Free Alabama Certificate of Incorporation for Delaware

There are several types of business entities that you can create. Therefore, we recommend that you read the topics under Types of Business Entities before continuing with the Certificate of Incorporation. If you determine that a corporation is the proper type of entity for your needs, the Certificate of Incorporation ("Certificate") is one of several instruments which are required in order to form a regular, for-profit corporation ("business corporation").

If the business operations of the entity will be located in the state of Delaware, then most likely the corporation should be formed under Delaware law. Note that although Delaware has a reputation for being "friendly" to corporations, the provisions of Delaware law responsible for this reputation apply primarily to large corporations with many stockholders. If the business operations of the entity will be located in a state other than Delaware, it rarely makes sense to incorporate in Delaware because

• the corporation would have to qualify as a "foreign corporation" in the state where it will operate,
  
• annual fees and license taxes would have to be paid in both states, and
  
• if a legal problem arises related to the corporation's business, a lawyer licensed to practice in Delaware would have to be consulted.

IMPORTANT: The Certificate is intended to be used by a corporation which will be formed and initially owned by a small number of stockholders. Before any shares of stock are sold or issued, the corporation must comply with the Corporate Securities Act administered by the Delaware Department of Justice. Both state and federal securities laws will apply to the sale or issuance of stock by the corporation, and before issuing any stock you should consult with a corporate or securities attorney.

IMPORTANT: The Certificate is appropriate for use in forming a "general purpose" corporation. If you are interested in forming a professional bank or trust company, insurance company, close corporation, or professional corporation, then special laws apply and you should consult with a corporate attorney.

Changes to the Certificate typically involve a three step process: board approval, stockholder approval, and filing a Certificate of Amendment with the Delaware Secretary of State. The changes are effective only upon filing with the Secretary of State. If a corporation has more than one class of stock, certain changes that adversely affect the rights, preferences or privileges of a particular class require the approval of the shares in that class under Delaware law, even if the Certificate does not require it. Because the variety of possible changes to a corporation�s Certificate is virtually limitless, and some changes have a different approval process from others, we recommend that you consult with an experienced corporate attorney before making any changes to your Certificate.

Changes to the bylaws can usually be made by the directors (if given that authority when the bylaws are originally adopted by the incorporators or the initial directors, and if no contrary rights or restrictions are contained in the Certificate or in any other stockholder agreements), subject to concurrent power by the stockholders. In larger corporations, that is why the most critical provisions (such as voting and dividend rights) are placed in the Certificate so that the directors are not able to affect certain stockholder rights without stockholder approval.

The identity of the registered agent or the location of a corporation�s registered office can be changed by a resolution of the directors and the filing of a certificate with the Secretary of State. At the time of this writing, the fee to file such a certificate was $104.00.

Corporations may generally authorize more than one class of stock (for example "common" stock and "preferred" stock), and may authorize more than one series in a class of stock (for example "common series 1" and "common series 2"), each with different rights and privileges regarding such things as voting, dilution protection, liquidation rights and the payment of dividends. However, most simple corporations, including the type of corporation for which the Certificate was prepared, authorize only one class and one series of common stock. If more than one class or series of stock is desired, you should contact an experienced corporate attorney for assistance.

Some states, including Delaware, offer corporations the option of electing to be organized as a "close corporation." In Delaware, a close corporation�s Certificate must state "This corporation is a close corporation", must expressly limit the number of stockholders to 30 or less, and must meet certain other criteria specified by Delaware law. If the corporation qualifies and makes such an election, it is allowed to operate under relaxed rules and less formal management by the stockholders instead of the directors and officers. In such event, the stockholders involved in management of the corporation may have liability for managerial decisions.

Few corporations actually make such an election, for various reasons, and an informed decision to make such an election should only be carried out after consultation with an experienced corporate attorney.

Delaware law allows you to choose any name that is not likely to mislead the public and is not already in use. The name of the corporation must include one of the following words (or abbreviations):

• Company (Co.)
  
• Corporation (Corp.)
  
• Incorporated (Inc.)
  
• Limited (Ltd.)
  
• Association (Assoc.)
  
• Club
  
• Foundation
  
• Fund
  
• Institute
  
• Society
  
• Union
  
• Syndicate

Note: Delaware's Secretary of State will not accept Certificate setting forth a name in which "bank" or related words appear, unless certain criteria are met.

The second requirement is that the name chosen must be distinguishable from any other corporate name which is already on file in Delaware, including out-of-state corporations registered in Delaware as �foreign� corporations and names that have been temporarily reserved by persons intending to incorporate using that name. Whether a name is "distinguishable" lies within the discretion of the Secretary of State. For example, "Acme, Inc." is likely not sufficiently distinguishable from "Acme Corp." or "Acem, L.L.C." However, the Secretary is likely to allow "Smith, Inc." as well as "Smythe, Inc.," even though the two sound identical. It is possible to adopt a name that is substantially the same as an existing corporation, upon proof of consent by such corporation and a finding by the Secretary of State that under the circumstances the public is not likely to be misled.

