Corporate Law 101 – Securities Lawyer

Because only issuers can go public and have their securities publicly traded, it is necessary for many unincorporated businesses to set up corporate entities before beginning their going public transactions.  Companies going public should have a basic understanding of corporate law and what it means to conduct business through a corporate entity.   This blog post addresses the most common questions we receive from small businesses about setting up and operating a business as a corporate entity.

What Does It Mean To Be A Corporation?

A corporation is a distinct legal entity separate and apart from its shareholders or owners.  Corporations are incorporated pursuant to the state law in which the Corporation is formed. Corporations can take various forms including C-Corporation, S-Corporation, Limited Liability Company, and Professional Corporation (also known as a Professional Association). A Corporation’s existence is perpetual, unless dissolved by its Board of Directors or the state where it is formed, as for failure to pay required annual fees and/or file annual reports.

What Are Benefits of Having A Corporate Structure?

A major benefit of having a Corporation structure is that the liability of officers and/or directors is limited.  Corporate debt is typically limited to the amount of money that has been invested in the Corporation. Thus, if the corporation fails to pay its debts and liabilities, creditors may only seize the Corporation’s assets.

When Does Corporate Existence Begin?

Corporate existence begins with the filing of Articles of Incorporation (in some states referred to as Certificate of Incorporation, Articles of Association, or Articles of Organization) with the Secretary of State in the state where the corporation is formed. States also require filing and license fees.

How Does A Corporation Get Its Name?

The person forming a corporation is known as an “Incorporator”. The Incorporator selects the Corporation’s name. The Secretary of State maintains a list of names of existing corporations and will not allow incorporation of a new entity with an identical or similar name. Some states allow the reservation of a corporate name before the Articles of Incorporation are filed. Before filing Articles of Incorporation, the Incorporator should check with the Secretary of State to ensure its desired name is available and if possible, reserve the name to ensure availability.

What Are Articles of Incorporation?

The Articles of Incorporation must be prepared in accordance with each state’s requirements. Typically, the Articles of Incorporation contain the corporate name and address of the Corporation, the name and address of the initial Directors, Incorporators, and of the Registered Agent, the authorized number of shares and classes, and the par value.  Both the Incorporator and the registered agent are required to sign the Articles of Incorporation.

What Are ByLaws?

Bylaws are the rules that govern the Corporation’s operational and management procedures. Unlike Articles of Incorporation, bylaws are not filed with the Secretary of State.  Bylaws define the way the Corporation will be operated and managed.  Matters set forth in the bylaws include the date, time and place of the annual meeting of the Shareholders, quorum requirements, the number and power of the Board of Directors, and their term of office. Bylaws should establish the duties of the officers and provide for how amendments to the bylaws may be made.

What Is A Shareholder’s Agreement?

A shareholder’s agreement is a contract that sets forth the rights, duties, and obligations of a Corporation’s shareholders.  The agreement can include terms for purchases and sales of shares and rights of first refusal. Shareholder agreements can address such issues as withdrawal of officers, deadlocks in management, buyout price, evaluation and other contingencies.

Can I Amend My Articles of Incorporation and Bylaws?

Articles of Incorporation and bylaws can be amended.  The state law where the Corporation is formed outlines the procedures for amending the Articles of Incorporation or bylaws. To amend the Articles of Incorporation, an appropriate vote of the directors and shareholders is almost always required.  Once the Articles of Incorporation are amended, a certificate of amendment is prepared and filed with the Secretary of State.  Bylaws can be amended without any state filing requirements unless otherwise provided in the Articles of Incorporation or Bylaws.

Why Do I Need A Registered Agent?

Each Corporation must have a registered agent who is designated to receive notices from the state and accept service of process for lawsuits.  Upon receipt of a notice and/or a summons and complaint, the resident agent must remit these documents to the Corporation’s officers.

How Are Decisions For the Corporation Made?

Corporate decisions are made by the Board of Directors, Officers, and Shareholders depending on the nature of the decision.

What Is A Board of Directors?

The Board of Directors sets the Corporation’s affairs and policy but is not ordinarily involved in the Corporation’s day-to-day operations.  Directors typically serve for a specified period of time known as a “term” and may be removed for cause. Cause is generally defined as acting unlawfully, improperly, or not in the Corporation’s best interest.

Vacancies of the Board of Directors are normally filled by the remaining Directors who serve until a shareholder meeting, electing Directors.

Directors generally are not required to obtain shareholder approval for business matters but certain matters require approval by the Corporation’s shareholder such as a sale or disposition of all or substantially all of the Corporation’s assets not in the usual and regular course of business. Additionally, mergers, consolidations, or dissolutions of the Corporation may require the approval of a majority, or super majority, of the shareholders.

What Are Dividends?

Profits of a corporation may be distributed as dividends to the shareholders in accordance with their ownership interests. The Board of Directors makes the decision of whether or not to declare a dividend. Even if the Corporation is profitable, the Board of Directors does not have to declare a dividend and may retain the profits for expansion, or other purposes.

What Are Corporate Officers?

A Corporation’s Officers manage its day-to-day activities.  The Officers implement the affairs and policies established by the Corporation’s Board of Directors.  Accordingly, the Officers serve under the direction of the Board of Directors and may be removed by the Board of Directors if it determines that removal is in the best interests of the Corporation.

What Are Fiduciary Duties?

Officers, as well as Directors, occupy a fiduciary relationship to the corporation, that is, they owe a duty to the shareholders to act in the best interests of the corporation.

How Does A Corporation Get Its Shareholders?

Shareholders own the shares of the Corporation. Shares represent equity ownership of  the corporation.  Shareholders elect and remove the Directors, amend the Corporate bylaws and Articles of Incorporation, and vote on significant corporate issues, such as acquisitions, mergers, assets sales, and dissolutions.  Typically, shareholders are not involved in the day to day affairs or management of the Corporation unless the Corporation is closely held.  Shareholders can also be Officers and Directors. Profits of a corporation can be distributed to shareholders in the form of dividends and shareholders may sustain profits or losses on the sale of their shares. Generally, Corporations are required to hold at least one shareholder’s meeting each year though there is no penalty if a Corporation fails to do so and takes action by written consent of its shareholders.

What Is Share Ownership?

Corporate shareholders may freely sell, transfer, or assign their shares unless they are subject to an agreement limiting their ability to do so. A shareholder’s ability to sell its interest in the Corporation provides liquidity to shareholders. This is particularly true with publicly traded companies.

What Happens When A Corporation Dissolves? 

The existence of a Corporation continues until it is dissolved. When a Corporation is dissolved, it ceases to exist as a matter of law.  A Corporation may be voluntarily or involuntarily dissolved.

Generally, the shareholders can vote to voluntarily dissolve the corporation.  A Certificate of Dissolution must be filed with the Secretary of State of the state of incorporation to voluntarily dissolve the Corporation. Upon dissolution, corporate assets are sold and distributed to creditors and shareholders.

A Corporation can be involuntary dissolved by court order or by the Secretary of State if the corporation has failed to file annual reports or pay required annual registration fees.  Involuntary dissolution can also occur if a shareholder files an action to dissolve the Corporation and demonstrates that its directors are deadlocked, that they are acting illegally or fraudulently, or that corporate assets are being wasted or improperly used.

For further information about this article, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at[email protected].  This memorandum is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal  advice on any specific matter, nor does this message create an attorney-client relationship.  For more information concerning the rules and regulations affecting the use of Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings, Rule 144, SEC reporting requirements, SEC registration on Form S-1 and Form 10, Pink Sheet listing, OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings or please contact Hamilton and Associates.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Going Public Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com