Incorporate in Delaware - Doing Business in Delaware

Starting a Corporation in Delaware, Register a Stock Corporation in Delaware Online

We will complete and file all the necessary documents with the State of Delaware. One of our executives will sign the forms as incorporator. The duties and responsibilities of the incorporator cease as soon as the owner(s) meet and elect director(s) and officer(s). It is automatic. This procedure permits us to make any amendments or corrections to the documents that may be required and also allows us to sign the annual report forms should you wish to keep your ownership anonymous. This is the only function the incorporator can perform after the selection of director(s) and officer(s). Note: Delaware is one of the few states where one individual can be corporate director and hold all the required offices.

Forming a Corporation in Delaware, Start-Up a Stock Corporation in Delaware Online

What is a corporation? A corporation is a legal entity, created by statute (i.e., the state) with all the rights, privileges and responsibilities of a natural person; possessing the attributes of limited liability, centralized management, continuity of life and free transferability of interest.

Any person, partnership, association or corporation, singly or jointly with others, and without regard to such person's or entity's residence, domicile or state of incorporation, may incorporate or organize a corporation under this chapter by filing with the Division of Corporations in the Department of State a certificate of incorporation which shall be executed, acknowledged and filed in accordance with § 103 of this title. A corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes, except as may otherwise be provided by the Constitution or other law of this State.

If the persons who are to serve as directors until the first annual meeting of stockholders have not been named in the certificate of incorporation, the incorporator or incorporators, until the directors are elected, shall manage the affairs of the corporation and may do whatever is necessary and proper to perfect the organization of the corporation, including the adoption of the original bylaws of the corporation and the election of directors.

If you are selling goods or services, you need to consider forming a corporation or limited liability company for your business activities. One of the easiest ways to do this is to enlist the help of the Delaware company that probably does more of this work than any other company.

Coddan can form corporations or limited liability companies for you in any of the 50 States; it can also qualify your company to do business in any State or file an alternate company name (trade name). We have designed our web site so that you can incorporate online a Delaware corporation or limited liability company. In most cases, we will have your organizational certificates filed with the Delaware Secretary of State by the next business day after we receive your order.

The corporate name ending must contain the word "Association," "Company, "Corporation," "Club," "Foundation," "Fund," "Incorporated," "Institute," "Society," "Union," "Syndicate," "Limited," or the abbreviation "Co.," "Corp.," "Inc.," "Ltd.," or words or abbreviations of like import in other languages. The name must be distinguishable from the names of other corporations organized, reserved or registered as a foreign corporation under the laws of Delaware. Use of word "Trust" is prohibited except for corporations under supervision of the Bank Commissioner.

Articles of incorporation containing the following information :

• The name of the corporation
• Its registered office in the State of Delaware is to be located
• The nature of business and the objects and purposes proposed to be transacted, promoted and carried on, are to engage in any lawful act of activity for which corporations may be organized under the General Corporation Law of Delaware
• The amount of the total authorized capital stock of this corporation
• The name and mailing address of the incorporator
• All of the corporation's issued stock, exclusive of treasury shares, shall be held of record by not more than thirty (30) persons.
• All of the issued stock of all classes shall be subject to one or more of the restrictions on transfer permitted by Section 202 of the General Corporation Law.
• The corporation shall make no offering of any of its stock of any class which would constitute a "public offering" within the meaning of the United States Securities Act of 1933, as it may be amended from time to time.

What is a registered expert? A registered expert is an individual or corporation that resides in the State where your corporation was incorporated. As the official representative of your company, the registered expert receives and forwards you: any documents and notices emanating from the corporate authorities (e.g. annual report, franchise tax Notice, etc.); any notice or legal procedure involving your company. Coddan is one of the registered experts recognized by the State of Delaware.

Coddan provides you with a genuine Delaware street address that is unique to you. This is not a post office box! This is your own street address that US retailers will accept as a valid shipping destination. With the purchase of our Delaware corporation package and Delaware postal office address with mail forwarding service, you may use our Delaware office address as your business address to receive regular mail. In addition, we will repackage and forward (once a week) all legal and governmental mail in addition to up to 200 pieces of other mail for one year.

