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Articles of Incorporation

Introduction

In order to form a corporation (S or C corporation), the first legal document you must file with your state’s secretary of state (or other state agency) is called the Articles of Incorporation (also called a Certificate of Incorporation, or Incorporation Certificate in some states). You must file the Articles of Incorporation with your appropriate state agency because state laws are responsible for incorporation filings, not federal laws. That is why you can create a corporation in any state. It is also why there are different rules in every state for corporations (but many of the rules are very similar from state to state).

The Articles of Incorporation represent the single legal document that "gives life" to the corporation. Without the Articles of Incorporation there can be no corporation. However, you’ll also need an incorporator(s), i.e. the person who sets up the corporation, and you’ll have to properly complete and file the Articles before a state will recognize your corporation.

While the Articles of Incorporation serve as the "birth certificate" for the corporation, it also functions to create a contract between the corporation and its shareholders, a contract between the corporation and the state, and it puts the general public on notice about its existence.

Next, let’s take a look at where the articles of incorporation fit into the grand scheme of setting up a new corporation.

How the Articles of Incorporation Fit into a Corporation’s Formation

Before we jump right into what how the Articles of Incorporation work, it’s important to understand how this legal document fits into the process of setting up a new corporation.

In short, in order to form a corporation, you generally need four (4) things:

People
Paper
An act; and
Money

The "people" represent the incorporator(s). There can be one or more incorporators. Incorporators do the things necessary to bring the corporation "to life." The incorporators act on behalf of the corporation before there is a corporation. Incorporators do such things as sign and file the Articles of Incorporation, appoint a statutory agent, i.e. the person or entity that can receive service of process on behalf of the corporation (like a court summons), and may even call the first shareholders’ meeting or engage in other activities. Incorporators are invariably lawyers.

The "paper" represents the Articles of Incorporation, which is what this article is about.

The "act" is the actually filing of the Articles of Incorporation with the secretary of state (or other state agency). At the moment that the Articles of Incorporation are filed, the corporation comes "to life" (assuming everything is done properly). Think of the filing of the Articles of Incorporation as the "birth" of the corporation.

The "money" is the costs associated with the people, paper, and act. You’ll likely have to pay the incorporator, i.e. an attorney, if you don’t do it yourself. You’ll also have to pay the state filing fees associated with the Articles of Incorporation, which generally cost somewhere over $100 (but can be more in certain states).

Now that we’ve went over a basic review of where the Articles of Incorporation fit into the overall picture of creating a corporation we can explore some of the details about the Articles of Incorporation.

Next, let’s go over the purposes of the Articles of Incorporation.

Purposes

The Articles of Incorporation serve essentially four (4) purposes:

It brings the corporation "to life";
It represents a contract between the corporation and the shareholders of the corporation;
It represents a contract between the corporation and the state; and
It puts everyone on notice about the corporation’s existence.

The single act of filing the Articles of Incorporation with your state establishes these four basic relationships.

It also helps to know what the Articles of Incorporation are not, and do not do.

The Articles of Incorporation are not:

Bylaws (sometimes called Regulations)

Bylaws are used by corporations to set the groundwork for how the corporation runs.
A corporation’s bylaws are similar in many respects to an LLC’s Operating Agreement.

Articles of Organization

Articles of Organization are used by Limited Liability Companies to do many of the same things as a corporation’s Articles of Incorporation (but there are some differences).

The Articles of Incorporation do not:

Set up how the corporation runs, including such issues as management, shareholders, meetings, directors, officers, the issuance and transfer of shares, corporate records, indemnification, and many other operating provisions. All of this is done in the corporation’s Bylaws.

In essence, the Articles of Incorporation don’t do a whole lot more than the 4 functions mentioned above. The Articles of Incorporation are generally a fairly easy step to complete. The corporation’s Bylaws, on the other hand, take much more time and effort to properly set up. The Bylaws set up how the internal components of the corporation will run and generally can range in length from 10 to 40 pages or more. In contrast, the Articles of Incorporation are usually just 1 to 3 pages.

Next, we’ll explore the contents of the Articles of Incorporation.

Contents

While every state has different requirements for what must be contained within the Articles of Incorporation, the Articles of Incorporation generally contain the following information:

Name

The corporation’s name must be different from other corporations authorized to do business within that state. A search must be conducted to see if there are any confusingly similar names. If there are confusingly similar names, you should not use that business name. You should do a thorough search for confusingly similar names before you ever file the Articles of Incorporation. The secretary of state in your state of incorporation (or similar government body) will also conduct a brief search within its own database, but it is not sufficient to assure that you haven’t violated some other business’s rights.