Before proceeding with the incorporation steps, it is advisable to check with the Delaware Secretary of State's website to verify that the chosen name for the new corporation is available. Checking the availability of a corporate name does not reserve the name and has no binding effect on the Secretary of State, nor does it confer any rights to a name. The reservation of a corporate name may be made by filing an application with the Secretary of State. Fees and instructions for reserving a corporate name are available at the website of the Secretary of State. A name reservation is good for 120 days and may be renewed for successive 120 day periods. A preliminary check of the availability of a corporate name, as well as reserving a name that is available, can be done online at:

As of this writing, the fee for corporate name reservations was $75.00 per reservation.

The Certificate of Incorporation or the bylaws may specify whether the corporation will have a "corporate seal." Most new corporations choose NOT to have a corporate seal in order to avoid the requirement that such a seal imprint all official corporate documents. For example, the seal can be misplaced, stolen or it may be inconvenient to obtain when it is otherwise needed.

A corporation is a separate legal entity owned by one or more stockholders, and the stockholders have "limited liability." The stockholders elect directors who have overall responsibility for the management of the corporation. The directors elect officers who carry out the wishes of the directors. Thus, a corporation is more complex than either a sole proprietorship or a partnership. However, some of this complexity can be simplified in many small companies by having the stockholders serve as both directors and officers.

1. Organizational Formalities. Organizational formalities include such items as: Certificate of incorporation, organizational minutes (or consent), bylaws, stock certificates, federal employer identification number, and minutes and annual reports. For details on these items, see Organizational Formalities.

2. Limited Liability. The owners of the corporation (the stockholders) enjoy "limited liability," that is, the stockholders are only liable for the debts and expenses of the corporation up to the amount of their respective investments in the corporation's stock. However, some state laws may impose liability on the stockholders for unpaid wages in small corporations. Additionally, creditors frequently require the majority stockholder(s) to guarantee the debts of the small corporation or co-sign its notes in their individual capacity, or pledge their personal assets as security for the corporation's loans.

3. Income Taxation. The income and expenses of a corporation are reported on a separate tax form (Form 1120). Unlike the other forms of business entities, the corporation then pays its own taxes on its net income, instead of allocating the income to the owners. (However, alternative tax treatment is available if a "Subchapter S" election is made.)

4. Fringe Benefits. Generally, corporations have the most flexibility in deducting the costs of providing fringe benefits to employees, which is especially attractive for employees who are also officers and stockholders.

5. Double Taxation. stockholders can authorize the payment of dividends to themselves as a means of withdrawing accumulated profits from the corporation. The payment of dividends results in taxable income to the recipient stockholder, even though the corporation already paid tax on that income. This "double taxation" significantly reduces the "after tax" dollars for the owners. However, this double-taxation consequence is easily avoided in closely-held corporations because the stockholders can simply pay themselves greater wages or bonuses (subject to reasonableness) which are deductible by the corporation (taxable to the stockholder) and therefore a means of "distributing" the corporate profits which are taxed only once.

6. Use of the Regular Corporation. Corporations are formed to gain "limited liability," and in some cases, gain an advantage in deducting fringe benefits.

The Certificate can include a provision which limits or eliminates the directors' personal liability to the corporation or its stockholders, for breaching certain of their duties to the corporation and its stockholders. Although in small companies the directors are often the same persons as the stockholders, officers and/or employees, this provision is often included in the Certificate so that if and when there are "outside" directors, those individuals enjoy some protection against being sued personally for taking, or failing to take, certain actions. Without this protection, outside directors may be hesitant to serve on a company�s board.

The Certificate and bylaws can also provide that the corporation will indemnify (pay attorney fees and, if the person is found liable, the judgment amount) the directors, officers, employees and agents from lawsuits brought against those individuals in connection with their services to the corporation. However, under Delaware law there are limits to when a person may be indemnified, such as when the person acted in bad faith, recklessly, or in a self-dealing transaction, or when a court disapproves of indemnification.

Corporations may also obtain insurance covering their agents� liability separate from the corporation�s power to indemnify.

After the corporation is formed and is operating, the stockholders elect the directors of the corporation, who are generally responsible for overseeing the affairs of the corporation. The directors, in turn, typically appoint officers -- the president, one or more vice presidents, the secretary and the treasurer -- to carry out the day-to-day tasks and implement the strategies established by the directors.

Because the function of the incorporator typically ends once the corporation is operating, the "initial directors" are sometimes named in the Certificate so that there is a continuous provision of authority. The initial directors serve until the first annual stockholders meeting, at which time "regular directors" are elected. Some states require that the initial directors be named in the Certificate. In Delaware and some other states, the initial directors need not be named until the "Organizational Minutes" or a substitute, the "Organizational Consent," is prepared following the incorporation.