If you want to become familiar with the description and the contents of Delaware company formation packages, offered by Coddan and to find above, what kind of service is included in this or that Delaware companies incorporation package, to get an idea about the price of annual renewal of the service, and about the general legal requirements to the company registration within State of Delaware, please, select the package you need from the list, situated on top of this page.

How to Incorporate and Run a Corporation in America

Corporation - a group of persons granted a state charter legally recognizing them as a separate entity having its own rights, privileges, and liabilities distinct from those of its members. State law classifies and regulates different types of corporations. Essentially, a business corporation is one that engages in any lawful business that is not specially regulated under state law, such as the insurance, banking or trust business. Before discussing the rules that apply to business corporations, let's look at a few other types of corporations that are set up and operated under special state rules.

A nonprofit corporation (in some states called a "not-for-profit" corporation) is formed under a state's Nonprofit Corporation Act for nonprofit purposes. In other words, its primary purpose is not to make money for its founders, but to do good work - for example, to establish childcare centers, shelters for the homeless, community healthcare clinics, museums, hospitals, churches, schools or performing arts groups.

Most non-profit companies are formed for purposes recognized as tax exempt under federal and state income tax laws. This means that the nonprofit doesn't have to pay corporate income tax on its revenues, that it is eligible to receive tax deductible contributions from the public and that it qualifies to receive grant funds from other tax-exempt public and private agencies.

State law as well as federal tax-exemption requirements typically prohibit a non-profit corporation from paying out profits to nonprofit members except in the form of reasonable salaries to those who work for it. When a nonprofit dissolves, the members are normally not allowed to share in a distribution of assets of the nonprofit. Instead, any assets remaining after the nonprofit dissolves must be distributed to another tax-exempt organization.

Special types of nonprofits may be recognized under state law that do allow people to own, in one fashion or another, corporate assets so they can receive a portion of these assets when the nonprofit dissolves. For example, a nonprofit homeowners' association or nonprofit trade group may give each member a proprietary interest in the assets of the nonprofit.

Like regular corporations, a nonprofit corporation may sue or be sued; pay salaries; provide various types of employee fringe benefits; incur debts and obligations; acquire and hold property; and engage, generally, in any lawful activity not inconsistent with its nonprofit purposes and tax-exempt status. It also provides its directors and members with limited liability for the debts and liabilities of the corporation and continues perpetually unless steps are taken to dissolve it.

There are key differences between forming and operating a nonprofit and a regular business corporation: to form a nonprofit, in most states you must file special Nonprofit Articles. Nonprofit bylaws typically contain provisions similar to those of business corporations.

However, nonprofits typically set up a number of special committees to handle nonprofit operations and nonprofits routinely schedule more frequent meetings of directors than their commercial counterparts. Also, nonprofits replace shareholder provisions with member provisions, which specify the rules for membership meetings and the qualifications, responsibilities and rights of members.

Of course, nonprofit bylaws do not contain provisions relating payouts of profits (payment of dividends). The state Nonprofit Corporation Act typically follows or is in close proximity to the state Business Corporation Act in the corporate statutes, so you can usually use the citation to your state's Business Corporation Act to help you locate the Nonprofit Corporation Act. (A few states include nonprofit as well as business corporation statutes in a consolidated General Corporation Act.) A critical part of forming and operating a nonprofit is obtaining a federal and state income tax exemption and making sure to operate the nonprofit in a way that meets the tax exemption requirements.

Many states have enacted laws, usually as part of their Business Corporation Act, that allow for the organization of a special type of business corporation, called a "close" or "statutory close corporation." These laws permit corporations with a small number of shareholders - usually no more than 35 - to operate without a board of directors according to the terms of a specially prepared shareholders' agreement.

In other words, the owners of a close corporation can dispense with normal corporate formalities and operate their corporation under a shareholders' agreement, similar to the way in which owners of a partnership operate their business under the terms of a partnership agreement.

Operating a close corporation under a shareholders' agreement can provide business owners with a great deal of flexibility. For example, the shareholders' agreement can dispense with the need for annual director or shareholder meetings, the need for corporate officers, or even for the board of directors itself, allowing shareholders to manage and carry out the business of the corporation without having to put on their director or shareholder hats.

And, as in a partnership, profits can be distributed without regard to capital contributions (stock ownership); thus a 10% shareholder could, for example, receive 25% of the profits (dividends), but special tax rules apply to this sort of special allocation of business profits. Your tax advisor can fill you in on the details if you want to know more.

