How is a Corporation Formed?
Typically, a corporation is formed as a result of the efforts of one or more persons called promoters. These individuals bring together interested persons and take the preliminary steps to form a corporation. Regardless of the promoters' efforts, however, the resulting corporation is not liable on any contract made on its behalf. The promoters cannot bind an organization that is still to be created. Usually, though, once it comes into being, the corporation adopts the contracts and is bound by them.
Articles of incorporation are drafted, and when submitted to the proper state official (usually the Secretary of State) they are a plan that serves as an application for incorporation. In most states, when the articles are properly filed, the corporate existence begins. The articles are signed and submitted by one or more persons called incorporators. At least one of the incorporators must have legal capacity to enter into a binding contract. Thus, the incorporators cannot all be minors.
The articles of incorporation are a plan filed by the incorporators and they generally contain:
The name of the corporation;
The period of duration, which may be indefinite and everlasting;
The purpose, or purposes, for which the corporation is organized. This may be stated broadly, for example: «any purposes legal for a corporation in this state»;
The number and kinds of shares of capital stock to be authorized for issuance;
The location of the proposed corporation's principal office and the name of its agent to whom legal notices may be given;
The number of directors or the names and addresses of the persons who are to serve as directors until the first annual meeting of shareholders or until their successors are elected (in some states, the incorporators serve as directors until the shareholders elect their replacements);
The name and address of each incorporator;
Any other provision consistent with the law.
In some states, the incorporators file a certificate of incorporation instead of articles of incorporation, but with the same result. Many years ago, when a corporation was created by a special act of the legislature, a charter was issued. Today the word charter refers broadly to the articles (or certificate) of incorporation taken in connection with the governing statutory law. It also may refer to the contract that exists between the state and the corporation.
What are Shares of Stock?
Corporations issue small units of ownership known as shares of stock. A person who owns one or more shares of stock is a shareholder (also called a stockholder).
The corporation uses the money received from the initial sale of stock to buy equipment, supplies, and inventory; to hire labor; and to pay other expenses. As goods and services are produced and sold, more income flows into the business. Often earnings are reinvested. Money is borrowed to provide for further expansion, and sometimes more shares of stock are sold.
A shareholder is issued a stock certificate, which is written evidence of ownership and rights in the business. Stock ownership does not transfer title to specific corporate property to the holder. The corporation, as a legal person, remains the owner of all corporate property.
Stock may have a par value, which is the face value printed on the certificate. If it does not have a par value, it is no-par stock and is originally sold at a price set by the board of directors of the corporation. When either par or no-par stock changes hands in later transfers, the price may be much higher or lower. This market price will be determined by many factors, including economic conditions of the country, the industry, and the company — especially its past profits and future prospects.
Corporations may have one or more types of stock. Those found most frequently are common stock and preferred stock. Common stock is the basic type and generally the only kind that allows its owners voting rights in corporate elections. One vote per share may be cast. Common shareholders receive all dividends (distributions of corporate profits) unless preferred stock has been issued.
Preferred stock usually lacks voting power but does have priority claim on corporate dividends. For example, by contract with the corporation, the preferred shareholder may be entitled to receive $7 per share each year before any distribution of profits is made to the common shareholders. If profits are high, the common shareholders may get more money than the preferred shareholders. Preferred stock may also have a priority claim on funds generated by a corporate liquidation (sale of all assets) if and when the business is terminated.
Preferred stock may be cumulative. This means that if the dividend is not paid in a given year, it remains due and payable in the future. Each year the unpaid dividends cumulate (add up) and must be paid in full before the common shareholders receive any dividends. In some cases, the preferred stock is also participating. For example, in a given year, the fully participating preferred shareholder will receive the contracted amount of dividend per share, and the common shareholder will receive an amount per share equal to that received by a preferred shareholder. Beyond that, any balance of profits distributed is divided equally or in some other specified ratio between the preferred and common shareholders. Most corporations issue little or no preferred stock.