An Employer Identification Number (EIN) is a nine-digit number (for example, 12-3456789) assigned by the federal government to sole proprietors, corporations, limited liability companies, partnerships, and other entities for federal tax filing and reporting purposes.

An entity must obtain an EIN if the entity:
pays wages to one or more employees,
operates as a corporation or partnership, withholds taxes on income, other than wages, paid to a non-resident alien,
has Keogh Plan, or
is involved with any of the following:

1. Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
   
2. Estates
   
3. Real estate mortgage investment conduits
   
4. Non-profit organizations
   
5. Farmers' cooperatives
   
6. Plan administrators

In order for stock transfer restrictions to be enforceable, the buyer and seller of the stock must have actual notice of the transfer restrictions. Therefore, the restrictions should be noted conspicuously on the stock certificate (if certificates are issued) so that proposed purchasers of the stock have "actual notice" of the restrictions. If there are no certificates issued, actual notice should be provided to the stockholders (the potential sellers) and to the potential buyers when the corporation learns of the proposed sale.

If transfer restrictions are to be implemented, you may wish to include them in the Certificate or bylaws when the corporation is formed, rather than later by amendment, because restrictions implemented by an amendment to the Certificate or bylaws are not binding upon shares already outstanding prior to the amendment unless the owners of those shares voted in favor of the amendment.

Many states create a statutory presumption that an executive officer of the corporation enjoys the authority to execute (sign) any written document on behalf of the corporation in the ordinary course of business, including, for example, documents for the sale of products or for leasing equipment.

However, a corporation�s board of directors or its Certificate or bylaws may specifically provide otherwise by establishing limits on the authority of officers to sign documents on behalf of the corporation. For example, many boards of directors adopt a tiered signing structure so that officers at different levels have different dollar amounts they may commit to on behalf of the corporation (without further express authorization).

If it is desirable to restrict such authority to certain officers or officer combinations, the Certificate or bylaws can include such a restriction, and, if filed in the county records, all relevant parties are likely deemed to have received constructive notice of the restriction. (Note that the bylaws must be recorded if they, rather than the Certificate, contain such restrictions.) This option provides some security against unintended transactions by heedless officers.

Under new IRS "check the box" regulations, LLCs consisting of two or more members will be automatically taxed as partnerships unless they affirmatively elect to be taxed as a corporation. Single-owner LLCs will be taxed as a sole proprietorship unless they affirmatively elect to be treated as a corporation. In other words, for federal taxation classification purposes, the old four-factor test is no longer relevant.

LLCs can enjoy partnership, or sole proprietorship, "pass through" taxation of income even though they may be organized to have

1. limited liability,
   
2. unlimited life,
   
3. centralized management, and
   
4. free transferability of ownership.

A corporation is formed in Delaware by filing a "Certificate of Incorporation" (informally referred to as a "corporate charter") with the Delaware Secretary of State. The Certificate must contain a minimum set of required information; other information is optional. A filing fee must accompany the Certificate. In conjunction with the filing of the Certificate, it is necessary to also prepare corporate "bylaws" and either "organizational minutes" or an "organizational consent"; however, the bylaws and organizational minutes are not required to be filed with the Secretary of State.

A general partnership is like a sole proprietorship except that it is owned and managed by more than one owner.

1. Organizational Formalities. Generally, organizational formalities are not required by law to form a partnership, but often the partners adopt a partnership agreement that explains how the partnership will be operated and governed.

2. Personal Liability of Partners. Similar to a sole proprietorship, each partner is personally liable for all of the debts and expenses of the business; that is, each partner's liability is "unlimited." Further, each partner is liable for the acts of the other partners.

3. Income Taxation. The income and expenses of a partnership must be reported on a separate tax return (Form 1065). The net income of the partnership is then allocated to the partners, and the individual partners report their respective shares of the income on their individual income tax returns.

4. Taxation of Fringe Benefits. A partnership may have more flexibility in deducting the costs of providing fringe benefits to employees than a sole proprietorship, but the costs of such benefits provided for the partners themselves may not be deductible.

5. Use of a General Partnership. The partnership form of business is most often used for small businesses whose owners want to avoid the tax consequences that result from corporate ownership and are willing to accept personal liability. One of the main drawbacks of the general partnership is that the partnership is dissolved or liquidated whenever a general partner ceases to be a partner for any reason, unless the remaining partners agree to continue the business, which consent is often difficult to obtain.

Any person, partnership, association or corporation, or any combination of the foregoing, may act as incorporator, even if not a Delaware resident. If no directors are named in the Certificate, then the incorporator may take initial organizational steps, such as adopting bylaws and appointing officers and directors.