Despite the benefits of informality and flexibility, most incorporators don't want to form close corporations. Indeed, it is estimated that less than 2% of all business corporations are formed as close corporations. Why hasn't the close corporation business form caught on in the states that allow it? There are a number of reasons.

To begin with, most incorporators do not want to operate their corporation under informal or nonstandard close corporation shareholder agreement rules and procedures. In fact, many incorporators form a corporation to rely on the traditional corporation and tax statutes that apply to regular business corporations. By doing so, they know what is expected of directors, officers and shareholders - for example, they can simply follow the rules set out in their state BCA to call and hold meetings of directors and shareholders without having to design their own procedures.)

Second, shares of stock in a close corporation normally contain built-in restrictions on transferability, and most incorporators do not want their shares to be restricted in this way. Third, it is costly and time consuming to prepare a shareholders' agreement. It's much simpler and less expensive to adopt standard corporate bylaws.

Formalities When Starting Up Your Corporation in USA: Attributes of a Corporation

Corporate documents: the primary corporate legal documents are Articles of Incorporation, bylaws, stock certificates and minutes of meetings.

Articles of incorporation: the key corporate organizing document is the articles of incorporation. In some states, the articles go by a different name, such as the corporate charter or certificate of incorporation. A corporation comes into existence when its articles of incorporation are filed with the state corporate filing office. It is an application filed with the state to have an artificial legal entity known as a corporation brought into existence and sets forth basic information about the corporation that can also define or limit elements of the corporation's existence. The filing of articles is the only legal filing necessary to create a corporate entity.

However, you'll want to follow up after filing articles by preparing and adopting bylaws, holding a first meeting of directors and issuing stock to your initial shareholders. These additional steps are necessary to make sure the legal organization of your corporation is complete. The articles normally contain basic structural information, such as the name of the corporation; the names and addresses of its directors; its registered expert and registered office address; and the corporation's capital stock structure.

By-laws: after the articles of incorporation, a corporation's bylaws are its second most important document. You do not file bylaws with the state. They are an internal document that contains rules for holding corporate meetings and carrying out other formalities according to state corporate laws. Bylaws typically specify how often the corporation must hold regular meetings of directors and shareholders, as well as the call, notice, quorum and voting rules for these meetings.

Also, bylaws usually contain the rules for setting up and delegating authority to special committees of the board of directors, the rights of directors and shareholders to inspect corporate records and books, the rights of directors and officers to insurance coverage or indemnification (reimbursement by the corporation for legal fees and judgments) in the event of lawsuits, plus a number of other standard legal provisions.

Stock certificates: a new corporation issues stock to its founders and initial investors. Stock ownership is usually documented by stock certificates given to each shareholder. Today, many states do not require the actual completion and delivery of paper stock certificates to shareholders, but we think it continues to make sense to issue certificates. A stock certificate is tangible evidence of a person's ownership rights in your corporation, and most founders and investors expect to receive one after buying shares in a new corporation.

State law sets out the very basic content requirements for stock certificates. Normally, the minimum information necessary is the name of the corporation, the state where the corporation was formed, the name and number of shares issued to the shareholder and the signature of two corporate officers.

Minutes of the first directors meeting: after filing the articles and preparing bylaws, the initial board of directors meets to formally approve the bylaws, approve the issuance of stock to initial shareholders, appoint corporate officers and handle other essential corporate startup tasks. If the initial members of the board are not named in the articles, the incorporator - the person who signed and filed your articles - prepares a written "Incorporator Statement" in which the incorporator appoints the initial board members prior to its first meeting.

Once the board has been named - either in the filed Articles or the Incorporator Statement - the board of directors can hold its first meeting. The actions taken by the board at its first meeting should be documented by written minutes that are filed in the corporate records book.

Corporate duration: the duration of a corporation is almost always listed as "perpetual" in the articles. This means there is no stated time limit at which point the corporation shall be dissolved.

Initial board of directors: the following states require that the initial board of directors be named in the articles of incorporation: Alabama, Arizona, District of Columbia, Maryland, Massachusetts, Nevada, New Jersey, New Mexico, Rhode Island, South Dakota, and Texas. Louisiana requires the filing of a form entitled "Initial Report" with the articles of incorporation and, in the initial report, the incorporators are to name the first board of directors. All others do not require that the initial board be named in the articles of incorporation; however, it is permissible to do so.

