Corporation formation examples: the patterns that repeat

Corporation formation examples repeat in predictable ways. The nine scenes below are composites, not real companies. The agencies, forms, tools and prices named in them are real: the Delaware Division of Corporations, the California Secretary of State, IRS Form SS-4 and IRS Form 2553.

Each scene turns on a document that existed on the day or did not. Each is written as a moment where somebody asks a question and the answer has to come from a record. The purpose is to show what the machinery is for, since that is hard to see from a description of it.

What to take away

The bank asks who may sign

A newly formed corporation sends its founder to open an account at Chase or Mercury. The bank asks for evidence that this person may act for the corporation. The founder brings the certificate of incorporation from the state and nothing else: no bylaws, no officer appointment, no board resolution.

Banks run a Customer Identification Program under 31 CFR 1020.220. They want the legal name, address, tax ID and authorization. An EIN comes free from IRS Form SS-4. A board resolution names who may sign. Chase lists a $15 monthly fee for Business Complete Banking. Mercury advertises no monthly fee.

The founder is the only human involved and is plainly in charge, and it still takes three weeks to fix. 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. The stock ledger was never updated. He leaves on good terms, then asks what happens to his stake.

Nothing does, because there is no stake. Delaware General Corporation Law Section 152 lets the board issue shares, and Section 158 covers stock certificates. A stock ledger from Carta or Pulley records the issue.

What exists here is a promise. It is a different problem with a different cost, and it lands on the corporation at the worst moment. Cleaning it up typically runs $1,000 to $10,000 in legal fees.

The share register that does not add up

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

Section 219 of the Delaware General Corporation Law requires a stock ledger. Carta and Shareworks both produce one. The board resolution and stock purchase agreement are the source documents. When the ledger disagrees with them, the buyer's adviser has to reconcile each entry. That work pushes the closing date.

The founder who signed personally

A three year lease is signed with just a name on the line. No corporation is named. No title is 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 a corporate form.

A commercial lease often includes a personal guaranty. That guaranty lets the landlord pursue the founder's personal assets. Naming the corporation and signing as an officer keeps the contract on the corporate side. Delaware General Corporation Law Section 141(a) puts management in the board, but it does not erase a personal signature.

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. Memory against memory is not evidence.

Delaware General Corporation Law Section 141(f) allows board action by written consent. A unanimous written consent can be prepared in a day. Diligent and BoardEffect are board portals that store minutes. An attorney typically charges $250 to $1,000 for a consent. That record is what a court or a buyer will read.

The officer who kept acting after leaving

An officer resigns. The public filing is not updated. Nobody tells the bank. Months later that person signs something. Whether the corporation is bound is now a question. Questions of that shape are expensive whichever way they resolve.

Delaware General Corporation Law Section 142(b) lets the bylaws say how officers are removed. The Delaware Division of Corporations annual report lists officers. The bank's signature card is separate. 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. 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.

IRS Form 2553 makes an S election. The form asks for shareholder consents and a tax year. A corporation can have 100 shareholders and one class of stock. For a calendar year, the deadline is March 15. Rev. Proc. 2013-30 gives late election relief. An accountant typically charges $500 to $2,000 to review the choice.

The second state that arrived one hire at a time

Two remote employees in a neighboring state are hired eight months apart. Nobody calls it an expansion. That state has its own view on corporations doing business there. It has 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; the way to find it is described in working with the filing office.

California charges $100 to register a foreign corporation and $25 for a Statement of Information. Texas charges $750. The California Secretary of State and the Texas Secretary of State publish the forms.

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. It surfaced years later attached to a founder's personal record.

Delaware charges $204 to file a Certificate of Dissolution. The minimum franchise tax there is $175, due March 1. A registered agent service such as CSC or Registered Agents Inc. typically costs $125 to $300 a year. The IRS requires a final Form 1120 or Form 1120-S. Until dissolution, those obligations keep coming.

What the nine have in common

None of the nine was caused by choosing a corporation rather than another form. None would have been prevented by choosing differently. The comparison in weighing the forms makes this point at more length.

The Model Business Corporation Act, published by the American Bar Association, is the template for many state corporation laws. Delaware General Corporation Law is the other common reference.

Read the scenes 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. No real company, person or event appears here. The named agencies, forms and tools are real.

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. A unanimous written consent under Delaware General Corporation Law Section 141(f) takes minutes to draft.

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. The register is the stock ledger, the filing is the annual report at the state office, and the bank is the signature card.