Corporations may not issue stock unless the transaction is qualified under federal and state securities laws or exempt from qualification requirements. Most private companies issue stock under an exemption. We recommend that you contact an experienced corporate attorney for assistance before issuing shares of stock.

Stock may generally be issued for such consideration as determined by the board (or stockholders if required by the Certificate) consisting of money paid, services rendered, debts cancelled, or property actually received. However, future services cannot constitute payment for stock. Promissory notes also cannot constitute payment for stock, except in narrow circumstances (if you wish to issue stock for a promissory note, we recommend you discuss the matter first with an experienced corporate attorney).

The LLC is a form of business entity which represents a second attempt (in addition to the "S" corporation) to combine the "limited liability" feature of the corporation with the tax advantages of the partnership. LLCs are a relatively new form of business entity. Wyoming enacted the first LLC statute in 1977 and, as of this writing, LLC statutes are in effect in all fifty states.

1. Organizational Formalities. The formation of an LLC is similar to the formation of a business corporation -- by filing a Certificate of Formations with the Secretary of State. The certificate must include basic information regarding (1) the name of the LLC which must contain the words �Limited Liability Company�, �LLC� or �L.L.C.� and (2) the registered office of the LCC and the name and address of its registered agent.

   The Certificate can also include provisions regarding (A) the management of the LLC by all members (the owners) or certain persons (who can, but need not be members), known as "managers," a term similar to corporate directors, (B) limited liability of its members and managers, and (C) whether less than a unanimous vote of the members is required to dissolve, sell or merge the LLC or amend its governing documents (see Certificate of Formation and Operating Agreement). Initially, most states required an LLC to have two or more persons as members at the time that it is formed, but currently all states allow single-member LLCs.

2. Operating Agreement. The LLC is not required to, but may adopt an Operating Agreement that describes the rights and obligations of the members and how the LLC will be operated. The Operating Agreement is similar to a partnership agreement and somewhat similar to corporate bylaws. If an Operating Agreement is not adopted, the government of the LLC will depend on prescribed state laws. It is generally recommended that LLCs adopt an Operating Agreement.

3. A federal tax Employer Identification Number should be obtained, as well as possible permits and licenses, depending upon the activities of the LLC.

4. Limited Liability. Similar to a corporation, the owners ("members") of an LLC have "limited liability."

5. Income Taxation. The LLC usually attempts to avoid corporate taxation. For LLCs formed prior to January 1, 1997, it was necessary to carefully structure the LLC in order to avoid the characterization by the Internal Revenue Service that the LLC was so similar to a corporation that it should be taxed as a corporation. These objectives may still be important for purposes of state income taxation, so this program provides educational information about them. However, effective January 1, 1997, the Internal Revenue Service adopted new regulations, which, for federal income tax purposes at least, abandons the old "four-factor" test and allows most LLCs to be taxed like a partnership or Subchapter S corporation.

6. Use of LLCs. The LLC form of business entity is used primarily by small businesses that want:
   1. the limited liability protection of a corporation;

   2. the flexibility of organization and tax benefits of a partnership;

   3. the ability of the members to take part in the management of the business, unlike the prohibition that applies to limited partners in a limited partnership and the cumbersome three-tiered management structure of stockholders, directors and officers of a corporation;

   4. the protection to members afforded by many state statutes that disallow the transfer of any member's management rights in the LLC (versus "financial rights" which can often be transferred without restriction) without the consent of the non-transferring members; and

   5. freedom from the "S" corporation eligibility requirements. Although there are a few uncertainties involved with the formation of an LLC because it is a relatively new form of entity, there is an increasing trend toward the use of LLCs for small businesses, particularly service-oriented businesses.

A further variation of the general partnership is the LLP. The specific provisions of the LLP depend upon state law, but generally a partner in an LLP is not liable for the obligations of the partnership arising from the negligence, wrongful acts, or misconduct of another partner.

However, each partner remains liable for the general contractual and commercial obligations of the partnership and for his or her own acts. The LLP entity is popular primarily with multi-state accounting firms.

The limited partnership is a variation of the general partnership, designed to cure the "unlimited liability" disadvantage. A limited partnership has one or more of both "general" and "limited" partners. The general partner is responsible for the management of the partnership, receives a share of the partnership profits and losses, and is personally liable for the debts. The limited partners share in the profits and losses but are not permitted to have any management responsibilities. In return, their liability is limited to their investment in the partnership.

The limited partnership form of business is most often used for specific projects, for which a developer (the general partner with technical and management expertise) wishes to attract investors (limited partners) who do not want the risk of personal liability and are comfortable in allowing someone else to manage the project.

The bylaws or Certificate must state the number of directors of the corporation. Alternatively, the bylaws or Certificate may state a minimum and maximum number of directors, with the exact number of directors to be fixed, within the limits specified, by approval of the board or the stockholders.

