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Corporations - Steps In Incorporating

( Originally Published 1918 )

The Corporate Name.—The first step in the organization of a corporation is to decide upon its name. This must be stated in the charter or certificate of incorporation. When allowed, it be-comes both the name and the property of the corporation exclusively, and necessary legal steps may be taken to prevent its use or the use of a name so similar as to be calculated to deceive.

By the same token it follows that the name thus selected must not infringe upon any name already used by some other corporation, either organized under the laws of the same state or, being a foreign corporation, licensed to do business within the state. Hence it is advisable to inquire of the Secretary of State if the name selected may be used before taking any further steps.

Purposes.—Generally speaking, a corporation may be organized for any lawful purpose. But under the general corporation laws of the different states corporations organized thereunder may not engage in banking, insurance or as common carriers, unless they are organized under special laws pertaining thereto. But so far as general business is concerned, the corporation may be formed to carry out the business planned by the incorporators.

The next step, therefore, is to determine the purposes for which the corporation is to be formed. In doing this and more particularly in setting them forth in the charter or certificate of incorporation it is of vital importance that they be fully stated, as a corporation, being a creature of statute, has no more or broader powers than are specified therein and such as are incidental thereto and comprehended thereby. For that reason it is the practice of corporation lawyers to include in their clients' charters or certificates of incorporation, the fullest powers permitted by law, so as to enable the corporations to do almost anything.

Where to Incorporate.—The selection of the state in which to take out the incorporation is often of the greatest importance. It is not necessary that the corporation be organized under the laws of the state in which it proposes to do business. Any state may be selected where the incorporation laws afford the proposed corporation the widest latitude in the conduct of its affairs, in the amount of authorized capital permitted as well as the state fees and various other phases. That is why many of the largest corporations doing business in New York City are incorporated under the laws of Maine, New Jersey, Delaware and other states. These great industrial giants extend their activities into many states and are, in order to conduct their business most economically, compelled to engage in many different lines of business, from mining, refining ores, maintaining and conducting homes and stores, to operating railroads and steamer lines, all in addition to their manufacturing enterprise, but as a necessary part of it, and they therefore sought the state giving them the necessary breadth of powers in their charters.

The state fees on incorporation are also an-other very important factor with the large corporations. Take the case of the United States Steel Corporation. Had it been incorporated under the laws of the State of Pennsylvania, its seemingly logical state, the fees would have amounted to something over $3,500,000. While in New Jersey, the state in which they are incorporated, such fees amounted to only $220,000.

Local Corporations.—In the case of the usual small corporation, whose business is more closely confined to a given locality, it is generally advisable to incorporate under the laws of the state where its principal office or place of business is to be situated. In many instances where a local corporation has been formed under the laws of some other state, and it seeks local capital in the promotion of its business, there is apt to be an undercurrent of suspicion that there was some ulterior motive, something planned that would not have been permitted in the home state. Where local capital is sought, often the opinion of local counsel is requested, and when the incorporation is in the home state, and the counsel is familiar with the provisions of the laws, he is in a better position to advise his clients than where the incorporation has taken place in a state with whose incorporation laws he may be more or less unfamiliar. In short, it is best to incorporate at home unless there are controlling reasons for seeking a charter at the hand of some other state.

Capitalization.—Another very important step in the organization of a corporation is the determination of the amount of capital of the new enterprise. In this connection it should be clearly borne in mind that lack of sufficient capital is the chief cause of business failures. It is not to be inferred that the amount specified in the charter of a corporation has anything to do with it, but it is important in determining the amount to be stated in the charter for the reason that care should be taken to provide ample funds to carry the new venture through its most trying period—the first two years of its existence. If the amount stated in the charter is ample, and the incorpora-tors arrange to make it promptly available, the venture is far more likely to succeed than if it were launched on the too sanguine hope of being able to "get by" with less.