Publication: only Arizona, Georgia, and Nebraska require the incorporators to publish notice of the incorporation for a set period of time (usually once per week for four weeks). Please go to the Secretary of State's site for the state in question to obtain additional information on this subject.

Corporate powers: each state's Business Corporation Act gives business corporations carte blanche to engage in any lawful business activity. In legalese, "lawful" doesn't just mean non-criminal; it means not otherwise prohibited by law. Generally this means that a corporation can do anything that a natural person can do. However, in most states, it is not lawful for a regular business corporation to engage in the banking, trust or insurance business. If you want to set up one of these special financial corporations, you will need to follow special procedures - for example, obtain the written approval of your state's Banking or Insurance Commission, and prepare and file special articles of incorporation with the state.

Corporate officers: while a corporation is considered a legal "person," capable of making contracts, paying taxes and otherwise enjoying the legal rights and responsibilities of a natural person, of course it needs real people to carry out its business. State BCAs classify corporate people in the following ways: incorporators, directors, officers and shareholders.

Incorporators: the Incorporators - these are the individual or individuals (most states allow for a single incorporator) who sign the articles of incorporation thus requesting the state to bring the corporation into existence. This is more than a mere administrative act as the incorporators have the power in most states to name the first board of directors of the corporation. The incorporator is not required to be an initial director, officer or shareholder of the corporation - nor must the incorporator be a resident of the state. The only legal requirement for incorporators is that, in many states, the incorporator must be at least 18 years old.

Registered expert: this is the individual or corporation located within the state of incorporation who receives all legal notices from the state relative to the corporation and is recipient of service of process should the corporation be sued. All states require that a registered expert be named in the articles of incorporation.

Directors: under each state's Business Corporation Act, directors are given the authority and responsibility for managing the corporation. Let's look at some of the common features of state law that apply to directors. State law does not impose residency or stock ownership requirements on directors. Your directors can come from any state and need not be shareholders.

The only director requirement in some states is an age requirement - in these states, directors usually must be at least 18 years old. The directors meet and make decisions collectively as the board of directors. In all states, the board may consist of one or more individuals. Many state BCAs specifically say that a director must be a natural (real) person, as opposed to another corporation or limited liability company (LLC). Even if your state's BCA doesn't say this, it is understood in all states that only real people may be elected as board members.

Corporate officers: State BCAs specify the officer positions that a corporation must fill. These are known as the corporation's "statutory officers," and usually include a president, vice president, secretary and treasurer. You list the names and addresses of your statutory officers in the annual filing you must make each year with your state corporate filing office.

State law normally does not impose specific requirements on what statutory officers must do, except to say that one officer - typically the corporate secretary - must be appointed to keep corporate records, including meeting minutes. Often, the boards of small business corporations fill the statutory officer positions as a formality to comply with state requirements, while the people who supervise and run the corporation day-to-day are given titles other than those required by law.

The statutory officer position of secretary normally has no real-life counterpart in the everyday world of the corporation. In other words, the position of corporate secretary is one created to accommodate state BCA legal requirements, not the entrepreneurial needs of the corporation. However, the person appointed as secretary does have real work to do. As mentioned above, the secretary must keep the legal records of the corporation, preparing minutes of board and shareholder meetings. And banks and other financial institutions often require the signature or certification of the corporate secretary to attest that the board has approved items of business, such as a formal board resolution to approve a bank loan or line of credit.

The secretary also normally handles all requests from the board or shareholders for copies of corporate legal documents - such as corporate Articles, bylaws or minutes of meetings or records of stock ownership in the corporation. Common practice is to delegate many of the duties of corporate secretary to another salaried officer - commonly the chief corporate financial or administrative officer.

Shareholders: the corporate shareholders invest in a corporation and elect its board of directors. They are not personally liable for corporate debts or other obligations. A shareholder's basic financial rights in the corporation are: participation in corporate dividends, and a stake in corporate assets (the shareholders' equity as shown on the corporate balance sheet).

