Free Articles of Incorporation Worksheet

While the corporation begins its existence when the Secretary of State files the Articles, several 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. An "organizational meeting" of the incorporators (or the initial directors, if they were named in the Articles) 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 Articles, the Organizational Consent SHOULD include a description of the actions take to complete the organization, such as:

   • Adoption of the Bylaws, and
     
   • Election of officers.
   
   The Organizational Consent 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 individually waive such notice.

3. There are other documents and forms that are commonly prepared in connection with the formation of a corporation. These can include shareholder voting agreements, long-term employment agreements, stock transfer restriction or buy/sell agreements among the shareholders, 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.

4. Additionally, minutes of shareholder and director meetings must be prepared at least annually. Annual Reports must be filed with the Secretary of State.

5. Finally, it is important to pay close attention to the necessity of respecting the corporate formalities on an on-going basis. Occasionally, the Internal Revenue Service or a court will find that the activities of the corporation are indistinguishable from the financial affairs of the shareholder(s). This is called "piercing the corporate veil" and can result in the shareholder(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 shareholders and directors which are documented with minutes.

There are several types of business entities. If it is determined that a corporation is the proper type of business entity to form, the Articles of Incorporation Worksheet can be used to organize the information that will be needed by a lawyer or other advisor to prepare the necessary documents to establish the corporation.

Most likely, the corporation should be formed under the laws of the state in which the business will be located. Otherwise, the corporation would have to qualify as a "foreign corporation" in the state where it will operate, and it may be necessary to pay annual fees and license taxes in both states. If a legal problem arises related to the corporation's business, a lawyer licensed to practice in the state of incorporation would have to be consulted.

A corporation is formed by filing "Articles of Incorporation" (also referred to as a "certificate of incorporation"), with the state's Secretary of State. The Articles must contain a minimum set of required information; other information is optional. A filing fee must accompany the Articles. In conjunction with the filing of the Articles, it is necessary to also prepare corporate bylaws and either "organizational minutes" or "organizational consent."

Some states offer corporations the option of electing to be organized as a "close corporation." If the corporation qualifies and makes such an election, it is allowed to operate under relaxed, partnership-type rules, allowing for less formal management by the shareholders instead of the directors and officers. However, few corporations actually make such an election and an informed decision to make such an election should only be carried out after consultation with a lawyer.

IMPORTANT: State and federal securities laws require compliance with complex registration procedures unless the incorporation process meets a set of exemptions, including: (a) a very limited number of persons will purchase the stock, (b) there will be absolutely no public solicitation or advertising to sell the shares, (c) the shares will be sold/issued to persons who will become directors or officers of the corporation or who are immediate family members of a shareholder/director or shareholder/officer, and (d) the shares will be purchased by persons who intend to hold the shares for their own investment and not for resale. Consult an attorney or other advisor for further information.

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. (See Subchapter S Election.) 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.

The corporation begins its existence when the Secretary of State files the Articles. However, additional steps must be taken to complete the organization. See Additional Steps for details.

Corporations may generally authorize more than one class of stock (for example "common" stock and "preferred" stock), each with different rights and privileges regarding such things as voting and the payment of dividends. However, most simple corporations, including the type of corporation for which these Articles were prepared, authorize only one class of stock. (If more than one class of stock is desired, a lawyer should be contacted for assistance.)

While the Articles of Incorporation define the basic structure of the corporation, the "bylaws" are used to further define this structure. The bylaws can contain any provisions not inconsistent with state law or the Articles, relating to the business of the corporation, the conduct of its affairs, and the rights and powers of the shareholders, directors, officers and employees. Changes to the Articles require shareholder approval while changes to the bylaws can usually be made by the directors (if given that authority when the bylaws are originally adopted by the incorporators and initial directors, subject to concurrent power by the shareholders). In larger corporations, that is why the most critical provisions are placed in the Articles so that the directors are not able to affect certain shareholder rights without shareholder approval.

A further consideration is that bylaws, unlike the Articles, are not usually recorded in the public records. 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, that provision should be in the recorded Articles 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.

