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.
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:
State or country of residency:
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.)
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?