In practice, shareholders of small corporations normally do not receive dividends. Rather, they wait until the corporation's overall value increases, then sell their shares. In a small, closely held corporation, the only market for these shares is another shareholder or the corporation itself. If the corporation has a good chance for success, the shareholder waits until the corporation is sold to another business that cashes out the existing shareholders or converts their shares to marketable shares in the acquiring business. And, of course, the corporation may go public and create a market for its own shares.

Capitalization of the corporation: a corporation needs people and money to get started. The money or dollar value of assets used to set up a corporation is called its "capital," and the process of obtaining these startup funds and property is called "capitalizing" the corporation. Most states have no minimum capitalization requirements. South Dakota and Texas are exceptions: they say that a minimum of $1,000 in cash or property must be paid into the corporation by its initial shareholders before the corporation can begin doing business. While it may be tempting to start a business on a shoestring and earn as you learn, the idea of starting a corporation with little money or assets is usually impractical.

Business corporations are in business to make money, and you normally need at least a reasonable amount of cash and assets to begin corporate operations. To give your corporation the best chance of succeeding, we recommend that you fund your corporation with enough money and other assets to begin doing business and to cover shortrange expenses, taxes and debts. Of course, if your business will be based in your home, or otherwise get off to a low-key start, your initial investment or capitalization can be appropriately modest. In short, the important thing is not the amount you contribute, but that your startup capital is large enough to meet initial business needs.

Formalities When Registering a Corporation in USA: More Information About the Corporate Documents and Incorporation

The certificate of incorporation is the basic governing document of the corporation. It must include certain terms and may include other terms. The information that must be included is narrow in scope: the name of the corporation, the name and address of the corporation's registered expert in the state of incorporation, the purpose for which the corporation is organized (it is sufficient to say that the corporation may engage in any lawful act or activity for which corporations may be incorporated under the General Corporation Law), the number, par value (if any) and terms of the authorized stock and the name and mailing address of the incorporator. Every certificate of incorporation is deemed to contain the provisions of the General Corporation Law so it is unnecessary to repeat key provisions of that law in the certificate.

The certificate of incorporation may include any other terms desired in the certificate so long as these are not contrary to the General Corporation Law. Since most of the terms of the General Corporation Law may be varied in the certificate of incorporation, broad flexibility is possible.

For example, the certificate of incorporation may grant or deny to the board of directors the power to adopt or amend Bylaws; may increase above a majority the number of votes of directors or shares necessary to take board or stockholder action; may grant or deny pre-emptive rights or limit the corporation's term of existence (which is otherwise perpetual); may limit or eliminate the liability of directors for acts of simple negligence; and may make any other provision for the management of the business and for the conduct of the affairs of the corporation that does not conflict with the General Corporation Law.

The corporation is formed, and its existence commences, upon the filing of the certificate of incorporation with the Secretary of State. It is not necessary to obtain judicial or regulatory approval for the incorporation so long as the certificate of incorporation complies in form with the simple requirements of the General Corporation Law. Often it is possible to form a corporation in a matter of hours. The appointment of an initial board of directors and initial officers, adoption of Bylaws and issuance of shares complete the organization of the corporation.

A corporation which is properly formed and operated as a corporation assumes a separate legal and tax life distinct from its shareholders. A corporation pays taxes at its own corporate income tax rates and files its own corporate tax forms each year (IRS Form 1120).

As a separate entity, it can buy real estate, enter into contracts, sue and be sued completely separate from its owners. Also, money can be raised easier via the sale of stock; its ownership can be transferred via the transfer of stock; the duration of the corporation is perpetual (the business can continue regardless of ownership); and the tax advantages can be considerable (i.e. you are able to deduct many business expenses, healthcare programs, etc.). Income is reported completely separate via a tax return for the corporation.

Normally, a corporation's management and control is vested in the board of directors who are elected by the shareholders of the corporation. Directors generally make policy and major decisions regarding the corporation but do not individually represent the corporation in dealing with third persons. Rather, dealings with third persons are conducted through officers and employees of the corporation to whom authority is delegated by the directors of the corporation.

The corporation is the most enduring form of business entity. Originally created hundreds of years ago as a way to protect the shareholders in risky overseas ventures, corporations today are now formed by filing the necessary documents and fees with the Secretary of State. This creates a separate legal entity that is separate from the shareholders. It's akin to creating a new "person" with its own name and social security number (called the EIN or Tax ID Number: we can prepare this for you).

