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CORPORATION FORMATION CHECKLIST FOR FIRST MEETING
INTRODUCTION:
The incorporation
process requires decisions as to structure, ownership and control that
must be made before various documents can be filed with the State of California to form the corporation.
Making these decisions often requires medium and long term planning, and
in the case of family businesses, often requires advice as to the complex
interaction between family dynamics and business requirements.
The corporation is
essentially a small “republic.” Normally, each shareholder has one vote
per share owned and the shareholders elect the Board of Directors who, in
turn, elect the Officers who do the day to day running of the
corporation. One can compare the shareholders to voters, the Board of
Directors to a Legislature, and the Officers to the Executive Branch of
the government.
While the Articles of
Incorporation which creates the shell can be formed without determining
the identities of the shareholders, directors and officers, the operation
of the company and the creation of Bylaws, issuance of ownership
certificates (stock certificates) etc, requires those decisions be made.
Shareholders normally
elect Directors annually and Directors normally appoint Officers
annually. There are complex rules in California as to how many shares must be
owned to guaranty the ability to elect at least one Director (cumulative
voting rules) but in general, the person owning a majority of the stock
can normally elect a majority of the Directors. Since Directors control
who are Officers and since Officers determine who are the employees of
the Company, it is clear that the decisions made at the initial
incorporation are vital ones for the history of the Company.
Our office normally
incorporates the shell then participates in the first meeting of
shareholders, directors and officers, usually about a week after the
Articles are filed. Advice as to decisions to make at that meeting is
normally required from both the Attorney and the Certified Public
Accountant since key tax decisions are also likely to be made. One reason
our office charges a flat fee for incorporation is that the owners of the
Company must receive that advice or they may make critical errors at the
inception and the flat fee allows the owners to ask all the questions and
receive all the advice they require without worrying about the excess
cost that would otherwise ensue.
The checklist below
indicates the essential questions that must be confronted at the initial
meeting of the Incorporator, Board of Directors, and Shareholders. It
makes sense to fill in as much as you can though some answers may have to
await advice from counsel. However, before the incorporation process is
complete, all the questions below must be answered.
INSTRUCTIONS:
Please review the following
questions and provide the requested information in the space provided and
bring it to our meeting to discuss your incorporation. This information is needed to complete
your corporation’s organizational minutes, bylaws and other
corporate housekeeping documents.
If you need assistance in providing the requested information,
please do not hesitate to contact our office.
1. Who Are the Initial
Shareholders?
(The typical California corporation has one class of
shares but more classes can be created, though there can be tax and
voting results that must be carefully considered. The selection of share
structure and ownership is probably the single most important question to
be considered. The danger is of dead lock if there is even ownership
among shareholders or the alternative danger is of domination by a
majority shareholder and these possibilities must be closely analyzed.
This is one of the questions normally discussed in detail at our
meeting.)
a. How many shares to be issued to each
shareholder?
b.
Who
will be the shareholders?
( We
will need information on the individual shareholders to determine what securities
exemption will apply as well as whether or not a subchapter S exemption
will be available.)
c.
Will
the initial shareholders be individuals, trusts or other entities?
( The
answer has tax consequences re subchapter S election as well as securities
consequences re available exemptions)
/1/ Will shareholders also be
employees?
d.
Will
stock be issued or sold to additional persons other than the initial
shareholders in
the future?
California securities laws require various
types of filings depending on the nature of the shares being offered, how they are
offered, and the nature of the people being asked to purchase shares. The
following information is important for those purposes.
e. Please
provide the following information regarding each shareholder:
Name:
Address;
Citizenship status:
State or country of residency:
Business experience:
Investment aim:
How long you have known the person?
Financial information such
as the individual’s net worth (excluding personal residence,
furnishings and automobiles):
f. What is the type or nature of the
corporation’s intended business?
g. Does the business require special permits
or licenses?
(Certain types of
businesses can only be owned by licensed professionals, such as
professional corporations (doctors, lawyers, etc.) or contractors, etc.
