decision you are facing is complex, you anticipate any complications or objections, or you simply have questions and need more information, consult with a tax or legal specialist before using the forms in this book. A consultation of this sort will be far more cost-effective than making the wrong decision and having to fix it later. Besides, the fees you incur should be relatively low, since you’re not handing all the paperwork to the lawyer or tax person to do for you. For information on choosing and using a legal or tax professional to help you with ongoing corporate decisions and documentation, see Chapter 20.