Operating a corporation involves at the minimum holding a yearly directors and shareholders meeting (the location is determined by you and the expenses are deductible), keeping written minutes of major company decisions and maintaining general corporate compliance as dictated by the corporate bylaws. Registering in the United States not a lengthy procedure, the applicant must, however, be well aware of the requirements of state law and the entire process may become quite tedious for some individuals.

The adequate capitalization: you must invest in the company an adequate amount of capital for the nature of the company's business. You cannot simply lend the company the money. In the case where the company is not adequately capitalized, a court may permit a creditor to look through the company and hold the owners liable for the company's obligation. Courts have held that inadequately capitalized companies can be considered to be shams. The question of how much is adequate is fact specific and should be discussed with your attorney or accountant.

Maintaining the corporate identity: you don't need to be left out on your own to prepare the minutes of organization meeting, minutes of the first meeting, special minutes of meetings and annual minutes of meeting. You do not need to be kept in the dark about which should be dealt with immediately after you form your company and what you must tend to keep your company viable for the future.

In addition to the issues discussed in the previous paragraph, there are a number of steps which you should take to preserve your corporation identity separate from its owners: make all annual filings with the Secretary of State and pay the franchise fee on time. Operate the company under its proper name or properly filed trade name. Make sure that people dealing with your company understand that it is a corporation and that they are not dealing with you as an individual.

Avoid, to the extent possible, giving personal guarantees. Any document signed on behalf of the company should clearly indicate that the person signing is doing so as an officer of the corporation or as a member or manager of the LLC without personal guarantee. As noted above, treat the company as a separate financial entity.

Payments to the company need to be documented as capital contributions, loans, compensation, dividends or loan repayments. These are items which should be enumerated in the annual minutes of the board of directors.

Stock or membership certificates are only evidence of ownership and not necessary for ownership. Stockholder and members are not required to be US citizens and are not required to be US residents. Ownership must appear in the company's minutes and on the transfer records.

It is the better practice to issue stock or membership certificates. Any restriction on transfer must appear on the certificate to be effective against third parties. If you let employees drive their own cars on company business, make sure that both your and their insurance is sufficient and make sure that your company is listed as an "additional insured" on their policy of insurance.

Do not take inconsistent positions with your insurance company (no business use) and then deduct car expenses on your company's tax return. If you lend money to the company the company should adopt a resolution authorizing the borrowing and should issue a note. If you have a pension plan, consult your accountant or plan administrator at least annually for a review because of changes in the law or regulations.

Formalities When Incorporating a Corporation in USA: Delaware Corporations' Capital Structure

Delaware does not impose any minimum capital requirements. A corporation is free to establish the capital structure that best suits its needs. Corporations may issue a single class of stock or multiple classes of stock, as the Certificate of Incorporation provides.

Stock may be voting or non-voting, and shares of one class may be given a greater or lesser number of votes per share than shares of another class. Stock may be common stock, standing last in line in the event of liquidation, or preferred stock with a preference over common stock as to dividends, liquidation or both.

The dividend rates of preferred stock may fluctuate in accordance with a formula expressed in the certificate of incorporation or they may be fixed, and stock may be entitled to participate in the earnings of the corporation available for dividends generally or only in a specified portion of those earnings. Stock may be made convertible into shares of a different class and may be made redeemable by the corporation.

The Delaware General Corporation Law also confers on corporations the power to borrow money, guarantee debts, issue bonds and otherwise incur debt. Although unusual in practice, the General Corporation Law permits corporations to create voting debt, that is, debt that carries with it the authority to vote along with stockholders, so long as the certificate of incorporation so provides.

Dividends on common stock are normally payable when, as and if declared by the board of directors, unless restricted in the Certificate of Incorporation. Dividends on preferred stock are also discretionary unless fixed in the certificate of incorporation.

Dividends may be paid out of the net assets of the corporation over and above its capital. (Generally speaking, capital is the aggregate par or stated value of the issued shares.) If no such funds are available, dividends may be paid out of the net profits of the corporation in the year declared and/or the preceding fiscal year. Stockholder approval of proposed dividends is not required, but this requirement may be imposed, if desired, by appropriate provision in the certificate of incorporation.

