What is a corporate charter (articles of incorporation)?
A corporate charter is the founding legal document filed with the state (in the U.S., the Secretary of State; in Canada, the federal or provincial registrar). When accepted by the state, it formally creates a corporation and describes how the company is organized and governed. Filing the charter is the step that makes a corporation a recognized legal entity.
Core points (brief)
– Filing jurisdiction: submitted to the state Secretary of State (or registrar in Canada) and usually requires a filing fee.
– Legal effect: once accepted, the business becomes a corporation; if not filed before operating as a corporation, owners may face personal liability for debts and claims incurred while the business operated without formal corporate status.
– Purpose: identifies whether the entity is for‑profit or nonprofit and explains what the company does (industry, products/services).
– Key content: corporate name (and any required suffix such as “Inc.”), principal location, names/addresses of founders/incorporators, initial directors and officers, registered (authorized) agent and address, number of shares authorized and par value (for stock corporations).
Definitions (short)
– Corporate charter / Articles of incorporation: the written, filed instrument that creates a corporation and records basic structural and governance facts.
– Registered agent: a person or business designated to receive lawsuits and official notices on behalf of the corporation.
– Authorized shares: the maximum number of stock shares the charter allows the company to issue.
– Par value: a nominal dollar amount assigned to each share in the charter (used in some jurisdictions to compute stated capital).
Typical requirements to include in the charter
– Company name (some states require an indicator like “Inc.” or “Incorporated”).
– Statement of corporate purpose (what the business will do).
– Whether the entity will be for‑profit or nonprofit.
– Principal place of business or registered office.
– Name and address of the registered agent.
– Names and addresses of founders/incorporators and usually initial directors and officers.
– For stock corporations: number of authorized shares and par value per share (if applicable).
– Payment of the applicable state filing fee.
Practical checklist (what to prepare before filing)
1. Choose a legal name and confirm any required suffix for your state.
2. Decide whether the corporation will be stock or nonprofit and draft a concise purpose statement.
3. Pick a registered agent and obtain their address/consent.
4. Determine the number of authorized shares and whether to assign a par value.
5. Compile names and addresses of incorporators, initial directors, and initial officers.
6. Check your state’s required form or template and the current filing fee.
7. Sign and submit the charter to the appropriate state office and pay the filing fee.
8. Keep the accepted charter and proof of filing in corporate records.
Small worked example (authorized shares and par value)
– Suppose a startup’s charter authorizes 1,000,000 shares with a par value of $0.01 per share.
– Total par (nominal) amount = 1,000,000 × $0.01 = $10,000.
– If the company initially issues 100,000 shares at par, the stated capital recorded at issuance = 100,000 × $0.01 = $1,000.
This example shows how par value multiplies by number of shares to give a nominal capital figure; issuance price and accounting treatment can differ from par value in practice.
Risks of not filing before doing business
Starting corporate activities before the charter is filed or accepted can expose owners to personal liability for business obligations incurred while the corporation did not legally exist. Filing the charter before transacting business helps create the legal shield between owners and corporate obligations.
Practical notes
– Many jurisdictions publish sample forms or templates for articles of incorporation; some founders still hire attorneys to ensure the charter language suits their governance and tax needs.
– State rules vary: check the office of the Secretary of State (or federal/provincial registrar in Canada) for exact content
Sorry — I can’t continue the original Investopedia text verbatim. I can, however, provide an original, practical continuation in the same structure and tone that picks up from the practical notes and covers the typical next topics you’d expect after filing a corporate charter. Below is that continuation.
Common post‑filing actions
– Adopt bylaws. Bylaws are the internal rules (procedural governance) the board uses to run the corporation. They typically set meeting procedures, officer roles, and voting rules. Bylaws do not usually get filed with the state.
– Hold an organizational (initial) board meeting. Typical agenda items: adopt bylaws, appoint officers, approve a shareholder stock issuance plan, authorize opening bank accounts, and designate a corporate records custodian.
– Issue stock and record share ownership. Many startups issue a small number of founder shares on incorporation; maintain a share ledger (stock transfer book) and prepare stock certificates or electronic evidence of ownership.
– Obtain an Employer Identification Number (EIN). The EIN (tax ID) from the tax authority is required to open bank accounts, hire employees, and file tax returns.
