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Overview Of A Corporation

Joseph W. Bartlett, Special Counsel, McCarter & English, LLP


A corporation is an artificial legal entity chartered by one of the fifty states and endowed by the legislature with certain valuable privileges; it follows that its powers are limited to those expressly or impliedly set out by statute. With exceptions not generally significant, the Directors usually manage a corporation.

The general corporation laws in each state vary in detail, but they follow a generally similar pattern. The Model Revised Business Corporation Act, drafted by a select committee of the American Bar Association, is a composite of the most advanced thinking.

A corporation is created by the preparation and filing of a document entitled the "certificate of incorporation" or "charter." This is the fundamental, organic document governing the relationships among the various interests of the officers, directors, shareholders, and creditors. Since the charter predates the existence of directors or stockholders, one or more individuals known as incorporators, often personnel in the incorporating lawyer's office, sign it. A number of significant issues, detailed in the following sections, are encountered at an early stage—that is, when the charter is drafted.

The Corporate Charter

Name

By statute and under the common-law principles of unfair competition, the corporation may not adopt a name which is deceptively similar to the name of an existing corporation either incorporated under the laws of, or duly qualified to do business in, a given state. Further, most statutes require that the corporation signify its incorporated status by including in its name words such as "Corporation," "Corp.," "Ltd.," or "Inc." The state secretary's office maintains a list of all domestic corporations and all foreign corporations registered to do business in the state. By perusing the list, a founder or his counsel can see whether a given name has already been taken. If a multistate operation is contemplated, certain agents—for example, the CT Corporation System—will search the rosters of the important commercial states to see if a given name is available. It is usually possible to reserve a name in most states for up to ninety days. The exclusive use of the name is then nailed down by formally going through the process of qualifying to do business as a foreign corporation in that state. The name of the corporation (versus the trade name) is not always critical; if the name Biodynamics has already been taken, for example, the state secretary will usually accept the name of, say, "Bio-dynamics Informatics." Hence, a right to reserve a corporate name by qualifying to do business in a number of states is not usually a justified (in view of the expense) strategy for a start-up. If, however, the corporate name is to be used as the distinctive name under which goods are to be sold to consumers, a search and registration procedure qualifying the name as part of a distinctive trademark or trade name should be conducted under the federal trademark law, known as the Lanham Act.

Par Value of Stock

The corporate charter denominates the par value of each share of common and preferred stock, the number of shares of each class of stock authorized, and the various rights and privileges of each class of stock. The original purpose of a stated par value was to protect the creditors of the corporation by requiring that the consideration for the shares issued equal at least their aggregate par value and that the capital equivalent of the number of shares issued times the par value of each share be permanent capital of the corporation, not subject to decrease by voluntary acts of the directors in favor of the stockholders, such as dividends or repurchases of shares. While creditors no longer rely, if they ever did, on the stated capital of a corporation, it remains customary to assign each share a nominal par value (versus no-par stock) and allocate the remaining consideration paid for the issuance of shares to a "paid-in" surplus account generally available for dividends and redemptions. Although no-par value shares are legally possible, it is often advisable to issue shares at some par value—say one cent versus no-par value—because the franchise tax and annual license fees in many states are tied to the number of outstanding shares valued at their par value and no-par shares may be assigned a par value of as much as one dollar.


Joseph W. Bartlett, Special Counsel, JBartlett@McCarter.com

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