2. How many directors will
the bylaws authorize?
(You are required to have
at least one director if there is one shareholder; 2 directors for 2
shareholder and at least 3 directors for corporations with 3 or more
shareholders. You may also decide
to have a flexible board of directors with a variable rather than a fixed
number of directors. For example,
you may authorize a board of not less than three or more than five. If
using a variable number of directors the code requires that the maximum
directors cannot be more than twice the minimum, minus one. Directors
need not be citizens or even reside in the United States but must be over the age of 18.)
a. Who will be the initial
directors? Provide their names and
addresses.
3. Who will be the Agent for Service of
Process for the new corporation?
(Please provide both the
name and address of the person who will be the agent. Lee Stimmel will be named in Articles and
can continue as Agent if you so chose.
The Agent must also be named in the Statement By Domestic Stock
Corporation which must be filed by the corporation. We will prepare this
document for your signature and file it for you with the Secretary of
State. The information necessary
to complete the organizational minutes will also be sufficient to draft
the Statement.)
4. What is the California street address that will be used for
the principal place of business for the corporation?
( This is required in the
Statement by Domestic Stock Corporation and cannot be a PO Box.)
5. Who will be the officers of the
corporation?
( If you have one
shareholder that person can be all of the officers. If more than one shareholder, who will
be the president/CEO, treasurer/CFO and secretary...For example you could
be president and CFO and another shareholder etc. could be
secretary. It is usually better
not to have same person be both president and secretary. The usual
officers are President, Chief Financial Officer (Treasurer) and
Secretary. You can provide in the Bylaws for additional officers or even
co-presidents.)
President:
Secretary:
Treasurer:
Other? (Vice Presidents)
6. Will the corporation be
Type C or Subchapter S? What will
be your accounting year?
( Subchapter S means taxes
are passed through to the shareholders while Subchapter C has the
corporation having its own tax identity. Accounting advice is normally
needed for this decision. As for
the accounting year, this would be limited if you elect to be a
subchapter S corporation.)
7. Who will be authorized to sign checks?
a. Will one or more signature be
required?
b. Will your accountant obtain the EIN
number for the corporation? If not, who will do this?
(The EIN number is an
employer identification number and is like a corporation’s social
security number. The EIN is
obtained by completing a SS-4 Form and submitting it to the IRS who then
issues the EIN number. Please
provide us with a copy of the SS-4 Form and your EIN number when obtained
for filing in your corporate records)
8. What is your choice for the date of the
annual shareholder meeting?
( California corporate law requires that a
shareholder’s meeting be held annually.)
9. What is your choice for
the date of the annual director’s meeting?
10. How
many shares of stock are going to be authorized in your Articles of
Incorporation? (You
must state in your Articles authorized number of shares. This can have
tax ramifications in certain jurisdictions.)
a. How many shares of
stock are going to be issued in the initial stock issuance?
(Will you keep some shares in
reserve for future issuance?)
11. What will be the amount and type of
consideration to be paid for the shares of stock?
(For example, the
consideration may be cash, services rendered to the corporation, or
transfer of assets from an existing business....You may also want to
discuss this with your accountant)
12. Does the company want to elect to treat
startup cost as deferred expenses to be deducted over 60 months?
( This is another question
for your accountant.)
13. Does the corporation intend to open an
office in another jurisdiction?
14. What do you wish to happen to the
Shares if a Shareholder dies? Can the other Shareholder’s buy the
shares from the Estate?
15. What do you wish to happen
if there is a divorce and shares are community property?
16. What fringe benefits are to be
available to the employees and/or officers?
(Health? Auto? Home office?
Etc.)
17. Pension Plan? 401K?
18. Will you be doing business in other
States? Internationally?
19. Will you be entering
into Joint Ventures with other entities?
20. Have you planned to
alter all your stationary, business cards, bank accounts into the name of
the new entity?
21. Any other questions you
have?
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