– Open corporate bank accounts and obtain necessary licenses and permits. Use only corporate funds and signed corporate checks to preserve limited‑liability protection.
Amending the charter (articles of incorporation)
Why amend: increase authorized shares, change par value, alter corporate purpose, change registered office or agent, or convert entity type. Typical mechanics:
1. Board proposes amendment and recommends shareholder vote (unless state rules differ).
2. Shareholders approve by the vote required in the charter and state law (often a simple or supermajority).
3. File the amendment form or restated articles with the state filing office and pay the fee.
4. Update corporate records to reflect the change.
Key points: Check the charter and state law for voting thresholds and whether a restatement (replacing the entire articles) simplifies multiple changes.
Foreign qualification (doing business outside the charter state)
– “Foreign qualification” means registering to do business in another state or province.
– Steps: file a Certificate of Authority (or equivalent), appoint a registered agent in that jurisdiction, and file periodic reports/fees there.
– Failure to qualify can lead to fines, inability to sue on contracts in that state, or complicate enforcing rights.
Maintaining the liability shield (avoiding “piercing the corporate veil”)
– Keep corporate and personal finances separate; no commingling of funds.
– Observe formalities: hold meetings, record minutes, follow bylaws.
– Adequately capitalize the corporation for foreseeable risks at formation.
– Document major decisions and contracts in writing.
These practices reduce the risk that creditors or courts treat owners as personally liable.
Recordkeeping and compliance calendar (typical items)
– Maintain a minute book containing: articles, bylaws, shareholder agreements, minutes of board/shareholder meetings, stock ledger, and material contracts.
– File annual/periodic reports and pay franchise taxes as required by the chartering jurisdiction.
– Renew business licenses and registered‑agent arrangements on schedule.
Dissolution and revocation
– Voluntary dissolution: board resolution and shareholder approval, then file articles of dissolution and wind up affairs (pay creditors, distribute surplus).
– Administrative dissolution: can occur for failing to file reports or pay fees; corporation should remedy the default and file for reinstatement where permitted.
– After dissolution, retain records for the jurisdiction’s required period (often several years).
Practical checklist — before, during, and after filing
Practical checklist — before, during, and after filing
Before filing
1) Choose jurisdiction and corporate type
– Decide state of incorporation (e.g., state where you operate vs. Delaware for investor familiarity). Check filing fees, franchise tax rules, and annual reporting requirements for that state.
– Select entity form (C corporation vs. S corporation). If you may want S corp tax treatment, note the S election deadline (generally 75 days after the effective date or start of the tax year).
2) Name and reserved name
– Verify name availability with the state. Check trademark databases if you plan national branding.
– Optionally reserve the name temporarily (many states allow name reservation for a fee).
3) Corporate governance basics
– Draft articles (certificate) of incorporation: include corporate name, registered agent, authorized shares, par value (if any), purpose (can be broad).
– Draft bylaws (internal rules) and a shareholder agreement if there will be multiple owners with special rights (transfer restrictions, drag/tag provisions).
4) Capital structure and initial capitalization plan (worked example)
– Decide authorized shares, par value, and initial issuance. Example:
– Authorized: 1,000,000 shares; Par value: $0.001 per share.
– Founders issued: 100,000 shares at $0.01 per share = $1,000 cash received.
– Accounting entries (simplified):
– Debit Cash $1,000
– Credit Common Stock (par) $100 (100,000 × $0.001)
– Credit Additional Paid‑in Capital $900
– Document vesting, option pool, and pre-money capitalization table.
5) Practical vendor and cost planning
– Estimate costs: state filing fee (typical range $50–$800+ depending on state), registered agent fee ($50–$300/yr), franchise taxes (varies widely), legal/accounting setup fees.
– Prepare a timeline: name clearance (same day to few days), filing processing (same day to several weeks; expedited options may exist).
During filing
1) File articles of incorporation
– Submit articles/certificate and payment to the state filing office (often Secretary of State). Choose electronic or paper filing per the state’s system.
– Provide registered agent name and address (registered agent receives legal process).
2) Obtain a filing receipt and corporate ID
– Save the filed articles and the state’s filing receipt. Note the corporation’s effective date and file number.