Although some states other than Delaware require a minimum of three directors (unless there are fewer than three stockholders), most states, including Delaware, allow for a single director. All directors must be persons (as opposed to corporations or other legal entities), but need not be stockholders of the corporation.

Because the Certificate is prepared for start-up corporations, there is probably no need to authorize a huge number of shares. "Authorized" shares refers to the total number of shares that can be sold ("issued"), either upon formation or at a later time. �Issued� shares refers to the total number of shares actually issued to stockholders, and must be less than or equal to the authorized shares. The number authorized need only be large enough to be able to reflect the percentage ownership of the owners.

For example, if Bob and Ted intend to own the entire corporation in a 60-40 ratio, respectively, the corporation could authorize 100 shares and issue 60 to Bob and 40 to Ted. In fact, the corporation could issue 6 to Bob and 4 to Ted, and, as long as the other 90 shares are retained by the corporation as �authorized but unissued� shares, Bob and Ted still own their desired percentages of the corporation because they own all of the stock that the corporation has "issued."

For start-up purposes, many corporations simply authorize 1,000 shares initially. The stockholders can authorize additional shares later by amending the Certificate. Delaware has two primary methods of calculating franchise taxes - the "authorized shares" method and the "assumed par value" method. To determine the tax consequences relating to number of shares issued, you should contact an experienced corporate attorney for assistance.

Organizational formalities in a Corporation include these items (and others not listed here):

1. Certificate of Incorporation. The corporation is formed by filing a Certificate of Incorporation with the Secretary of State. The Certificate must include basic information regarding the names and addresses of the corporation, the registered agent, and the incorporator, as well as the number of authorized shares of stock. In addition, the Certificate can include provisions regarding limited liability of the directors, preemptive stock rights, staggered directors' terms, and any unusual stockholder meeting requirements.

2. Organizational Minutes (or Consent). A corporation is also required to hold an organizational meeting to elect initial directors (unless already named in the Certificate of Incorporation), elect officers, adopt Bylaws and take care of other organizational matters. Corporate minutes are prepared in order to document the decisions reached and actions taken. Instead of an actual meeting, these organizational activities can be handled by a written "organizational consent" signed by all of the incorporator(s) or the initial directors, unless such a method is prohibited in the Certificate.

3. Bylaws. In addition to a Certificate of Incorporation, a corporation must have a set of Bylaws which define how the business and affairs of the corporation will be managed and regulated. Typically, a set of Bylaws includes provisions regarding stockholder meetings and voting, and the duties, qualification, election, terms and meetings of the directors. The Bylaws (or the Certificate) may also include provisions regarding stock transfer restrictions, the execution of written instruments, higher-than-majority quorum requirements for director meetings, and indemnification of directors.

4. Stock Certificates. A corporation may choose to issue stock certificates as evidence of the ownership by the stockholders of their respective interests in the corporation. However, physical certificates are not always required.

5. Federal Tax Employer Identification Number (EIN). An EIN must be obtained for the corporation using Internal Revenue Service tax form "SS-4." Other forms, applications and licenses may be required, depending on the activities of the corporation. For example, there may be a need to register as a contractor, or the need to obtain a sales tax permit.

6. Minutes/Annual Reports. After formation, the corporation must observe certain formalities in order to preserve its separate legal status. Minutes or other records of stockholder and director action must be prepared at least annually. Additionally, annual reports generally must be filed with the Secretary of State.

7. Close Corporations.Close corporations may be exempted from following all of the corporate formalities. You should consult with a qualified corporate attorney if you are unsure of what corporate formalities you need to follow as a close corporation.

Many companies choose to authorize stock with no par value, or a nominal par value of, for example, $0.001 per share. Delaware and most other states allow "no par stock." In the past, corporations designated a par value of, for example, $15 per share, in order to set a minimum price at which the shares could be initially sold by the corporation. More importantly, for the protection of the corporation's creditors, the corporation could not distribute cash to the stockholders which would deplete the corporation's "capital" below the aggregate par value of all issued shares. However, today's creditors typically restrict such distributions by separate agreements with the corporation, so there is little necessity to designate a par value merely to satisfy creditors.

Note that some states, including Delaware (which has alternative methods of calculating franchise taxes) may base their franchise taxes off the par value per share, if any. Because Delaware uses an �assumed par value� method of tax calculation as one of its alternative methods of calculating frachise taxes, many Delaware corporations choose to authorize stock with a nominal par value of $0.001 or $0.0001 per share. To determine the tax consequences relating to number of shares issued, you should contact an experienced corporate attorney or tax advisor for assistance.

Preemptive rights give existing stockholders the right to purchase sufficient shares -- whenever the corporation intends to issue more shares -- so that those existing stockholders can maintain their percentage ownership of the corporation. Because the authority to issue new shares typically rests with the board of directors, a majority stockholder could effectively vote to sell new shares to himself which would dilute the percentage interests of the minority stockholders. Without preemptive rights, the majority stockholder could end up controlling major decisions which could otherwise have been blocked by the minority stockholders.