The corporation’s name must generally end in the following words or their abbreviations:

Incorporated or Inc.;
Corporation or Corp.;
Company or Co.; or
Some other similar word or abbreviation that puts people on notice that they are dealing with a corporation

Address

The corporation must generally list the address of its "principal place of business" (PPB). The PPB is where the corporation’s headquarters or main facility is located.

Purpose

The person who incorporates the business, i.e. the incorporator, generally will not limit the purpose of the business and allow the corporation to engage in "all lawful activities."

In the past, incorporators would actually list what the corporation did. For example, a car body repair shop might have listed its purpose to "engage in auto body repair." This seems logical, right? However, if the business then decided to do something besides auto body repair (like car sales), a shareholder of the corporation might be able to successfully sue the business for acting outside of its authority. A business that acts outside of its authority is known as an ultra-vires act. So, to get around this dilemma, most incorporators list the purpose of the corporation as something such as:

To engage in any purpose or purposes for which individuals may lawfully associate themselves

That way, the corporation can engage in different types of business activities without worrying about committing an ultra-vires act. If a business fails to list its purpose, most state laws will assume that the business can engage in any lawful activity.

Duration

Incorporators usually list the corporation to "continue in perpetuity," i.e. forever. If an incorporator fails to state anything about the duration of the corporation, most state laws will presume that the corporation can continue in perpetuity.

If an incorporator puts a limit on the duration (e.g. 20 years), then that corporation will only last as long as it is set up to last.

Capital Structure

"Capital structure" is just a fancy word for "stock." The incorporator will generally list the following:

Authorized stock;
Number of shares per class of stock (and any preferences):

Stocks can have different classes. For example, one class of stock might be preferred, i.e. that class of stock gets paid first, while another class of stock gets paid second.
One class of stock may allow those shareholders to vote on corporate issues, while another class of stock may not grant shareholders voting rights.

Voting rights; and
Information on par value, if any.

Par value is the minimum value that each share must sell for. Think of it like the basement floor – you cannot go any lower. For example, if par value was set at $.05, no shares could be sold for less than $.05. Many states don’t have par values, and for the states that do have par values they tend to be very low like 1/10 of a cent. Still, the incorporator has the freedom to set a par value for the corporation’s stock, if he or she wants to.

Authorized stock is the number of shares that a corporation is allowed to issue to shareholders. Authorized stock is different than issued stock. Issued stock is the actual stock that has been given to shareholders. For example, a corporation may be authorized to issue 5,000 shares, but only issue 3,000 shares. So, why would a corporation do this? Well, there are many different reasons. One main reason is to have the ability to issue more shares when the corporation is worth more money in the future, i.e. the corporation increases in value, and can ask for a higher price/share. That way, the corporation can raise additional capital, i.e. money, without have to take a loan from a bank.

Another thing to keep in mind is that corporations have to buy their shares from the state. So, that means the more shares that a corporation authorizes, the more money it has to pay to the state where it incorporates. Each state has different rates for shares, which can cost around $.10/share or so.

There may be other requirements, but these are the basic requirements that most states require. So, again, the main information within the Articles of Incorporation includes the corporation’s:

Name
Address
Purpose
Duration; and
Capital structure

Finally, let’s wrap up this article with some ideas to keep in mind.

Conclusion

In this article, we went over how the Articles of Incorporation fit into the bigger picture of setting up a new corporation. We discussed the purposes and contents of the Articles of Incorporation, how it differs from other legal documents, and some the key terminology to keep in mind.

You can think of the Articles of Incorporation as the "birth certificate" for the corporation. Without the Articles of Incorporation there can be no corporation. Still, you’ll need an incorporator and have to properly complete and file the Articles with your state’s secretary of state (or other state agency). You’ll also need to pay the filing fee and fees associated with your incorporator and/or lawyer.

To find the proper form go to your state’s secretary of state within the business filings section. Or you can contact a local representative from the Small Business Administration, which can be found online at http://www.sba.gov/. Or contact your local business attorney.

NEXT STEP: After you create the Articles of Incorporation, you'll have to create your corporation's bylaws which act as the "guts" of the company. Please read "Bylaws of Corporations" for details on setting up a corporation's bylaws.