3) Apply for an EIN
– Apply online at the IRS (free) for an Employer Identification Number; needed for bank accounts, payroll, and tax filings.
4) Make tax and securities elections if applicable
– If electing S corp status, file IRS Form 2553 within the required window and ensure shareholder eligibility.
– If issuing securities to non‑accredited investors or raising capital, confirm compliance with federal and state securities laws (use exemptions where applicable and file any required notice/fees).
After filing (initial organizational steps)
1) Organizational meeting and minutes
– Hold the initial board meeting to adopt bylaws, appoint officers, authorize opening bank accounts, approve issuance of shares, and approve initial contracts.
– Record minutes and place them in the minute book.
2) Issue stock and maintain the stock ledger
– Deliver stock certificates or electronic stock records per state rules. Record each issuance in the stock ledger with dates, consideration paid, and vesting/transfer restrictions.
3) Open corporate bank accounts and set up accounting
– Open a bank account in the corporation’s name using the EIN and certified copy of the articles. Segregate personal and corporate funds.
– Establish accounting policies, chart of accounts, and accounting software. Consider sales tax, payroll withholding, and 1099 vendor tracking.
4) Licenses, permits, and registrations
– Obtain local business licenses and any professional permits required for operations.
– Register for state employer taxes and sales tax accounts as required.
5) Ongoing compliance calendar (first-year priorities)
– Annual/periodic report filing dates and fees.
– Franchise tax due dates or estimated payments.
– Renew registered agent and business licenses.
– Board and shareholder meeting dates; minutes retention schedule.
6) Insurance and risk management
– Obtain directors & officers (D&O) insurance if you have outside investors or a public profile. Obtain general liability and workers’ compensation as required.
7) Record retention and document control
– Keep the minute book, bylaws, share ledger, signed contracts, and tax returns. Typical retention: corporate records permanently; tax records often 3–7 years (confirm state/federal guidance).
Checklist summary (quick actionable list)
– [ ] Confirm state, corporate type, and name availability.
– [ ] Draft articles and bylaws; determine authorized shares and par value.
– [ ] Reserve name (optional) and choose registered agent.
– [ ] File articles and pay state fees; get filing receipt.
– [ ] Obtain EIN from IRS.
– [ ] Hold organizational board meeting; adopt bylaws and issue shares.
– [ ] Open corporate bank account; set up accounting.
– [ ] Register for state/local taxes and licenses.
– [ ] Ensure securities compliance for any share issuance.
– [ ] Set up compliance calendar for filings, taxes, and renewals.
– [ ] Obtain appropriate insurance and maintain records.
Assumptions and caveats
– State rules vary: fees, processing times, required forms, and franchise taxes are jurisdiction specific. Always check the state filing office rules for precise requirements.
– Tax treatment depends on elections (C vs. S
) corporations; an S corp is a pass‑through entity for federal income tax (profits/losses flow to shareholders’ personal returns) but requires qualification rules (no more than 100 eligible shareholders, only certain types of shareholders, and only one class of stock). A C corporation is taxed at the corporate level and again at the shareholder level on dividends (commonly called “double taxation”). Other entity types (LLCs, partnerships) have different default tax treatments and optional elections; consult the IRS rules for details.
– Limited liability is not absolute: corporate limited liability protects shareholders from company debts in normal circumstances, but courts can “pierce the corporate veil” if the corporation is a mere alter ego of owners, is undercapitalized, or corporate formalities are ignored (e.g., commingling personal and business assets, failing to hold meetings, failing to keep records). Maintaining corporate formality is part of preserving the charter’s protections.
– Corporate charter is a public record: the filed articles (or certificate) of incorporation become public documents with the state. Expect basic information (name, registered agent, incorporator, authorized shares) to be searchable. If confidentiality of ownership is important, investigate state rules and professional services that help with privacy.
– Amendments and restatements: to change the charter (for example, to increase authorized shares, change the corporate name, or alter par value) you normally need board approval, shareholder approval per the bylaws/state law thresholds, and then you must file articles of amendment (sometimes called a certificate of amendment) with the filing office and pay the fee. Some changes may trigger additional disclosure, tax, or securities obligations.
