Considerations in Forming a Corporation

The modern corporation is the most important form of business in the history of the world. It has facilitated the rapid economic development of the last 150 years by permitting businesses to attain economies of scale. Businesses organized as corporations can attain such economies because they usually have a greater capacity to raise capital, a capacity created by corporation law. Corporation law allows people to invest their money in a corporation and become owners without imposing unlimited liability or management responsibilities on themselves. Many people are willing to invest their savings in a large, risky business if they have limited liability and no management responsibilities. Far fewer people are willing to invest in a partnership or other business form in which owners have unlimited liability and management duties.

Corporations are the form of business organization most often associated with the term business. Most large businesses are corporations. Corporations are creations of the state, with methods of creation dictated by state statute. Businesses are generally required to file their articles of incorporation with the Utah Division of Corporations and Commercial Code. Upon approval, the incorporators designate the board of directors and issue stock. The directors are subsequently elected by the shareholders and are responsible for establishing corporate policy. They have a fiduciary duty to preserve the corporation. The board is empowered to hire managers to operate the business and conduct its affairs. The shareholders are the owners of the corporation. They enjoy limited liability, but do not participate in the day-to-day management of the business.

In the words of Chief Justice Marshall in Dartmouth v Woodward (1819):
"A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creation of law, it possesses only those properties which the charter of its creation confers upon it...These are such as are supposed best calculated to effect the object for which it was created. Among the most important are immortality and if the expression may be allowed, individuality; properties by which a perpetual succession of many persons are considered as the same, so that they may act as a single individual A corporation manages its own affairs, and holds property without the hazardous and endless necessity of perpetual conveyance for the purpose of transmitting it from hand to hand. It is chiefly for the purpose of clothing bodies of men, in succession, with these qualities and capacities, that corporations were invented, and are in use. By these means, a perpetual succession of individuals are capable of acting for the promotion of the particular object, like one immortal being."

The Principal Characteristics of Corporations

  1. A corporation may be created only by permission of the State Government.
  2. A corporation is a legal person and a legal entity independent of its owners (called shareholders) and its managers (called officers and the board of directors). Its life is unaffected by the retirement or death of its shareholders, officers and directors. A corporation is a person under the Constitution of the United States. Like natural persons, it is protected from unreasonable searches and seizures and is guaranteed due process and equal protection under the law. It also has free speech rights. It has its own domicile and its own place of residence, whose locations determine in part whether a state may constitutionally impose its laws on the corporation.
  3. A corporation may acquire, hold and convey property in its own name. A corporation may sue and be sued in its own name. Harm to a corporation is not harm to the shareholders; therefore, with few exceptions a shareholder may not sue to enforce a claim of the corporation.
  4. A shareholder has no right or duty to manage, the business of the corporation. The directors and officers need not be shareholders.
  5. The shareholders have limited liability. With few exceptions, they are not liable for the debts of a corporation beyond their capital contributions to the corporation. The corporation is a legal entity separate from its shareholders, even if there is only one shareholder. Corporation law erects an imaginary wall between a corporation and its shareholders that protects shareholders from liability for a corporation's actions. Therefore, obligations of a corporation are not obligations of its shareholders, and acts of a corporation are not acts of its shareholders. Consequently, the shareholders' liability is limited to their capital contributions to the corporation. Nevertheless, courts will sometimes ignore the separateness of a corporation and its shareholders by piercing the corporate veil. The primary consequence of piercing the corporate veil is that a corporation's shareholders may lose their limited liability.
  6. Generally, the ownership interest in a corporation is freely transferable. A shareholder may sell his shares to whomever he wants whenever he wants. The purchaser becomes a shareholder with the same rights that the seller had.
  7. Generally, shareholders owe no fiduciary duties to the corporation. A shareholder who is not an officer or a director may deal with the corporation as may any other person. A shareholder may be a creditor of the corporation.
  8. A corporation pays state and federal income taxes on its income. Shareholders have personal income from the corporation only when the corporation makes a distribution of its assets to them, as when the corporation pays dividends to its shareholders.

Creating a Corporation

A corporation is formed in the state of Utah by filing Articles of Incorporation in duplicate with the Division of Corporation and Commercial Code, together with the appropriate fee. The following information may be of assistance to you - we encourage you to consult an attorney to ensure your fullest legal protection and benefit.

