Understanding Your Articles of Incorporation
This blog post is part of a series geared towards small business owners to help them understand general legal concepts and documents affecting their business. To view other blogs in this series, click here.
Your corporation’s Articles of Incorporation (sometimes called a “Certificate of Incorporation” or a “Charter” depending on the state) are the foundational document that legally establishes your corporation with the state. This document is filed with your state’s Secretary of State (or equivalent agency) and legally creates your corporation.
This document is more than just a formality. For small business owners, understanding its core provisions isn't just a legal formality; it's crucial for defining your company's structure, powers, and the rights of its owners.
Here are the essential provisions typically found in Articles of Incorporation and how they can affect your business and you as the owner:
1. Corporate Name and Purpose
- What it is: This section states the legal name of your corporation (e.g., "Danielle’s Widgets, Inc.") and the business purpose for which the corporation is formed. This is often something vague (where allowed), such as "to engage in any lawful act or activity for which a corporation may be organized" to ensure flexibility.
- Why you should care: The name is your business's legal identity, and it must be unique and distinguishable from other entities in your state. It must comply with any naming rules in your state. A broad purpose clause gives your company maximum flexibility to pursue various business activities without needing to amend the Articles later.
2. Registered Agent and Office
- What it is: You must name a registered agent—an individual or company legally authorized to accept important legal documents (like service of process or tax notices) on behalf of the corporation—and the address of the registered office. There are businesses that exist that may be able to serve as your company’s registered agent, or sometimes (if allowed in your state) an attorney may serve as your business’s registered agent. Or it can be an owner of the business.
- Why you should care: Naming a registered agent ensures the corporation can always be officially notified of legal actions or state communications. Failing to maintain a valid registered agent can result in your corporation being suspended or administratively dissolved by the state. You cannot operate a corporation without a registered agent.
3. Authorized Shares of Stock
- What it is: The Articles detail the types and number of shares the corporation is authorized to issue. This is often split into common stock (standard voting shares) and sometimes preferred stock (shares with special rights, like priority in dividends or liquidation).
- Why you should care: This provision directly impacts ownership and control.
- For the Business: It sets the maximum number of shares you can ever sell or issue without a formal amendment. The number of authorized shares does not have to match the number of shares actually issued, as long as it stays below the maximum.
- For the Owner: If you’re the sole owner, you'll likely hold 100% of the common stock. If you plan to take on investors or partners, the share structure determines how control and profits are divided. Preferred stock provisions can give investors specific protection and influence.
4. Incorporators and Initial Directors
- What it is: The incorporator is the person(s) who signs and files the Articles. The Articles usually list the initial board of directors who will govern the corporation until the first shareholder meeting.
- Why you should care: The initial board is responsible for adopting the bylaws and getting the company fully operational. For small businesses, the owner(s) are often the initial incorporator and the entire initial board of directors.
5. Indemnification and Limitation of Liability
- What it is: These optional but highly common clauses provide that the corporation will indemnify (financially protect) its directors and officers against claims and lawsuits related to their corporate duties, as long as they acted in good faith. It often also limits their personal liability to the maximum extent permitted by law (usually excepting cases of fraud or gross misconduct).
- Why you should care: This offers important personal protection for the owners/officers. By providing this protection, it makes it easier to recruit and retain qualified directors and officers. It reinforces the main benefit of incorporation: separating the owner's personal assets from the company's liabilities.
6. Optional Provisions
While not strictly required, many Articles include additional provisions that define how the company operates, which are particularly important for small, closely-held corporations. Often these provisions are found in the bylaws of a corporation, but occasionally can be found in the Articles:
- Transfer Restrictions on Shares: For small businesses with multiple owners, this provision can restrict an owner’s ability to sell their shares to an outside party without first offering them to the company or the other owners. This is critical for maintaining control over who your partners are and is very common in closely held corporations.
- Voting Requirements: Some Articles of Incorporation may establish special rules for approving major corporate actions. This requires more than a simple majority (e.g., 75% of shareholders) to approve major corporate actions like mergers, sales of assets, or amendments to the bylaws. It gives minority shareholders more protection and influence. However, these “supermajority” clauses also have risks that you should discuss with an attorney.
- Director Qualifications: These provisions can require directors to meet certain standards in order to be eligible to serve as a director.
- Limitations on Corporate Power: While usually broad, you can use the Articles to specifically limit the types of business the corporation is authorized to conduct, although this is less common for general operating businesses.
- Preemptive rights: This provision gives existing shareholders the first opportunity to buy new shares.
Your Articles of Incorporation are a public document that governs the fundamental structure of your business. While many states offer basic, pre-filled forms, small business owners should always consult with a legal professional to understand if these basic forms are right for their business. Speaking to an attorney can ensure that your specific goals—whether that's maximum flexibility, specific owner protections, or clear succession planning—are legally documented from day one.
If need legal assistance regarding your business, please contact Danielle Dietrich, Esq. at ddietrich@potomaclaw.com or 412-449-9141.
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