By-laws, Operating Agreements, Resolutions and More

Around the time of incorporation, you will draft your corporate by-laws or operating agreement. Both outline the rules and protocols of how the company will conduct business and who will be in positions of ownership and management. Both remain part of the company's permanent record unless amended by a resolution.

Corporate By-Laws summarize the responsibilities of the officers and directors, describe how the Board of Directors will function, explain when and how board and shareholder meetings will be held, as well as where to find corporate meeting minutes. This document is typically authorized by the initial directors named on the Certificate of Incorporation. Corporate by-laws are not filed with any government authority, but should be filed with other company documents. They remain part of the company's permanent record unless they are amended via corporate resolution. 

Operating agreements (much like corporate by-laws of a corporation) outlines the rules and protocols for how the LLC will operate.  It represents an agreement among the members managing the limited liability company. Specifically, the operating agreement describes the responsibilities of the managers and members, the percentage of member ownership, as well as voting rights. This operating agreement is crucial to providing liability protection to the members of the LLC. It should be maintained with other corporate records such as meeting minutes and membership certificates. 

A corporate kit is a formal binder used to store corporate documents. Because it is so important to protect the corporate veil of your company, a corporate kit is an ideal tool for organizing and maintaning vital corporate records.  The kit includes stock or membership certificates, sample operating agreements and by-laws, as well as minute books.  Corporate kits can be ordered here

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The Best Home-State for your Business

Incorporation is a state-level process so you must choose a state in which to form your corporation.  This becomes your “home state” or “domestic state”. For most businesses this is the state where your headquarters are located, whether it’s your garage or a corporate suite.

If a company chooses to form in a state where they are not located or if the company conducts business nationally, internationally, or is not U.S.-based, the home state chosen will be based on costs to form, taxes and other legal factors. 

Popular Formation States

Delaware – low formation cost, moderate annual fees, no state income tax and the most favorable legal environment (Chancery Court with well-developed laws)

Nevada – low formation cost, moderate annual fees, no state income tax, similar legal environment to Delaware but with shorter case history)

Wyoming – low formation cost, low annual fees, no state income tax (tax on assets held in Wyoming), corporate and LLC laws which are favorable to corporations.

Florida – low formation cost, moderate annual fees, good online business infrastructure.

South Dakota – moderate formation cost, low annual fees

Colorado – low formation cost, low annual fees

For businesses outside of the U.S., some choose New York or DC as a formation state due to the prestige of the location, particularly in foreign markets.  Neither would be considered low cost, however some U.S. based businesses might find the prestige factor useful for their line of products or services.

Please keep in mind that if you choose to form outside of your home-state, you may have to file as a “foreign corporation” in your state. This “foreign” designation is what states use to differentiate between companies that began their corporate life (filed the papers) in-state (domestic), as opposed to registering after forming in another state.

For more information on state by state incorporation visit our page: Which State?

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Thinking of Incorporating? You'll Need to Appoint a Registered Agent

What’s a registered agent? This is a commonly asked question among entrepreneurs who are new to the incorporation process.  It is a statutory requirement that all entities appoint a registered agent, also known as resident agent or statutory agent, when incorporating. The registered agent can be an individual or business entity and must have a physical address in the state of incorporation. The primary responsibility of the registered agent is to receive legal correspondence on the entity’s behalf, in addition to, any official notices from the Secretary of State. Failure to maintain a registered office in the state of incorporation can cause the entity to fall out of good standing and even be declared Void if a new agent is not appointed.

There is often a misconception that the registered agent address is the same as the principal office address. This is not the case. The two are very different and serve different purposes. Most jurisdictions allow business entities to maintain a principal place of business outside the state. If the business does not operate or maintain an address in the state of incorporation, a commercial registered agent can be appointed. Many companies elect to appoint a "commercial" registered agent - like American Incorporators - to accept all legal and tax notices on behalf of a company and then forward it to the client. Designation of the registered agent is typically made on the formation documents. By electing a commercial registered agent the company does not have to worry about service providers arriving at their place of business, nor does their personal address have to be disclosed for public record or amended if it's a new address. 

Do I need a Registered Agent? Yes,virtually every state requires a registered agent be appointed to receive service of process and annual tax notices on behalf of the business entity. However, a registered agent is defined as a registered address in the state of formation. Thus, people who form their business in the state where they reside can serve as their own registered agent. Most people do, however, elect a commercial registered agent - 

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Shareholders, Directors and Officers

Each of these positions play an important and distinct role within a corporation. The same individual can hold one or more of these positions. The roles of each are defined in a corporation's initial Articles of Incorporation and/or By-laws.

Shareholders are owners of the company based on their holdings. They purchase stock in the company and may receive dividends if the company is profitable. They may also vote on major company decisions such as mergers or liquidation. Shareholders are also known as stockholders

Directors, typically operating as part of a Board, make up the governing body elected by shareholders. They are responsible for the management of a corporation's business and affairs. 

Officers often consist of roles such as President, Vice President, Treasurer, and Secretary. Officers are appointed by the Board of Directors. They are responsible for carrying out the Board's policies and they are responsible for making day-to-day decisions. The number of board members and officers (and their responsibilities) will vary and is generally defined in the articles of incorporation or by-laws.

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State to State Business Requirements

Business owners often differ in where they decide to incorporate. Some prefer to incorporate in their home state, while others prefer the benefits of corporate friendly states like Delaware or Nevada. However, it is important to consider state requirements, particularly requirements about qualification. 

1) Do I have to operate my business in the state where I incorporate?