Here again the question of the state in which the incorporation shall be had becomes important, as in many states there is a provision that the corporation shall not begin business until a certain per cent of the capital stated in the char-ter shall have been paid in in cash or in its equivalent in property. In Illinois it is fifty per cent. In New York one-half of the authorized capital must be paid in within one year from date of incorporation and the amount with which the corporation will begin business stated in the certificate of in-corporation. These provisions, while embarrassing in some instances, are lacking in the requirements of other states, but they are aimed to as-sure, as far as possible by law, that the new corporations shall be sufficiently well financed to at least make their ultimate success feasible. Most of the states have a minimum of permitted authorized capital, generally $1,000.

Kinds of Stock.-With the amount of capital settled, the next question is as to the kind or kinds of stock that the corporation shall have. The stock may be either with a fixed par value or the newer and rapidly becoming popular no-par-value, or a combination of both. If the stock is all of one kind, it is all "common" stock, whether it have a par value or not. A portion of the stock may be "preferred" stock, and the balance "common" stock, with or without par value. The kind or kinds of stock and their par value, if any, together with the number of shares of each, must be set forth in the charter or certificate of incorporation.

Par Value Stock.--The most common class of stock is that which has a definite or fixed par value, and into which the authorized capital is divided. The par value may be such sum as the incorporators decide, so long as the amount con-forms to the provisions of the laws of the state of incorporation. Such stock is "full paid" when the amount of such par value has been once paid into the treasury of the corporation either in cash or in such property as the board of directors shall decide to be reasonably worth such par value and lawful and suitable to the purposes of the corporation.

No-Par-Value Stock.—Of recent years there has been permitted the issuance of stock having no par value, but which finds its value in the relation of the number of shares issued and out-standing to the total net assets of the corporation.

New York was the first state to authorize the is-sue of such shares, and the practice has followed in many others. In Illinois it is required that the assets of the corporation be not less than $5 for each share of no-par-value stock issued. Under this arrangement the corporation may sell such stock for the best price obtainable, and just as in the case of stock that has a fixed par value, the value is the relation of the outstanding shares to the assets of the corporation.

Preferred Stock.--Preferred stock is that which is entitled to some preference or right over other stock of the same corporation. This is usually in regard to the payment of dividends and the distribution of the assets in the event of a liquidation. In most cases the holders of preferred stock are entitled to be paid dividends out of the surplus net earnings of the corporation to a certain rate, before any dividend is declared or paid on the common stock. In many cases preferred stock is used as a means of securing funds for the corporation instead of resorting to the issue of bonds, and most frequently where the corporation is not possessed of property at its inception that might be mortgaged to secure such an issue, as the preference in case of liquidation or dissolution means that the preferred stockholders are to be paid in full before any sum is paid to the holders of the common stock, hence preferred stock as a rule is more desirable for the investor.

Cumulative Dividends.-In connection with the issue of preferred stock, the preference as to the declaration and payment of dividends, may be either cumulative or non-cumulative, as provided in the charter or certificate of incorporation.

By the term "cumulative" dividends is meant that if the specified dividends are not earned in any one year, they must be added to the dividends on the preferred stock for the following year, so that all current dividends as well as all in arrears must have been paid to the preferred stockholders before any dividends can be declared or paid on the common stock.

Non-Cumulative Dividends.—If the preferred dividends are "non-cumulative" that means that if they are not earned, declared and paid in any one year, the preferred stockholders lose their right to them for such year, and that there are no arrearages to be made up before any dividends may be declared and paid on the common stock. It follows that the "cumulative" dividends are the more attractive to investors, as they most closely approximate the regularity of the pay-ment of interest on bond issues.

Preferred Stock Voting Powers. Owing to the fact that the issue of preferred stock is so generally a substitute for a bond issue in the raising of corporate funds, it is frequently provided that the preferred stockholders shall have no voting powers at any meetings of stock-holders, but that the same shall be confined to the holders of the common stock. This is optional with the incorporators but as the holders of preferred stock are frequently given a certain amount of common stock as a bonus, the with-holding of voting powers from the preferred stock does not deprive the owners from a voice in the management of the affairs of the corporation, as they vote on their shares of common stock, whereas to give voting powers to the preferred stock as well, would, in effect, double the voting powers of such stockholders, often to the detriment of the owners of the common stock.

