How to Form a Corporation and Follow Governance Requirements

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A Google search for "governance documents" will yield a multitude of different documents (e.g., "Certification of Incorporation," "Code of Ethics," "Audit Committee Charter"). For someone forming a corporation, these can be overwhelming and even discouraging. However, the good news is that the most corporations do not need many of these documents.

Large Corporations

It only gets complicated when a corporation grows to a level where federal regulations begin to take effect. A simple way to know if you’re defined as "large" is if your corporation is publicly traded (listed on a Stock Exchange or sold on an OTC market). Most corporations are closely-held (not publicly traded) and state law tends to relax corporation formation requirements for these in order to spur more business within the state. In most instances, a corporation begins as a closely-held corporation.

Required vs. Needed

Before proceeding with LLC governance documents, let’s distinguish between "required" documents and "needed" documents. The "required" document is mandated for LLCs by state law. Without it, the state won’t recognize a business as an LLC. The "needed" document is not mandated by state law, but every LLC should have it handy to prevent future issues and even lawsuits. LLCs are also generally required to file an annual (or biennial) report with the state, but we won’t address that in this article.

Required Governance Document - Certificate of Incorporation

Every corporation must have a Certificate of Incorporation. This is like a corporation's birth certificate and is used as proof of a corporation's existence. It’s issued by the state and requires a corporation to file Articles of Incorporation with the state (along with applicable state fees).

The Articles of Incorporation set forth the basics of your business. Generally, the minimum requirements for the Articles are : (1) corporation name; (2) corporation's purpose (i.e. "to engage in any lawful activity"); (3) name and address of corporation's registered agent (the entity authorized to accept delivery of legal documents on the corporation's behalf); and (4) stock information (number of shares the corporation can issue, designation of share classes, and initial value of each share). Beyond this, the Articles will usually identify the person(s) responsible for signing and filing the Articles. The Articles may also state the number and names of the first directors.

Most states have a standard Articles of Incorporation form. An applicant can simply fill in the blanks, sign, and file with the state. However, depending upon the complexities of your corporation you may elect to include any special provisions within the Bylaws (see below). Consult a professional when considering these special provisions. The Certificate should be kept with the registered agent.

Needed Governance Document - Bylaws

States don’t require LLCs to file an operating agreement. In fact, in a number of states the operating agreement doesn’t even have to be in writing to be enforceable. However, you should absolutely have this document in writing. It is essential and possibly the most important document your LLC can have. Due to relaxed requirements for the Articles of Organization, some important governing aspects of an LLC are left unwritten. As with the bylaws of a corporation, the operating agreement of an LLC fills in the blanks.

The bylaws describe corporate office functions, how shareholders' and directors' meetings are called and conducted, shareholder voting, director qualifications, board committee functions, and procedures for and limits on issuing and transferring shares. Many bylaws contain provisions to protect the directors, the officers, or both, as well as a clause that allows bylaws to be enforced even if a particular provision is held as invalid. The bylaws must be consistent with the Articles of Incorporation. If discrepancies arise, the Articles hold precedence. The bylaws may be amended as needed and should specify the necessary procedures for amendment.

Needed Governance Document - Minutes of Meetings

Every corporation must have an annual meeting for shareholders and directors. A corporation may also call special meetings. Activity that occurs at these meetings is recorded in the meeting's minutes. The minutes are the official record. Although the minutes are important, they should remain light. Only include substantive information, and exclude exhaustive details on what was presented.

Committee Charters

For many corporations, the only governing board they will need is the Board of Directors. Larger corporations may have specialized governing needs (i.e. litigation and audit committees). These may even be federally mandated. As such, the corporation will create committee charters that act as the committee's bylaws.

Code of Ethics/Conduct

Beyond the governance documents listed above, the corporation may also communicate its expectations of directors, officers and employees. These expectations are listed in an ethics code (shareholders expectations of the corporation and its officers) and a code of conduct (the corporation’s expectations of its employees). These documents are not necessary for smaller corporations where shareholders, directors, and officers are synonymous. For larger corporations with many employees and many shareholders, these codes are very necessary.

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