The corporate name must include an indication that the entity is a corporation so that parties who deal with the corporation are aware of its status. Therefore, the name must include one of the following words or an abbreviation of the word:

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

The second requirement is that the name chosen must be distinguishable from any other corporate name which is already on file in that state, including 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 NOT sufficiently distinguishable from "Acme Corp." However, the Secretary is likely to allow "Smith, Inc." as well as "Smythe, Inc.," even though the two sound identical.

Before proceeding with the incorporation steps, it is advisable to contact the state's Secretary of State to verify that the chosen name for the new corporation is available.

The Articles 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.

Each corporation must keep accounting records and prepare tax returns for all of its transactions. The accounting period will end at the same time every twelve months after the initial year of existence, usually at the end of a month. This accounting "year-end" will coincide with the corporation's tax year-end so that the tax return can report a summary of the year's transactions. Although this accounting ("fiscal") year need not end on December 31, there are advantages in electing the calendar year as the corporation's fiscal year, and in some cases, the corporation is required to adopt the calendar year as its fiscal year.

A calendar year may prove to be the simplest to operate because the individual shareholders report their personal taxes on that basis. Furthermore, if the corporation will elect to be treated as a Subchapter S corporation (see Subchapter S Election), the Internal Revenue Service generally requires that the corporation adopt the calendar year as its fiscal year, unless the corporation can persuade the IRS that a non-calendar year corresponds to the natural business cycle of the corporation, or unless another exception applies. A "personal service corporation" -- one where the primary business of the corporation is of the owners performing personal services, for example consultants, doctors, dentists, lawyers, architects -- is also generally required to adopt the calendar year as its fiscal year.

The decision to adopt a fiscal year which differs from the calendar year should only be made after discussion with a lawyer or tax advisor.

A corporation is a separate legal entity owned by one or more shareholders, and the shareholders have "limited liability." The shareholders 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 shareholders serve as both directors and officers.

1. Organizational Formalities. Organizational formalities include items such as articles of incorporation, organizational minutes (or Consent), bylaws, stock certificates, federal employer identification number, and minutes and annual reports. See Organizational Formalities for further details.

2. Limited Liability. The owners of the corporation (the shareholders) enjoy "limited liability," that is, the shareholders 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 shareholders for unpaid wages in small corporations. Additionally, creditors frequently require the majority shareholder(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 shareholders.

5. Double Taxation. Shareholders 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 shareholder, 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 shareholders can simply pay themselves greater wages or bonuses (subject to reasonableness) which are deductible by the corporation (taxable to the shareholder) 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 Articles can include a provision which limits or eliminates the directors' personal liability to the corporation or its shareholders, for breaching certain types of their duty of care. Although in small companies the directors are often the same persons as the shareholders and/or the officers and/or the employees, this provision is often included in the Articles 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.

In some states, this protection is only available to the directors, not the officers. But it is available to persons serving in both capacities unless it can be shown that the action complained of was taken solely in the person's capacity as an officer.

The Articles and bylaws can also provide that the corporation will indemnify (defend) the directors, officers, employees and agents from lawsuits brought against those individuals which arose out of the performance of their duties.

After the corporation is formed and is operating, the shareholders elect the directors of the corporation who are generally responsible for managing 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 policies established by the directors.

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

Although some states require a minimum of three directors (unless there are fewer than three shareholders), most states allow for a single director.

If there will be more than one regular director (those elected by the shareholders), consider dividing 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 shareholder's meeting). The use of this method provides continuity on the board because only one-half or one-third of the board is replaced at any one time.

An Employer Identification Number (EIN) is a nine-digit number (for example, 12-3456789) assigned 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 (a) pays wages to one or more employees, or (b) files a tax Schedule C (Profit or Loss from Business) or Schedule F (Profit or Loss from Farming) on Form 1040 (U.S. Individual Income Tax Return) and has a Keogh Plan or is required to file excise, employment, or alcohol and tobacco or firearms returns.

Corporations must obtain and use an EIN even if they do not have any employees. If an entity already has an EIN, it may need to get a new one if either the organization or ownership of the business changes, for example, by incorporating a sole proprietorship. On the other hand, a new EIN should not be obtained if merely the name, but not the type, of the business changes.