For example, suppose the corporate bylaws required a 75% approval by the stockholders in order to sell a major corporate asset, such as a factory. stockholder Smith owns 55% of the outstanding stock of the corporation, not enough to approve the sale without the consent of the owners of another 20% of the shares. Therefore, stockholder Smith votes to sell enough new shares to himself, and not the others, so that his percentage ownership of the corporation exceeds 75%, allowing him to unilaterally approve the sale of the factory. Therefore, preemptive rights are usually intended for the protection of minority stockholders.

Professional corporations are a variation of the basic corporate form. They are used by professionals -- persons who are required to obtain a license from the state in order to practice their profession, for example, physicians and lawyers.

A stockholder in a professional corporation must be a licensed professional in the same profession, and continues to be personally liable for his or her own professional conduct. But the professionals do receive liability protection with respect to the professional conduct of the other stockholders.

Like professional corporations, professional limited liability companies are a variation of the basic LLC form. They are used by professionals -- persons who are required to obtain a license from the state in order to practice their profession, for example, physicians and lawyers.

A member in a professional limited liability company must be a licensed professional in the same profession, and continues to be personally liable for his or her own professional conduct. But the professionals do receive liability protection with respect to the professional conduct of the other members. Not every state offers professional limited liability companies.

Bylaws, unlike the Certificate, are not generally required to be recorded in the public records (see Execution of Written Instruments for an exception). Thus, outside parties are not likely to know of the contents of the bylaws. If there is a restriction on the transfer of stock, for example, consider placing that provision in the recorded Certificate or on the stock certificat itself so that third parties who would otherwise attempt to purchase the stock in violation of the restrictions will be deemed to have notice of those restrictions.

In Delaware and in other states, every corporation registered or doing business in the state must have both a registered office and a registered agent located in that state. The registered agent is the official contact for the corporation and will accept notices and correspondence from the Secretary of State, a stockholder, or any entity attempting to sue the corporation.

The agent may be either a resident individual or a corporation qualified to do business in the state. In fact, a corporation can act as its own registered agent if it is qualified to do business in the state. However, most corporations who have their principal office in a state other than where they incorporate utilize a service company who acts as registered agent for a large number of corporations for a fee. The Delaware Secretary of State (302-739-3073) can supply a list of available agents.

1. The Delaware Division of Corporations uses an electronic imaging system to record data so all documents submitted to the Secretary of State must be legible. We recommend that all documents be typed with letters in dark contrast to the paper.

2. All documents must be submitted on 8.5" by 11" paper. Documents should have margins of 1" on the sides, 2" at the top and 1.5" at the bottom. Documents should be typed or printed using black ink.

3. The Certificate of Incorporation should be signed in black ink by each Incorporator or, if the Certificate names the initial directors, then by all the initial directors.

4. The signed Certificate should be either mailed to the Delaware Division of Corporations, John G. Townsend Building, 401 Federal Street � Suite 4, Dover DE, 109901 or faxed to 302-739-3812 together with a cover memo that has the name and address of the person or firm submitting the Certificate. A complete mailing address along with a phone number, fax number and/or e-mail address of the contact person is required.

5. The filing fee and organizational tax (call the Secretary of State for specific information: 302-739-3073) must be received at the time of filing. Delaware accepts payment by check made payable to �Delaware Secretary of State� or by credit card (at the time of this writing, only VISA, MASTERCARD, and DISCOVER was accepted). At the time of this writing, the fee to file the Certificate with the Secretary of State was $89 plus $9 per additional page if your document is more than one page. Certified copies of the Certificate are available for $30 each, and it is a good idea to get at least one certified copy for your corporate records.

6. Note that any document that appoints a registered agent will not be filed until the registered agent agrees to act on behalf of the entity.

7. A lawyer or tax advisor should be consulted regarding the advisability of electing to be treated as a "Subchapter S" corporation for federal income tax purposes. THIS ELECTION MUST BE POSTMARKED NO LATER THAN TWO MONTHS AND 15 DAYS AFTER THE BEGINNING OF THE CORPORATION'S TAXABLE YEAR, and should be sent by certified mail as evidence of the date of mailing.

8. The corporation is formed as of the date that the Secretary of State files the document in the state corporate records. However, additional steps must be taken to complete the organization:
   1. The incorporators or the initial directors must adopt "Bylaws" and obtain a federal tax "Employer Identification Number."

   2. The Certificate must also be filed with the County Recorder where the registered office is located. However, the Delaware Secretary of State will usually forward a copy of the Certificate to the appropriate Recorder for this purpose.

