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Corporations

Getting A Corporation Started

Many corporations get their start through the efforts of a person called a promoter, who goes about developing and organizing a business venture. A promoter's efforts typically involve arranging the needed capital, or financing, using loans, money from investors, or the promoter's own money; assembling the people and assets (such as land, buildings, and leases) necessary to run the corporation; and fulfilling the legal requirements for forming the corporation.

A corporation cannot be automatically liable for obligations that a promoter incurred on its behalf. Technically, a corporation does not exist during a promoter's pre-incorporation activities. A promoter therefore cannot serve as a legal agent, who could bind a corporation to a contract. After formation, a corporation must somehow assent before it can be bound by an obligation that a promoter has made on its behalf. Usually, if a corporation gets the benefits of a promoter's contract, it will be treated as though it has assented to, and accepted, the contract.

The first question facing incorporators (those forming a corporation) is where to incorporate. The answer often depends on the type of corporation. Theoretically, both closely held and large public corporations may incorporate in any state. Small businesses operating in a single state usually incorporate in that state. Most large corporations select Delaware as their state of incorporation because of its sophistication in dealing with corporation law.

Incorporators then must follow the mechanics that are set forth in the state's statutes. Corporation statutes vary from state to state, but most require basically the same essentials in forming a corporation. Every statute requires incorporators to file a document, usually called the articles of incorporation, and pay a filing fee to the secretary of state's office, which reviews the filing. If the filing receives approval, the corporation is considered to have started existing on the date of the first filing.

The articles of incorporation typically must contain (1) the name of the corporation, which often must include an element like Company, Corporation, Incorporated, or Limited," and may not resemble too closely the names of other corporations in the state; (2) the length of time the corporation will exist, which can be perpetual or renewable; (3) the corporation's purpose, usually described as "any lawful business purpose"; (4) the number and types of shares that the corporation may issue and the rights and preferences of those shares; (5) the address of the corporation's registered office, which need not be the corporation's business office, and the registered agent at that office who can accept legal SERVICE OF PROCESS; (6) the number of directors and the names and addresses of the first directors; and (7) each incorporator's name and address.

Delaware: The Mighty Mite of Corporations

Delaware may be among the United States' smallest states, but it is the biggest when it comes to corporations: more than a third of all corporations listed by the New York Stock Exchange are incorporated in Delaware.

Delaware's allure is explained through a combination of history and law. Although today the state's corporations law is not necessarily less restrictive and less rigid than other states' corporation laws, Delaware could boast more corporation friendly statutes before model corporation laws came into vogue. As a result, corporate lawyers nationwide are more familiar with Delaware's law, and its statutes and case law provide certainty and easy access.

Delaware, more than any other state, relies on franchise tax revenues; thus, Delaware, more than any other state, is committed to remaining a responsive and desirable incorporation site. In addition, Delaware offers a level of certainty and stability: the state's constitution requires a two-thirds vote of both legislative houses to change its corporations statutes.

Delaware also has a specialized court that is staffed by lawyers from the corporate bar, and its highest court has similar expertise. Lawyers in the state continually work to keep Delaware's corporate law current, effective, and flexible. All combine to make Delaware the first state for incorporation.

A corporation's bylaws usually contain the rules for the actual running of the corporation. Bylaws normally are not filed with the SECRETARY OF STATE and are easier to amend than are the articles of incorporation. The bylaws should be complete enough so that corporate officers can rely on them to manage the corporation's affairs. The bylaws regulate the conduct of directors,

Proctor and Gamble president and CEO A.G. Lafley addresses shareholders at the company's annual meeting in 2002. A corporation's officers are responsible for running day-to-day business affairs and carrying out policies established by the directors.
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officers, and shareholders and set forth rules governing internal affairs. They can include definitions of management's duties, as well as times, locations, and voting procedures for meetings that affect the corporation.

Additional topics

Law Library - American Law and Legal InformationFree Legal Encyclopedia: Constituency to CosignerCorporations - History, Types Of Corporations, Getting A Corporation Started, Delaware: The Mighty Mite Of Corporations