Most states create a statutory presumption that any officer of the corporation enjoys the authority to execute (sign) any written document, including, for example, documents for the sale of real estate, unless the Articles or bylaws specifically provide otherwise. If it is desirable to restrict such authority to certain officers or officer combinations, the Articles or bylaws can include such a restriction, and, if filed in the county records, all relevant parties are deemed to have received constructive notice of the restriction. (Note that the bylaws must be recorded if they, rather than the Articles, 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 "C" corporation generally can deduct the costs of group health insurance plans, pension plans, and limited amounts of life insurance. The costs of these benefits for owner/employees are deductible if certain tax regulations are followed which discourage plans that primarily benefit highly compensated employees (who are often the officers and/or owners of the business). "S" corporations can generally only deduct the costs of benefits provided to non-owners. In the case of an "S" corporation, a stockholder who owns less than 2% of the company's stock is a "non-owner."

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.

Unless the Articles of Incorporation reserve the power to issue shares of stock to the initial shareholders, that authority is generally held by the directors. Therefore, the Organizational Consent should authorize the issuance of such shares. (Subsequent issuances of stock should be approved by the then-existing shareholders.)

The corporation may sell its unissued shares for money, or for property, past services or cancellation of a corporate debt. Many states prohibit payment in the form of a promissory note or future services. Furthermore, if the stock carries a par value, the stock cannot be issued for consideration less than such par value. For no-par stock, however, the shares may be issued for whatever consideration the directors determine is appropriate; but each of the initial shareholders, if more than one, should contribute the same amount per share. Some states require that the shares must be fully paid before they can be issued. Others allow for issuance upon partial payment.

The directors usually approve, by resolution, the initial issuance of a specified number of shares to specified persons for a specified consideration. The corporation then maintains a record of the holdings of each shareholder, and may also issue stock certificates, as evidence of the shareholder's ownership. If stock certificates are not automatically provided, the corporation sends the shareholder a statement describing the amount of stock titled in the shareholder's name.

Section 351 of the Internal Revenue Code of 1986 provides that no tax gain or loss shall be recognized if property is transferred to a corporation solely in exchange for its stock, if the transferor or transferors control the corporation immediately after the exchange. Therefore, in a small corporation, for example, the incorporator may transfer some land to the corporation in exchange for 50 shares of stock; if the value of the land at the time of the transfer is greater than the incorporator's original cost of the land, Section 351 may apply so that the transfer does not result in the incorporator having to recognize a gain on the transfer. A tax advisor or lawyer should be consulted in connection with the transfer of property to a corporation in exchange for shares of stock.

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 Articles of Organization with the Secretary of State. The Articles must include basic information regarding (1) the name and address of the LLC and its registered agent, and (2) its period of duration, for example, 10 to 35 years, although most states now permit perpetual duration.

   The Articles 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 (Articles of Organization and Operating Agreement). Some states still have statutes requiring an LLC to have two or more persons as members at the time that it is formed, but most states now allow single-member LLCs.

2. Operating Agreement. The LLC must also 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.

3. Federal Tax Employer Identification Number. 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, and so they will be described below. 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 a Subchapter S corporation. For more information, see Satisfying the Four-Factor Test (Pre-1997) and Federal Taxation for LLCs Formed After January 1, 1997.

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 shareholders, 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.

Because these Articles are prepared for closely held 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. 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, Bob and Ted still own their desired percentages of the corporation because they own all of the stock that the corporation has "issued." It is suggested that 1,000 shares be authorized. Additional shares can later be authorized by the shareholders by amending the Articles.

Corporate law in most states requires several steps in order to complete the formation of a corporation. After the Articles of Incorporation are filed which bring the corporation into existence, bylaws are prepared to further define the corporate structure. Then an "organizational meeting" of the incorporator(s) or the initial director(s) must be held to adopt the bylaws, elect the officers and approve various other actions to be taken. (The meeting will be held by the initial directors if they were named in the Articles of Incorporation; if not, then it will be held by the incorporator(s).) Instead of an actual meeting however, the incorporator(s) or initial directors can take action by unanimous written consent, if they all sign an "Organizational Consent." Use of the Consent method allows the organizers to comply with the formalities of the incorporation without having to provide notice of a meeting and then stage an actual "meeting" which might be attended by a very small number of people, even one.

The Consent is used to give formal approval to the incorporation actions already taken and to direct the officers to take further actions which are deemed necessary to make the corporation fully functioning.