   3. An "organizational meeting" of the incorporators (or the initial directors, if they were named in the Certificate) must be held. Alternatively, such incorporators (or initial directors, if named) can sign an "Organizational Consent " without a meeting.

      Assuming that the initial directors were named in the Certificate, the minutes SHOULD include a description of the actions taken to complete the organization, such as:

      • Adoption of the Bylaws,
        
      • Appointment of officers, and
        
      • Election of officers.
      
      The minutes CAN include other resolutions, such as:
      • Issuance of a specified number of shares to specific persons for a stated consideration
        
      • Acceptance of specific assets or liabilities by the corporation
        
      • Authorization to the president to obtain an Employer Identification Number
        
      • Authorization to the president to establish a corporate bank account and to borrow specific sums of money
        
      • Approval of a fiscal or calendar year for the corporation
        
      • Authorization to the president to file a tax election to be treated as a "Subchapter S" corporation
        
      • Authorization for the corporation to lease office space upon certain terms
        
      • Authorization and direction to the officers to obtain appropriate insurance coverage
        
      • Authorization to the president to adopt pension and/or profit sharing plans for the employees
        
      • Authorization to the president to enter into employment agreements with specific officer-employees
      
      If an organizational meeting will be held, the incorporators (or initial directors, if named) must be given at least two days' prior written notice of the meeting, unless they attend the meeting in person or individually waive such notice. The orginazational meeting can be held anywhere (in Delaware or elsewhere).

   4. There are other documents and forms that are commonly prepared in connection with the formation of a corporation. These can include stockholder voting agreements, long-term employment agreements, stock transfer restriction or buy/sell agreements among the stockholders, a lease or franchise agreement, a loan agreement, "Subchapter S" election, patent or trademark application, application for necessary licenses and permits, and trade name filings.

   5. Additionally, minutes of stockholder and director meetings must be prepared at least annually. Corporate attorneys often recommend holding director meetings more frequently, at least on a quarterly basis, to enable directors to meet their fiduciary duties to the corporation and to preserve the protections of the corporate entity.

   6. All corporations incorporated in the state of Delaware are required to file an Annual Report and to pay a franchise tax each year. Notification of Annual Report and franchise taxes due are sent to all Delaware registered agents in December of each year. Beginning with the 2007 Annual Report, due March 1, 2008, the State of Delaware is requiring mandatory electronic filing.

   7. Finally, it is important to pay close attention to the necessity of respecting the corporate formalities on an on-going basis. Occasionally, the IRS or a court will find that the activities of the corporation are indistinguishable from the financial affairs of the stockholder(s). This is called "piercing the corporate veil" and can result in the stockholder(s) being personally liable for the corporation's debts and/or being held to have personally received the corporation's income. In order to avoid these consequences, the corporation should have an adequate capital investment, maintain an up-to-date stock ownership ledger, preserve strict segregation of corporate versus personal cash funds, and hold at least annual meetings of the stockholders and directors which are documented with minutes.
   
   
9. A qualified corporate lawyer should be consulted regarding any unique issues not addressed by this program, especially in situations where investors will be sought to purchase stock in the new corporation.

A sole proprietorship is an unincorporated business owned and managed entirely by the "proprietor," except to the extent that the proprietor may delegate management responsibilities to an employee. It is the simplest form of business. However, simplicity may be the only advantage of the sole proprietorship.

1. Organizational Formalities. There are no organizational formalities required and generally no other agreements necessary. However, if the business will have employees, a federal tax Employer Identification Number will be required. A sales tax permit and/or licenses may be required.

2. Liability of Owner. The owner is personally liable for all of the debts and expenses of the business, that is, the owner's liability is "unlimited." If the business is unable to pay its obligations, the non-business assets of the owner will be at risk unless protected by an exemption (for example, the homestead exemption for the owner's personal residence). Some protection can be obtained through liability insurance.

3. Taxation. The income and expenses of the sole proprietorship are reported as part of the owner's individual income tax return. Tax advisers have noted that sole proprietorships have a higher rate of income tax audits than the same businesses run as corporations. There is no extra tax return to be prepared each year. Every other form of business entity requires a separate tax return for the business (except an LLC taxed as a sole proprietorship).

4. Taxation of Fringe Benefits. A sole proprietorship generally has less flexibility to deduct the costs of fringe benefits, which means fewer after-tax dollars.

5. Use of the Sole Proprietorship. The sole proprietorship form of business is most often used for small, low-risk businesses that have only a few employees and no need for more than one owner.

The bylaws may specify that the corporation chooses not to issue stock certificates. Because a stock certificate is not ownership itself but merely tangible evidence of ownership of the shares, certificates are not essential to owning stock. Corporations with only a few stockholders may feel that there is no need to incur the added expense of issuing certificates. In that case, the corporate stock register records will be relied upon to indicate the ownership of the outstanding stock. However, most corporations choose to issue certificates as a rule.

