Forming a Corporation

Learning Outcomes

  • Understand the basic steps in forming a corporation

Corporations are chartered by the state. Each state has a corporation act that permits the formation of corporations by qualified persons. Incorporators are persons seeking to bring a corporation into existence. Most state corporation laws require a minimum of three incorporators, each of whom must be of legal age, and a majority of whom must be citizens of the United States.

The laws of each state view a corporation organized in that state as a domestic corporation and a corporation organized in any other state as a foreign corporation. If a corporation intends to conduct business solely within one state, it normally seeks incorporation in that state because most state laws are not as severe for domestic corporations as for foreign corporations. Corporations conducting interstate business usually incorporate in the state that has laws most advantageous to the corporation being formed. Important considerations in choosing a state are the powers granted to the corporation, the taxes levied, the defenses permitted against hostile takeover attempts by others, and the reports required by the state.

Once incorporators agree on the state in which to incorporate, they apply for a corporate charter. A corporate charter is a contract between the state and the incorporators, and their successors, granting the corporation its legal existence. The application for the corporation’s charter is called the articles of incorporation.

After supplying the information requested in the incorporation application form, incorporators file the articles with the proper office in the state of incorporation. Each state requires different information in the articles of incorporation, but most states ask for the following:

Two leather bound books and a gavel.
  • Name of corporation.
  • Location of principal offices.
  • Purposes of business.
  • Number of shares of stock authorized, class or classes of shares, and voting and dividend rights of each class of shares.
  • Value of assets paid in by the incorporators (the stockholders who organize the corporation).
  • Limitations on authority of the management and owners of the corporation.
  • On approving the articles, the state office (frequently the secretary of state’s office) grants the charter and creates the corporation.

As soon as the corporation obtains the charter, it is authorized to operate its business. The incorporators call the first meeting of the stockholders. Two of the purposes of this meeting are to elect a board of directors and to adopt the bylaws of the corporation.

The bylaws are a set of rules or regulations adopted by the board of directors of a corporation to govern the conduct of corporate affairs. The bylaws must be in agreement with the laws of the state and the policies and purposes in the corporate charter. The bylaws contain, along with other information, provisions for (1) the place, date, and manner of calling the annual stockholders’ meeting, (2) the number of directors and the method for electing them, (3) the duties and powers of the directors, and (4) the method for selecting officers of the corporation.

Here is a short video on the role of corporations in our economy and the basics of a corporate structure:

You can view the transcript for “Corp 101: The Basics of Corporate Structure” here (opens in new window).

Practice Question