Number of shares the corporation is authorized to issue. At the time of incorporation, the incorporation documents specify the total number of shares that the corporation can issue. These are called the "authorized shares". The board of directors is responsible for deciding if and when to issue the authorized shares. When shares are actually given to the shareholders, they become issued, authorized shares. When determining ownership percentages, the number of authorized shares is not a factor.

All that is considered in determining ownership is the proportion of shares issued to each shareholder, not the actual number of shares. It may be wise for the company to authorize more shares than it plans to issue. This will allow the company flexibility to issue more shares if a second round of financing is required. Designating a small amount of authorized shares in the articles will limit the company's ability to do this. The number of shares authorized can only be changed by officially amending the articles with the Secretary of State.

Note that designating a large number of authorized shares may increase the state filing fees in a limited number of some states. Designating the number of authorized shares is done in the Articles of Incorporation for C-Corporations and S-Corporations and does not apply to LLCs.

Common shares and different classes of stock: if the company has only class of shares, these shares are referred to as the common shares. If they are the only class of shares, the common shares must be given all the rights associated with shares: the right to vote at the shareholder meetings, the right to receive dividends (if and when distributed), and the right to receive the company's remaining assets upon dissolution.

Different classes of shares may be created and vary based on differing rights and restrictions given to each particular class. In defining different classes of shares, it is important to note that at least one class of shares must have voting rights, at least one class must have the right to receive dividends and at least one class must have the right to receive the property of the corporation at its dissolution. If a corporation has more than one class, the classes will usually have an alphabetical designation.

For example, "Class A Common Stock", and "Class B Common Stock". Another common way to differentiate between shares is to have one class of common shares and one class of preferred shares.

Preferred shares: corporations are required to issue common shares. However, corporations are not required to authorize any preferred shares. The advantage of owning preferred shares, to shareholders, is that they have priority over common shareholders in receiving dividends.

The preferred shareholders are entitled to receive a specified amount of dividends before the common shareholders receive any. The downside of preferred shares is that they are usually (but not always) non-voting. Further, the preferred shares usually have a "capped" right to receive dividends, meaning that the distributions have an upward limit. The specifics of the rights and restrictions of preferred shares should be determined before issuing by the Board, or otherwise be designated within the corporate bylaws.

Corporations Management

The board of directors of the corporation is responsible for the management of the business and affairs of the corporation. In carrying out their management responsibility, directors are not experts of the stockholders. Instead, they are fiduciaries owing duties to the corporation itself and to its stockholders. To become effective, proposals at a board meeting must be approved by a majority of the directors present. Furthermore, there must be at least a quorum of directors present at the meeting. Unless defined otherwise in the corporation's Certificate of Incorporation or Bylaws, a quorum consists of a majority of the entire board of directors. Directors may also act by written consent, but in so acting must be unanimous. The board of directors may consist of as many or as few persons as the Certificate of Incorporation or Bylaws provide. There are no 'co-determination' laws, and there is no requirement that labor or any other constituency be specially represented. The entire board is elected annually, unless the Certificate of Incorporation provides for the board to be elected for staggered terms of up to three years. Voting in board elections is not cumulative unless the Certificate of Incorporation so provides.

The corporation's officers are selected by the board of directors, which also is empowered to remove the officers. Most corporations will have at least a president, treasurer and secretary. The authority of the officers is generally fixed in the Bylaws or in resolutions adopted by the directors. The officers exercise operational management. Stockholders, by contrast, do not manage the corporation. Stockholders elect directors annually, and have the power to approve or withhold approval of any proposal by directors to amend the Certificate of Incorporation, sell all or substantially all of the corporation's assets, merge the corporation with another organization or dissolve the corporation. Stockholders also have the right to adopt, amend and repeal the corporation's Bylaws and to inspect books and records. Stockholders exercise their authority in the form of stockholder resolutions adopted at a meeting, or by written consent (which need not be unanimous).

Although the management structure described above is customary, the General Corporation Law allows this structure to be varied by provision in the Certificate of Incorporation conferring powers otherwise vested in the board on some other person or persons. Directors and officers owe a fiduciary duty in conducting the corporation's affairs and, therefore, must act with due care, on an informed basis and with loyalty to the best interests of the corporation and its stockholders. To encourage entrepreneurial risk-taking, however, the Delaware courts will not second-guess the business judgments of directors so long as these elements of loyalty and care are present.