Corporation formation examples: lessons and useful context

Nine invented situations, each built around one piece of corporate machinery working or failing. Nothing here describes a real company, and no figure, fee or rule is stated as fact. The purpose is to show what the machinery is for, since that is hard to see from a description of it.

Each is written as a moment where somebody asks a question and the answer has to come from a record.

What to take away

• Every scene turns on a document that either existed on the day or did not. That is the whole subject.
• Shares, board authority and the register are where corporations differ from simpler forms, and where their specific failures live.
• Three of the nine are cured by one habit: writing down what was decided, when it was decided.
• Invented cases show shape, never rules. Your state's office and the IRS state the rules, and an adviser applies them to you.

The bank asks who may sign

A newly formed corporation sends its founder to open an account. The bank asks for evidence that this person is authorized to act for the corporation. There is a certificate from the state and nothing else: no bylaws, no appointment of officers, no board resolution.

The founder is the only human involved and is plainly in charge, and it still takes three weeks to fix, because the bank is not asking who is in charge. It is asking what the corporation resolved.

The ten percent that was never issued

An early employee was told he had ten percent. It was said in a meeting and repeated in an email. No shares were issued and the register was never updated. He leaves on good terms, then asks what happens to his stake.

Nothing does, because there is no stake. What exists is a promise, which is a different kind of problem with a different kind of cost, and it lands on the corporation at the worst moment.

The share register that does not add up

A buyer's adviser asks for the register. It shows more shares outstanding than the board ever approved issuing, because two issues were recorded and one was made twice. Reconstructing what was actually approved takes weeks and delays everything.

The founder who signed personally

A three year lease is signed with just a name on the line. No corporation named, no title given. When the business closes, the landlord looks at the signature and sees an individual. This is the most common way people discover the limit of what a corporate form does.

The board meeting nobody minuted

A significant contract is approved in conversation. Two years later a shareholder argues it was never authorized. Everyone remembers agreeing. Nobody wrote it down, and memory against memory is not evidence.

The officer who kept acting after leaving

An officer resigns. The public filing is not updated and nobody tells the bank. Months later that person signs something. Whether the corporation is bound is now a question, and questions of that shape are expensive whichever way they resolve. Which entries need changing after an event like this is set out in updating the record.

The election chosen from a table

A tax election is filed because a comparison table said it was better. The eligibility conditions were not read and the way the owner takes money was not modeled. The conditions live with the IRS, which publishes them under S corporation requirements; whether the choice fits a particular business is what an accountant is for.

The second state that arrived one hire at a time

Two remote employees in a neighboring state, hired eight months apart. Nobody thought of it as an expansion. That state has its own view about corporations doing business inside it, and its own registration and employment consequences. The federal half of the employment question starts at the IRS's overview of employment taxes; the state half belongs to the state, and the way to find it is described in working with the filing office.

The corporation that was abandoned

Trading stopped, the website came down, everybody moved on. The corporation was never dissolved. Recurring obligations kept running against a name that still belongs to somebody, and it surfaced years later attached to a founder's personal record.

What the nine have in common

Six turn on a document that should have existed on a specific day. Two turn on a public record that stopped being true. One turns on a decision taken from a general source rather than from the body that sets the conditions. None of them was caused by choosing a corporation rather than another form, and none would have been prevented by choosing differently, which is a point the comparison in weighing the forms makes at more length.

Read them once for the case that sounds like you, and once for the one you would fail today. The second pass is the useful one. The role of the person who receives legal papers, which two of these scenes quietly depend on, is covered in the agent of record.

Common questions

Are any of these real?

No. Every one is invented, including the timings and the outcomes. They are shaped like problems that filing offices and small business guidance describe in general terms, and no real company, person or event appears here.

Which is the cheapest to prevent?

The minutes. Writing down what a board decided, on the day, costs a few minutes and defuses three of the nine.

Do these apply to a corporation with a single shareholder?

Seven do. The disputes disappear and the evidence problem gets worse, because there is nobody else who can confirm what was decided.

Is there one that cannot be fixed afterwards?

The promise of equity is the hardest, because fixing it means issuing something now on terms that were agreed in a different year, and both sides remember the terms differently.

What would you do first, having read these?

Check that the register, the filing and the bank all describe the same set of people. If those three disagree, everything else is built on top of a disagreement.