The short answer is no. No state requires that you form your company in the state where you are doing business. And states like Delaware do not require that you conduct business in their state.  However, most states mandate that companies not formed there, but are conducting business in their boundaries, file a Certificate of Authority.This document in effect qualifies a business formed in another state to do business in the new state.  So if you form a Delaware LLC but are in fact conducting business in California you will have to qualify your business in California before you can do anything, including opening a bank account. This is much more expensive than simply filling your initial business in California. There are many factors that go into deciding where to form your business ans we recommend you speak with a lawyer or accountant if you are unsure. 

2) What does it mean to qualify in another state?

Qualifying to do business in another state is what happens when you are conducting business in a state other than where you initially formed your business. This may happen as your company grows and you decide to expand it in order to service neighboring states.  In other cases this happens because an individual decides for a number of reasons to form their company in a corporate friendly state like Delaware but plans to actually conduct business somewhere else. In this instance they can take advantage of Delaware laws and courts should they ever be sued, but qualify their business where they are actually located. 

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Incorporating without a Lawyer

Certificate of Amendment

Often times as companies grow, their original by-laws and operating agreements become outdated. Maybe the company needs to issue more shares of stock? Or maybe it is time for a name change? 

An amendment to your Corporation or Limited Liability Company is a formal filing with the state of registration that officially changes details of your business structure. Amendments can be very simple or very complex.n.  

Examples:

Name change: If you decide your company name no longer describes your business instead of forming a whole new corporation or LLC, you can elect to simply "amend" the name

Stock change: When you need to raise additional capital to expend your corporation, you can issue stock. The amount of authorized stock can be increased by filing an amendment with the state. The price for stock amendments vary for each company. 

Change in Directors or Members: If one of the directors or members listed on the Articles of Incorporation or Organization leaves, or a new one is added, you can update that information by filing an amendment. 

Filing an amendment does not change your Federal Tax ID, since your company is still the same legal entity. However, the Internal Revenue Service (IRS) must be notified of any name amendments

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Corporations such as C-Corps and S-Corps are owned by their shareholders. Shareholders are individuals who purchase stock in a company. A company does not have to be listed on a public stock exchange to sell stock in your company, the stocks can be sold privately to investors large or small. Stock can also be sold to employees as part of an Employee Stock Ownership Program (ESOP). The first step to selling stock is assigning it a par value. 

When issuing stock for a corporation a par value must be assigned per share. Par value is the nominal value of a share of stock as specified by the corporate charter. The stock cannot be sold for less than the set value.This is not to be confused with the selling price or asking price, nor the market vakye the stock is exchanged at. Par value is the minimum price of a share below which the share cannot be issued.

For example, if par value of a stock is $10 and the stock is traded for $5 the company would be liable for the remaining $5. To avoid this companies typically offer no par value or a par value less than $0.01. Assigning higher par values and issuing more stock can also add to your annual tax payments and initial incorporation fees. 

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What to Issue and How Much 

When incorporating your company it is important to understand the shares your company possesses, the right number of these shares to issue for your business venture, and the different ownership status with these shares. Many first time entrepreneurs lack clear, concise answers to their common questions about stock. AIL wants you to have the answers in order to run a successful business.

What is an issued share?

Issued shares represent the shares of stock that have actually been assigned or sold to shareholders. 

What is an authorized share?

Authorized shares are different than issued shares. They are the total number of shares that the company is allowed to issue. The number of authorized shares is specified initially in the company's Articles of Incorporation - however, the total can be amended with shareholder approval at a later date if necessary.Generally, a greater number of shares are authorized than required in order to give the company the flexibility to continue to issue stock as needed over time. 

How do I know how many authorized shares of stock to issue?

There is no magic number of shares that you should authorize when you form a company. The number depends largely on what you intend to do with the stock.  However, you should be aware that authorizing a higher number of shares than the state minimum (amount varies by state) can lead to higher formation costs and additional fees, even if those shares are not issued. AIL suggests a standard of 1500 shares in Delaware and 1000 shares in most other states.  We certainly can, and have, filed significantly higher amounts for our clients in the past. 

What is the difference between common and preferred stock?

Both common and preferred stock represent ownership in a C Corporation. Preferred stock shareholders are paid dividends first and more regularly than common stock holders.  Likewise, if the company liquidates or goes bankrupt, preferred shareholders are entitled to a portion of company assets before common shareholders.  However, they generally do not possess the same voting rights that are granted to common shareholders, whose number of votes correlates to their number of shares.  Preferred shareholders know the value of their projected dividends ahead of time and the amount they receive in dividend compensation does not increase with time. Alternatively, common shareholders may or may not receive dividends depending on how well the company is doing and the determination of the Board of Directors. 

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Domestic and Foreign Qualifications

A domestic corporation or LLC is a company formed in the state it is operating in. Meaning if you form your corporation or LLC in Delaware - you will be considered a domestic entity in Delaware. A foreign corporation or LLC is a legal business entity that has qualified to do business in a state other than where it was initially incorporated. In order to become a foreign entity a business must first qualify.  

If a business would like to expand and do business in a state other than where they formed, a Foreign Qualification, or Certificate of Authority, can be filed with the state. Once this document is filed the business may be permitted as a foreign entity in the applicable states. Without the proper foreign qualification, you could lose access to that state's judicial system or even be hit with fines, back taxes and penalties. 

Corporations and LLCs are subject to taxes and annual report fees in both the state of formation and any states where they are qualified to do business as a foreign entity. Most states also require corporations and LLCs to have a registered agent in each state where the company is qualified.

Need a Foreign Qualification (Certificate of Authority)?

We prepare and file qualifications for a foreign corporation or LLC, plus we provide registered agent services in all 50 states. Visit us online: www.ailcorp.com 

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