Corporate Charter: Everything You Need to Know
A corporate charter, also known as the Articles of Incorporation, is a legal document establishing the existence of a corporation. Once the charter is registered with the state in which the corporation will do business, the corporation is legally recognized.3 min read
A corporate charter, also known as the Articles of Incorporation, is a legal document establishing the existence of a corporation. Once the charter is registered with the state in which the corporation will do business, the corporation is legally recognized.
Corporations shield their owners from business liabilities, so in the event the corporation goes bankrupt, creditors will not be able to go after shareholders' assets. However, one of the drawbacks of traditional corporations is that they're subject to double taxation: they pay taxes on business profits before they're distributed to shareholders, and shareholders pay taxes on the income separately on their personal returns.
About Corporate Charters
One misconception that some people have about corporation charters is that they're a separate document from an Articles of Incorporation. Corporate charters, in essence, “give birth” to a new corporation. The charter represents the legal creation of a corporation once the Secretary of State approves and files it.
A corporate charter outlines basic information about a corporation. Each state may have slight variations in how corporations start, but the general requirements for a charter are pretty much the same. A charter isn't the same thing as corporate bylaws, which establish the rules for a company's daily operations.
Each state typically has its own requirements about what to include in a corporate charter. While detailed requirements vary from state to state, a corporate charter usually includes the following:
- Corporation name and address
- Purpose of the corporation
- For-profit or nonprofit status
- Registered agent name and address
- Number of authorized shares
- Share classes and their par values
- Corporate directors
Charter documents register the company with the state, and they're guidelines for beginning the company. After a corporate charter is officially filed, the board of directors has to hold an initial meeting. In the meeting, they must adopt governing rules for the new corporation. Stock corporations are required to provide a specific number of stock shares as well as stock prices for the initial public offering, or IPO.
When applicable, a charter transitions a business from a sole proprietorship or partnership to a corporation. There has to be a corporate designation in a company name when filing a corporate charter, such as Inc. or Corporation.
Individuals who wish to start a corporation will file the charter with the Secretary of State office. In most cases, the state charges a fee to file these documents, but nonprofits often pay a reduced fee. You can always contact the Secretary of State office in your state to get more information about requirements, rules, and fees for filing a corporate charter.
You can find a basic corporate charter template on various state government websites, but many people choose to consult business attorneys when they file because some states have more favorable business environments for corporations.
The individual writing the corporate charter should be familiar with the company's goals and startup activities. The writer should also be familiar with the laws that govern corporations in that jurisdiction.
The corporation's founders must create and file the charter before they start running the business. The charter establishes the basic elements of the corporation, such as the activities the business will engage in.
Corporations have to give reasons for their creation or state a purpose. For purpose, it's commonly stated in a corporate charter that the corporation will engage in lawful activities permitted by the state. This may also include what the corporation does, the type of services and products it provides, and the industry it's in.
If the corporation begins business transactions without first filing a corporate charter with the state, the corporation's owners put themselves at risk. This includes the risk of being held personally liable for business debts and damages created while the corporation conducted business without a legitimate charter.
Many people choose to begin a business in their home state because it's often less complicated to do so. However, some states have a reputation for being business-friendly, which is why many companies choose to start there. Make sure you adhere to all guidelines in the state you form your company so that you remain compliant and in good standing.
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