Certificate of Incorporation and Bylaws: Essential Elements to Know as An In-House Lawyer
Every corporate entity has legal formation and organizational documents. These organizational documents are like an operating manual for the company. They provide guidance about the internal affairs of the company and define the roles and duties of directors, officers, and stockholders.
As an in-house lawyer, you will need to be familiar with the organizational documents of your company and its subsidiaries. You will be responsible for knowing the contents of the company’s certificate of incorporation and bylaws. You will also need to be aware of the restrictions or limitations placed on certain corporate actions within these documents.
A significant number of corporations are formed in Delaware. As a result, the below guidance assumes a corporate entity formed under Delaware law. Requirements vary by jurisdiction, however, so it is necessary to examine particular state laws for non-Delaware corporations.
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State of Incorporation: Why Delaware is Often Selected
Approximately 68% of Fortune 500 companies are incorporated in Delaware. Many startups likewise decide to form their corporations in Delaware.
The preference for incorporating in Delaware is due to a combination of factors including:
- Low franchise taxes
- Ease of filing
- User-friendly online services
- A well-developed body of corporate law
- Judicial expertise in corporate law
- Business-friendly laws
The Delaware General Corporation Law (DGCL) is the statutory authority governing the organizational structure and powers of Delaware corporations.
Choosing a Corporate Form
The most common corporate form is the C-corporation. This legal structure results in U.S. federal income taxation at two levels. There is taxation at the corporate level when profits are earned and then again at the stockholder level when profits are distributed as dividends.
The other common corporate form is the S-corporation. The S-corporation structure is a “pass-through” entity. As a result, the S-corporation avoids paying an entity-level tax. Instead, only stockholders pay U.S. federal income tax when they receive profits.
Although C-corporations face double taxation, C-corporations are generally preferred over S-corporations. S-corporations face many limitations, including restrictions on the number and type of stockholders allowed. This corporate form becomes particularly challenging to use as the company becomes larger.
As a preliminary step, a company name must be selected. The DGCL prohibits the name from containing the word “bank” unless the corporation is actually a bank subject to state and federal banking laws and regulations. A trademark, service mark, and/or copyright search is typically run because settling on a company name.
There are a number of administrative steps that must be taken to form a corporation. It can be helpful to use a service company to file the incorporation documents. Paralegals typically are tasked with coordinating directly with the service company.
The initial directors and officers of the corporation will also need to be determined. These directors will need to sign future written consents, so it is important to select individuals that are actually available to sign resolutions and transaction documents.
Drafting the Certificate of Incorporation
The certificate of incorporation is the primary governance document of the corporation. It can only be amended with stockholder consent.
Below is an illustrative example of how the essential provisions in a certificate of incorporation are commonly organized:
- Article I: Name of the Corporation
- Article II: Registered Agent
- Article III: Business Purpose
- Article IV: Capital Stock
- Article V: Board of Directors
- Article VI: Limitation of Liability; Indemnification
- Article VII: Stockholder Action
- Article VIII: Bylaws
- Article IX: Section 203 of the DGCL Opt-Out
- Article X: Amendments
If the corporation has multiple classes of stock, its certificate of incorporation will be longer. If the corporation plans to eventually become a public company, its certificate of incorporation will also be longer in order to satisfy the requirements of the applicable stock exchange.
Drafting the Bylaws
The bylaws are the rules adopted by the corporation to govern its internal affairs and external dealings. They are considered secondary to the certificate of incorporation. This means that if the certificate of incorporation and bylaws present conflicting information, the information in the certificate of incorporation is considered correct.
The bylaws typically include the procedures governing meetings of stockholders and directors. They also usually detail the procedures for the issuance and transfer of stock certificates. Most bylaws can be amended by the board of directors.
Below is an illustrative example of how the essential provisions in a company’s bylaws are commonly organized:
- Article I: Officers
- Article II: Meetings of the Stockholders
- Article III: Board of Directors
- Article IV: Officers
- Article V: Stock Certificates and Their Transfer
- Article VI: General Provisions
- Article VII: Amendments