Free Organizational Consent

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 Document Information topic of that title), 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.

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 after 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 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 shareholders 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.

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.

This Consent document is designed to be used to form a corporation which will be owned and operated by a small number of shareholders, and which will not in any manner solicit outside investors to buy its shares of stock. State and federal securities laws must be complied with, requiring registration of the stock issuance unless the incorporation process meets a stringent 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 the shareholder/directors or shareholder/officers, and (d) the shares will be purchased by persons who intend to hold the shares for their own investment and not for resale. If any of the above provisions are not met, or if there are any unusual circumstances regarding the sale of the corporate shares, a lawyer should be consulted.

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.

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. Delaware law requires that notice of most meetings be given between ten and sixty days prior to the meeting. There is 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 Consent should be signed by all of the incorporators or all of the initial directors named in the Articles.

2. The previously-prepared bylaws should be dated and signed by the elected Secretary and attached to the Consent. (The date should correspond to the date on which the last signature is obtained on the Consent, which is when the Consent becomes effective.)

3. If the Consent adopts a corporate seal, the seal should be imprinted beside the appropriate resolution in the Consent.

4. If the Consent adopts a stock certificate form, attach a form to the Consent.

5. Obtain and complete an SS-4 Form to obtain an Employer Identification Number for the corporation.

6. If the Consent authorizes the issuance of shares of corporate stock, take the necessary steps to issue the shares in exchange for the consideration listed in the Consent.

7. If the Consent authorizes opening a corporate bank account and/or borrowing money, take the necessary steps to do so.

8. If the Consent authorizes paying incorporation expenses or reimbursing persons for such expenses, take the necessary steps to do so.

9. If the Consent directs the officers to make a Subchapter S tax election, take the necessary steps to do so, probably by working with a tax advisor or lawyer.

10. If the Consent directs the officers to obtain insurance coverage, take the necessary steps to do so.

11. If the Consent directs the officers to adopt a pension and/or profit-sharing plan, take the necessary steps to do so.

12. If the Consent directs the officers to lease office space, take the necessary steps to do so.

13. If the Consent directs the officers to enter into employment agreements with the officers, take the necessary steps to do so.

14. If the Consent specifies the date for the first annual shareholders meeting, take the necessary steps to provide notice to the shareholders.

15. The original signed Consent should be placed into the corporate records book.

16. 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, patent or trademark application, application for necessary licenses and permits, and trade name filings.

    Additionally, minutes of shareholder and director meetings must be prepared at least annually. An Annual Report and an Annual Franchise Tax Report must be filed with the Secretary of State.

    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 corporation is indistinguishable from the financial affairs of the shareholder(s). This is called "piercing the corporate veil" and can result in the shareholders being liable personally 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.

17. A lawyer should be consulted regarding any unique issues not addressed by this document.

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.

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

• 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