The corporation may wish to restrict the ability of stockholders to sell their shares to outsiders, in order to maintain the "closely-held" nature of the corporation. The restrictions may also be important to protect advantageous tax treatment, for example, to restrict the number of stockholders to less than 75 in order to preserve the right to be classified as a "Subchapter S" corporation.

A common example of a transfer restriction is to give the corporation a "right of first refusal," whereby any stockholder proposing to sell his or her stock must first offer to sell such stock to the corporation on the same terms.

Because of the number of different types of stock transfer restrictions which can be put in place, corporations that wish to put customized stock transfer restrictions in place often consult with an experienced corporate attorney to assist in structuring and drafting the appropriate documents.

Both business corporations and professional corporations can make a special "S" corporate election that alters how the income of the business is taxed. After forming a corporation, the stockholders elect "S" status for tax purposes under Subchapter S of the Internal Revenue Code by filing Form 2553 with the Internal Revenue Service on or before two months and 15 days after the beginning of the taxable year in which it is to be effective.

The income and expenses of an "S" corporation are reported on a separate tax return (Form 1120S), but like a partnership, the net income of the "S" corporation is then allocated to the stockholders who report their respective shares of the income on their individual income tax returns. Therefore, the "S" corporation combines the "limited liability" feature of the regular corporation with the tax advantages of the partnership.

A disadvantage of the "S" corporation is the number of technical tax rules. For example, the following rules (among others) apply:

1. Number of stockholders. An "S" corporation may not have more than 100 stockholders.

2. Type of Stockholders. Stockholders must be individuals (or certain trusts) rather than entities, and must not be non-resident aliens.

3. One Class of Stock. An "S" corporation may only have one class of stock.

4. Calendar Year-end. Generally, the corporation must use a tax year that ends on December 31 of each year, unless the corporation can show that it has a "peak period" of business that ends other than shortly before December 31.

5. Fringe Benefits. Some types of fringe benefits (for example, health insurance benefits) are not deductible for stockholders who own more than 2% of the corporation.

Many new closely-held corporations benefit by making a tax election to be treated as a "Subchapter S" corporation for purposes of classification by the Internal Revenue Service. For example, this allows corporate losses, which are common in the initial years of the corporate existence, to "flow through" to the stockholders' personal tax returns as an income tax deduction, and allows profits to be distributed without the double taxation (once at the corporate level and again at the stockholder level when dividends are paid) that is characteristic of regular corporations.

In order to qualify to make the "S" election, there are several eligibility requirements, including:

1. The corporation must not have more than one class of stock.
   
2. The corporation must not have more than 100 stockholders.
   
3. Stockholders must be individuals (or certain trusts) rather than entities, and must not be non-resident aliens.

Note: The deadline for making the election is two months and 15 days after the beginning of the taxable year for which it is to be effective. The election should be sent by certified mail as evidence of the date of mailing.

In Delaware, directors hold office until the end of their term, unless they resign or are removed before the end of their term. Generally, directors hold terms of office of one year, and at each annual meeting of stockholders, directors are elected to hold office until the next annual meeting.

If there will be more than one regular director (those elected by the stockholders), it is posible to divide the directors into two or three classes with terms of two or three years, respectively, so that one class of directors expires each year (after the initial stockholder's meeting).

This method is sometimes called a "classified" or "staggered" board of directors. The use of this method provides continuity on the board because only one-half or one-third of the board may be replaced at any one time.

There are four basic types of business entities: the Sole Proprietorship, the Partnership, the Corporation and the Limited Liability Company (the "LLC"). In addition, there are several subtypes.

A typical set of bylaws will include the following topics, unless such topics have already been addressed in the Certificate:

• Fix the number of directors, the duration of their terms, whether they will be separated into classes, and how vacancies will be filled.
  
• Specify the notice, quorum and other voting requirements for "regularly scheduled" and "special" the director's meetings.
  
• Allow the directors to delegate power to a committee of directors.
  
• Specify whether the directors or stockholders can take action by written consent without a meeting.
  
• Specify whether the directors shall have the ability to establish their own compensation.
  
• Establish the corporation's officers, describe their duties, specify whether an individual may hold multiple officer positions, and prescribe the method of appointing and removing officers and filling vacancies.
  
• Indemnify the directors, officers and other agents of the corporation against personal liability up to the maximum extent allowed under law.
  
• Provide for restrictions, if any, on the transfer of stock to outside parties.
  
• Designate the date, time and location of the annual meeting of the stockholders.
  
• Specify the notice, the quorum and other voting requirements for stockholder meetings.
  
• Specify whether cumulative voting is allowed by stockholders in electing directors and, if so, how such cumulative voting rights may be exercised.
  
• Specify whether the corporation will have a corporate seal.
  
• State whether the corporation will issue stock certificates.
  
• Specify how the bylaws may be amended.