  1. The Articles of Incorporation must include the following information (U.C.A. Section 16-10a-202 ):
    1. The corporate name (must contain the word or abbreviation of the word "Corporation," "Company," or "Incorporated.")
    2. The purpose or purposes for which the corporation is formed.
    3. The number of shares the corporation is authorized to issue. If more than one class of shares is authorized, each class must be designated along with a description of the preferences, limitations and relative rights of each class. For addition information, see Title 16-10a-601 of the Utah Code .
    4. The name and address of each of the incorporators (one or more persons may act as incorporators.)
    5. The Utah street address of the corporation's initial registered office and the name of its initial registered agent at such address.
    6. The signature of each of the incorporators.
    7. A statement in the Articles of Incorporation or an attachment signed by the Registered Agent acknowledging acceptance as such.
  2. When filing Articles of Incorporation, you must include the following:
    1. One (1) copy, originally signed, of Articles of Incorporation and one (1) copy of the original containing all of the information listed above.
    2. The filing fee of $54.00.
  3. Where to file:
    Division of Corporations and Commercial Code
    Utah Department of Commerce
    160 East 300 South
    P.O. Box 146705
    Salt Lake City, Utah 84114-6705
    (801) 530-4849

SPECIAL NOTE: The Utah Division of Corporations and Commercial Code provides a step-by-step guide to preparing articles of incorporation. The guide is located here on the web site.

Corporation Bylaws

Under Utah law, corporations are not required to adopt bylaws. However, they can be very helpful and are viewed by some as necessary. The function of the bylaws is to supplement the articles of incorporation by defining more precisely the powers, rights and responsibilities of the corporation, its managers, and its shareholders and by stating other rules under which the corporation and its activities will be governed.

The bylaws usually state the authority of the officers and the directors, specifying what they may do and may not do; the time and place at which the annual shareholder's meetings will be held; the procedure for calling special meetings of shareholders; and the procedures for shareholders' and directors' meetings. The bylaws may make provisions for special committees of the board, defining their membership and the scope of their activities. They set up the machinery for the transfer of shares, the maintenance of share records, and for the declaration and payment of dividends.

Financing the Corporation: Corporate Securities

Any business needs money to operate and to grow. One advantage of incorporation is the large number of sources of funds that are available to businesses that incorporate. One such source is the sale of corporate securities, including shares, debentures, bonds, and long-term notes payable.

Besides obtaining funds from the sale of securities, a corporation may be financed by other sources. A bank may lend money to the corporation in exchange for the corporation's short-term promissory notes, called commercial paper. Retained earnings provide a source of funds once the corporation is operating profitably. In addition, the corporation may use normal short-term financing, such as accounts receivable financing and inventory financing.

A corporate security may be either:

  1. a share in the corporation or
  2. an obligation of the corporation.

These two kinds of securities are called equity securities and debt securities. Every business corporation issues equity securities, which are commonly called stock or shares. The issuance of shares creates an ownership relationship: the holders of the shares-called stockholders or shareholders-are the owners of the corporation. Utah statutes permit corporations to issue several classes of shares and to determine the rights of the various classes. Subject to minimum guarantees contained in the state business corporation law, the shareholders' rights are a matter of contract and appear in the articles of incorporation and usually appear in the bylaws, in a shareholder agreement, and on the share certificates.

The Board of Directors Introduction

Traditionally, the board of directors has had the power and the duty to manage the corporation. Yet in a large, publicly held corporation, it is impossible for the board to manage the corporation on a day-to-day basis, since many of the directors are high-ranking officers of other corporations and devote most of their time to their other business interests. Therefore, the law permits a corporation to be managed under the direction of the board of directors. Consequently, the board of directors delegate major responsibility for management to committees of the board, such as an executive committee, to individual board members such as the chairman of the board, and to the officers of the corporation, especially the chief executive officer (CEO). In theory, the board supervises the actions of its committees, the chairman, and the officers to ensure that the board's policies are being carried out and that the delegates are managing the corporation prudently.

The Major Functions of Modern Boards of Directors

  1. To protect the assets and other interests of the shareholders of the corporation.
  2. To ensure the continuity of the corporation by enforcing the articles and bylaws and by seeing that a sound board of directors is maintained.
  3. To see that the company is well managed. To make decisions that are not delegable, such as the payment of dividends.

Officers of the Corporation

Appointment of Officers
The board of directors has the authority to appoint the officers of the corporation. Corporations are given great flexibility in determining the number of its officers. Under the law, one person may hold several offices, including the offices of president and secretary. If a corporation desires the protection of dual signatures as a safety measure, it must create positions for two officers whose signatures are required on corporate documents.

Authority of Officers
The officers are agents of the corporation. As agents, officers have express authority conferred on them by the bylaws or the board of directors. In addition, officers have authority to do the things that are reasonably necessary to accomplish their express duties.

Directors and officers must act within their authority and within the powers given to the corporation. They also have the duty to act with due care. Their duty of loyalty requires them to act in the best interests of the corporation as a whole. Most management actions are protected from judicial scrutiny by the business judgement rule: absent bad faith, fraud, or breach of a fiduciary duty, the judgement of the managers of a corporation is conclusive.