The Consent typically includes an item-by-item approval (each is a "resolution") by the incorporator(s) or the initial directors of the following items:

• Adoption of the bylaws (required).

• Election of the initial directors who will serve until the first annual meeting of the shareholders (required unless they have already been named in the Articles).

• Election of officers (required).

• Adoption of the corporate seal, if one will be used (required).

• Approval of the steps of incorporation taken so far, including the content of the Articles of Incorporation already filed (recommended).

• Issuance of corporate shares of stock 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 corporate bank account(s) and/or to borrow money.

• Approval of a fiscal year for the corporation.

• Authorization to the president to file a tax election to be treated as a Subchapter S corporation (see Subchapter S Election.

• Authorization for the corporation to lease office space.

• 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.

Organizational formalities include items such as articles of incorporation, organizational minutes (or Consent), bylaws, stock certificates, federal employer identification numbers, and minutes and annual reports.

1. Articles of Incorporation. The corporation is formed by filing Articles of Incorporation with the Secretary of State. The Articles 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 Articles can include provisions regarding limited liability of the directors, preemptive stock rights, staggered directors' terms, and any unusual shareholder 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 Articles 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 Articles.

3. Bylaws. In addition to Articles 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 shareholder meetings and voting, and the duties, qualification, election, terms and meetings of the directors. The Bylaws (or the Articles) 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 shareholders 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 shareholder and director action must be prepared at least annually. Additionally, annual reports generally must be filed with the Secretary of State.

Many companies choose to authorize stock with no par value. Most states allow "no par stock." In the past, corporations designated a par value of, for example, $5 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 shareholders 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.

In some states, annual filing fees may be based upon the number of shares multiplied by the par value per share, if any. In contrast, fees for no par stock are based upon the number of shares. It may be possible therefore to authorize 10,000 shares of 1-cent par value for lower fees than 5,000 shares of no par value stock. But this consideration is unimportant if only 1,000 shares of no par value stock are authorized, as recommended in this document.

Preemptive rights give existing shareholders the right to purchase sufficient shares -- whenever the corporation intends to sell more shares -- so that those existing shareholders can maintain their percentage ownership of the corporation. Because the authority to issue new shares typically rests with the board of directors, a majority shareholder could conceivably vote to sell new shares to himself which would dilute the percentage interests of the minority shareholders and allow the majority shareholder to control major decisions which could otherwise have been blocked by the minority shareholders.

For example, suppose the corporate bylaws required a 75% approval by the shareholders in order to sell a major corporate asset, such as a factory. Shareholder 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, Shareholder 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 shareholders.

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 shareholder 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 shareholders.

Every corporation registered or doing business in a 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 shareholder, 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 registered office must provide a street address and not merely a post office address.

The identity of the registered agent and/or the address of the registered office can be changed by a resolution of the directors and notification to the Secretary of State.

In order to avoid structuring an organization which is deemed to be a corporation for income tax purposes, the LLC must have no more than two of the four characteristics that define a corporation: (1) limited liability, (2) continuity of life, (3) centralization of management, and (4) free transferability of ownership.

Limited Liability. The members of the LLC certainly desire "limited liability" for the debts and expenses of the LLC. Because this characteristic is a given, the LLC is allowed to have only one of the other three characteristics. In fact, state LLC statutes usually try to allow the owners (members) to avoid all of the other three characteristics.

Continuity of Life. "Continuity of life" is the continuation of the business entity without regard to the death of the owners. To purposefully violate this characteristic, the duration of the LLC cannot be perpetual.

Centralization of Management. A corporation has "centralization of management" because of its management through a board of directors. This corporate characteristic can be avoided by giving all LLC members the right to be involved in the management of the LLC. However, if the owners of an LLC choose to establish "managers," the LLC can still avoid tax status as a corporation by avoiding two of the other three corporate characteristics.

Free Transferability of Ownership. Generally, the owners of a corporation can "freely transfer their ownership" in the corporation by selling their shares of stock. To avoid this corporate characteristic, the LLC can impose transfer restrictions, for example, that a member may not transfer his/her shares without the consent of all of the other members.

Shareholder meetings are of two types. An "annual" meeting must be held each year to elect directors at a minimum. All other meetings are "special" meetings, which can be called by the directors or by officers as specified in the bylaws, or by a majority of the shareholders.