Preferred and No-Par-Value Shares. — It is becoming more common to issue preferred stock with a fixed par value, dividends to be either cumulative or non-cumulative, and to make the common stock of no par value. This may be done in all states where no-par-value shares are permitted. No-par-value shares are also being issued as 'additional issues on increases of the capitalization of existing corporations, and irrespective of whether the outstanding shares are all common or common and preferred. In such cases the right to increase the capital through additional issue must be obtained from the state in which the corporation was organized.

Number of Directors.—Next in order is the selection of the number of directors of the corporation. This is determined in the first instance by the incorporators, and the number is stated in the charter or certificate of incorporation. The statutes of the different states provide usually a minimum as well as a maximum number of directors for business corporations, and such minimum is not less than three. It is permissible for the corporation, at a later date, to increase or decrease the number of directors by complying with the provisions of the statutes, but not so as to violate the limits prescribed as to the number.

Qualifications of Directors.—In most of the states it is required that the directors shall be stockholders of the corporation, although in New York this may be waived by proper charter or by-law provision. It is in most cases advisable that the directors be stockholders, irrespective of the provisions of the statutes, as experience shows that stockholders are more apt to have the interests of the corporation than outsiders, even if they are chosen to serve on the board. The provision in New York that directors may be selected from other than stockholders is to enable corporations to bring to their directorate the best talent available without the requirement of even the ownership of a single share of stock. But as above stated, the better practice is to require that they be stockholders.

Most states provide that at least one of the directors be a resident of the state in which the incorporation is had. This means that if the incorporation is had in another state than the one in which the business of the corporation is to be conducted, that a resident director must Be selected. Because of this provision, there have come into being in the states that make an appeal for incorporation of outside companies, companies or law firms who make it their business to furnish the resident director and to attend to all legal matters within such state, even to maintaining the office therein which may be required by law.

How Elected.—The directors for the first year are usually named in the charter or certificate of incorporation. Those to serve for the ensuing years are chosen by the stockholders at the annual meetings of the corporation. Vacancies in the board, occurring during the term, are usually filled by the remaining directors, such directors thus chosen serving until the next annual meeting. This is, however, a matter that is provided for in the by-laws of the corporation. In Illinois the directors for the first year are elected by and from the subscribers at their first meeting, all of whom are consequently stock-holders.

Terms of Office.—Generally the term of office of the directors is for one year. It is permissible, however, for the directors to be divided into three classes, the term of office of the first class to expire at the date of the next annual meeting, the second class one year later and the third class two years later. This arrangement involves the retirement of but one-third of the board each year and the election of each class to three year terms. But in the average business corporation, where the directors include the principal owners and interested parties, there is little to be gained in such division of the board into classes with different terms or times of expiration of their office. It, however, has its advantages in the larger corporations, where it is advisable to main-tain in office those who have become familiar with the business of the corporation and its policies, and not to subject them to any sudden change by the election of an entirely new board.

Amount of Capital to Begin Business.—In most of the states it is necessary to state in the charter or certificate of incorporation the amount of capital with which the corporation will begin business. This, in most instances, may not be less than $1,000. This does not mean that the capital of the corporation is limited to that amount, but that, irrespective of its authorized capital, it will not begin its career as a corporation until that specified sum has been paid in. The corporation would then arrange to secure the necessary amount of capital for the prosecution of its business by sale of its stock or in other ways, but it could not legally begin to do business until that minimum amount had actually been paid in. This amount is usually fixed in the charters at the minimum required by law, and that sum is actually paid in, in cash, so that there is no question as to the stock being in fact full paid, for the incorporators or subscribers become liable to the state and to creditors for the full amount thus named in the charter.

Illinois Rule.—In Illinois the provision is more rigid, as it is necessary that one-half of the entire authorized capital be paid to the commissioners (the incorporators) at the time of the first meeting, and the incorporation is not complete, and the company has no corporate organization until that is done. It is not necessary in Illinois or in the other states that the amount necessary to be paid in before the corporation can begin business be in actual cash, as it may be paid in in property necessary and useful to the purposes of the corporation, provided it is the fair cash equivalent as certified to by the directors or the commissioners as the case may be.

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