– Foreign qualification: “doing business” outside the state of incorporation generally requires registering as a foreign corporation in each state where you have substantial operations (employees, property, sales activities depending on the state). This involves filing a foreign qualification application, paying registration fees, and appointing a registered agent in that state.
– Securities compliance for share issuances: issuing stock may implicate federal and state securities laws. Private issuances commonly rely on exemptions (for example, Regulation D), which typically require filings or notice (e.g., SEC Form D) and state notice/fee filings. Public offerings require registration with the SEC or reliance on an exemption. Always confirm compliance steps before selling securities.
– Dissolution and involuntary termination: voluntarily dissolving a corporation usually requires board and shareholder approval, winding up affairs, notifying creditors, filing articles of dissolution, and filing final tax returns. States may administratively dissolve corporations for failure to file reports or pay taxes; reinstatement procedures vary.
– Record-keeping and corporate minutes: keep signed meeting minutes, stock ledgers, bylaws, corporate resolutions, contracts, and annual reports. Good records support liability protection and facilitate audits, fundraising, or sale transactions.
Practical checklist additions (post-formation):
1. Add recurring calendar items: annual report due dates, franchise tax payments, state business license renewals, corporate minutes review.
2. Confirm banking signatories and dual‑control rules for payments.
3. Establish accounting policies and internal controls (segregation of duties, expense approval).
4. Document equity grants and option plans; maintain a cap table.
5. Review insurance annually (D&O, general liability, cyber) and update coverage as the business grows.
Worked example — S vs C tax basics (simple illustration):
– Company A (C corp) earns $500,000 pre-tax, corporate tax at 21% = $105,000 tax; after-tax income = $395,000. If the board distributes $200,000 as dividends, shareholders pay tax on that dividend at their personal rate; the $200,000 is not deductible to the corporation → combined tax burden depends on shareholder rates.
– Company B (S corp) earns $500,000 pre-tax but is not taxed at the entity level; profits pass through to shareholders and are taxed on their returns (subject to payroll vs. distribution rules for owner-employees). The total tax depends on shareholder marginal tax rates and self-employment/ payroll tax considerations.
Assumptions and caveats summary:
– State rules differ materially — always consult the specific Secretary of State or equivalent office for the chosen state.
– Federal tax character depends on elections and eligibility (e.g., S election requires timely filing and eligible shareholders).
– Liability protection requires adherence to corporate formalities and adequate capitalization.
– Securities and tax matters can be complex; for material transactions, consult an attorney and tax advisor.
Selected resources
– Investopedia — Corporate Charter: https://www.investopedia.com/terms/c/corporatecharter.asp
– IRS — Apply for an Employer Identification Number (EIN): https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
– IRS — S Corporations overview: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
– U.S. Securities and Exchange Commission — Small Business and the SEC: https://www.sec.gov/smallbusiness
– USA.gov — Start a business: https://www.usa.gov/start
Filing and post-filing practical checklist
1) Before you file
– Choose a state of incorporation (consider taxes, fees, corporate law—Delaware often used for investors, but your home state may be simpler).
– Pick an available corporate name that meets state rules (no prohibited words; usually must include “Corporation,” “Incorporated,” “Limited” or an abbreviation).
– Decide authorized share structure: number of shares, classes (common vs. preferred), and par value (optional in many states).
– Designate a registered agent (person or service with a physical address in the state).
– Prepare incorporator information (name, address) and an initial director list if required.
2) Minimum contents typically required in Articles/Certificate of Incorporation
– Corporate name.
– Registered agent and registered office address.
– Purpose clause (often a general “any lawful purpose” is acceptable).
– Authorized capital stock (total shares, classes, and par values).
– Name and address of incorporator(s).
– Duration (most are perpetual unless a limited term is chosen).
Note: States vary—check the state filing office for exact required fields.
3) Example Articles summary (what you would enter)
– Name: ExampleCo, Inc.
– Registered Agent: Jane Doe, 123 Main St., Anytown, ST 00000.
– Purpose: Any lawful business activity.
– Authorized Shares: 1,000,000 shares of Common Stock, par value $0.01.
– Incorporator: John Smith, 456 Oak Ave., Anytown, ST 00000.
– Duration: Perpetual.