Notice of the annual meeting must be provided to all shareholders prior to each meeting unless the bylaws fix the date in advance. For example, the bylaws might specify that the annual meeting will be held at the corporation's principal place of business, at 2:00 p.m. on the second Tuesday of each March.

The actions taken at a meeting are only valid if proper notice of such meeting was provided to all shareholders or waived (a) in writing or (b) by attendance. The notice must be in writing and must specify the date, time and place of the meeting. If the meeting is a special meeting, the notice must also describe the purpose of the meeting. Some states require that notice of meetings must be given within a specified range of days prior to the meeting. And, there may be a higher minimum for certain special meetings at which major issues will be decided.

At the meeting itself, the first order of business is to establish that there is a "quorum" -- the minimum number of shares (usually 51%) are represented at the meeting so that official votes can be taken. In turn, in order for an action to be effective, it must receive the affirmative vote of more than 50% of the votes present (unless the percentage is altered by the Articles or bylaws). The Articles or bylaws can alter the quorum, but not to less than one-third.

If a shareholder is unable or unwilling to attend the meeting, that shareholder can designate an agent ("proxy" or "proxy holder") to vote his or her shares on his or her behalf. (Note: the term "proxy" also refers to the document which evidences the appointment and authority of the agent to vote for the shareholder.)

1. The Articles of Incorporation Worksheet is not a legal document and does not require any signatures, witnesses or notarization.

2. The Worksheet is an educational tool, and can be used to organize the information needed by a professional advisor to set up a 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 c an 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. 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 the stock itself but merely tangible evidence of ownership of the shares, certificates are not essential to owning stock.

Closely held corporations 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, the corporation is generally required to issue certificates upon demand by a shareholder, and most corporations choose to issue certificates as a rule.

The corporation may wish to restrict the ability of shareholders 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 shareholders 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 shareholder proposing to sell his or her stock must first offer to sell such stock to the corporation on the same terms.

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 shareholders (the potential sellers) and to the potential buyers when the corporation learns of the proposed sale.

Because the Articles of Incorporation are filed in the public records, all persons are generally considered to have "constructive notice" of the provisions of the Articles, but this rule does not apply to transfer restrictions. Therefore, the certificates must bear the restrictions even if the language is included in the Articles of Incorporation. Furthermore, the restrictions noted on the certificate must be supported by an identical provision to that effect in the Articles or bylaws, or in a shareholder agreement. If transfer restrictions are to be implemented, it is important to include them in the Articles or bylaws when the corporation is formed, rather than later by amendment, because restrictions implemented by an amendment to the Articles 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.

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 shareholders 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 shareholders 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 Shareholders. An "S" corporation may not have more than 75 shareholders.

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

3. 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.

4. Fringe Benefits. Some types of fringe benefits (for example, health insurance benefits) are not deductible for shareholders 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 shareholders' 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 shareholder level when dividends are paid) that is characteristic of regular corporations. In order to qualify to make the "S" election, the basic requirements are that the corporation must not (a) have more than one class of stock, or (b) have more than seventy-five shareholders.

For more information regarding the advantages and deadlines of making the Subchapter S election, consult an attorney or tax advisor.

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.

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

1. Fix the number of directors, and whether they will be separated into classes.

2. Specify the quorum and other voting requirements for the director's meetings.

3. Allow the directors to delegate power to a committee of directors.

4. Specify whether the directors or shareholders can take action by written consent without a meeting.

5. Deny the directors the ability to establish their own compensation.

6. Appoint the officers, describe their duties, specify whether an individual may hold multiple officer positions, and prescribe the method of appointing officers and filling vacancies.

7. Indemnify the directors against personal liability.

8. Restrict the transfer of stock to outside parties.

9. Designate the date, time and location of the annual meeting of the shareholders.

10. Specify the quorum and other voting requirements for the shareholder meetings.

11. Specify whether the corporation will have a corporate seal.

12. State whether the corporation will issue stock certificates.

Note: If there are any unusual circumstances which are not addressed by the options available in this document, a lawyer should be consulted.

There are four basic types of business entities: the Sole Proprietorship, the Partnership, the Corporation and the Limited Liability Company (the "LLC"). See the appropriate topics below for more information about each type.