Worked numeric example — authorization, issuance, and paid-in capital
– Authorized shares: 1,000,000 common shares (par $0.01).
– Founder issues at incorporation: 600,000 shares to Founder A, 200,000 shares to Founder B, 200,000 shares reserved for an option pool (unissued).
– Ownership percentages: Founder A = 600,000 / 1,000,000 = 60%; Founder B = 20%; Option pool reserved = 20%.
– If the company issues 800,000 shares at $0.50 per share (par $0.01):
– Total cash received = 800,000 * $0.50 = $400,000.
– Legal capital (par value) = 800,000 * $0.01 = $8,000.
– Additional paid-in capital = $400,000 − $8,000 = $392,000.
Notes: “Legal capital” and treatment of par value are state-law concepts; many startups set low par values to minimize legal capital.
Filing
Filing the charter (often called the articles of incorporation or certificate of incorporation) begins the corporation’s legal existence and creates the public record of the basic governance and capital structure. The process and required contents vary by state, but common elements and practical next steps are consistent across jurisdictions.
What to include in the filing (typical)
– Corporate name — must be unique in the state and usually contain a corporate designator (e.g., “Inc.”, “Corp.”).
– Registered agent and office — a person or service authorized to accept legal process.
– Purpose clause — can be a general-purpose statement (many states accept “any lawful purpose”).
– Authorized shares — number of shares the corporation may issue and, if applicable, par value per share.
– Classes/series of stock — rights, preferences, and limitations (if multiple classes are authorized).
– Incorporator(s) — the person(s) who sign the articles to form the company.
– Duration — usually perpetual unless a limited term is specified.
– Any statutory-required statements or signatures and the filing fee.
Step-by-step filing checklist
1. Choose a corporate name and confirm availability with the state secretary of state.
2. Decide authorized share structure (total authorized shares, classes, par value). Set low par value to minimize “legal capital” if desired and permitted.
3. Select a registered agent and obtain their consent.
4. Draft the articles/certificate of incorporation consistent with state form or model.
5. Obtain incorporator(s) signatures.
6. File with the state and pay the filing fee; request expedited processing only if necessary.
7. Obtain the file-stamped certificate from the state (proof of formation).
8. Immediately adopt initial corporate bylaws, hold the first board meeting, issue stock, and record shareholders in the stock ledger.
Immediate post-filing actions (what most states and investors expect)
– Adopt bylaws: Bylaws are the internal rules of the corporation (not usually filed with the state).
– Hold an organizational board meeting: elect officers, approve bylaws, authorize bank accounts, and approve initial equity issuances.
– Issue stock certificates (or electronic equivalents) and record all issuances in a stock ledger; contemporaneous records protect shareholders and comply with securities law.
– Apply for an Employer Identification Number (EIN) with the IRS for tax and banking purposes.
– Register for state taxes or business licenses if required.
– Keep minutes and a corporate record book; maintain separateness from owners to preserve limited liability protection.
Accounting and books — a short worked example (continuing the numbers from earlier)
– Situation recap: Company issues 800,000 shares at $0.50 per share (par value $0.01). Total cash received = $400,000; legal capital (par) = $8,000; additional paid-in capital (APIC) = $392,000.
– Typical journal entry at issuance:
– Debit Cash $400,000
– Credit Common Stock (par value) $8,000
– Credit Additional Paid-In Capital $392,000
– Record the issuance in the stock ledger showing: shareholder name, number of shares issued, date, consideration paid, and certificate number (if used).
Amendments to the charter (how and why)
– Why amend: increase authorized shares, create a new class of stock, change corporate purpose, change par value, or change the registered office.
– How: Board typically adopts a resolution proposing the amendment, shareholders approve per the charter/bylaws/state law, then file the amendment with the state and pay the amendment fee. Some amendments (e.g., changing share structure) often require shareholder approval.
– Practical effect: increasing authorized shares enables future issuances without a second incorporation filing but dilutes existing ownership if new shares are issued. Always calculate post-amendment ownership percentages and the impact on option pools before approving.
Dilution numeric example
– Starting authorized shares: 1,000,000; issued shares: 800,000. Founder A owns 600,000 (75% of issued), Founder B 200,000 (25% of issued). Option pool reserved = 200,000 unissued.
– If the