Articles of incorporation are a series of formal documents that must be filed with a government agency in order to legally document the formation of a corporation.
The firm’s name, street address, agent for service of process, and the amount and type of stock to be issued are all often included in articles of incorporation.
The “corporate charter,” “articles of association,” or “certificate of incorporation” are all terms used to describe the articles of incorporation.
History of Corporations in the United States
After being exploited for years by those in England during the American Revolution, the founding fathers of the United States had a healthy fear of corporations.
As a result, they limited the role of corporations by awarding only a limited number of corporate charters, mostly to those that benefited society as a whole.
Corporations’ authority was severely constrained for the first hundred years of American history, as owners could not own any stock or property, make financial contributions to a political party, and legislators may simply dissolve a corporation at any moment. Corporations did not have the same level of legal protection as they do today.
As the United States proceeded toward industrialization, the shift toward businesses having more power and authority occurred.
The American Civil War benefited companies tremendously, and with this new riches came bribes to lawmakers and courts, allowing for expanded liability protection and other corporate privileges. The important legal precedent set by the 1886 Supreme Court case Santa Clara County v.
Southern Pacific Railroad was that corporations were “natural people” and thus protected under the 14th Amendment. Corporations have grown in power during the next century and a half, and they no longer match the country’s founders’ intentions.
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KEY TAKEAWAYS
- The relevant file with a government authority (typically the state) that signals the formation of a corporation is called articles of incorporation.
- Articles of incorporation are filed with the Secretary of State’s office in the state where the business wishes to incorporate in the United States.
- The name of the company, the kind of corporate structure, and the number and type of authorised shares should all be included in the articles of formation.
- The legal backbone of the business is formed by the bylaws, which function in tandem with the articles of incorporation.
Understanding Articles of Incorporation
Many businesses in the United States and Canada are organized as corporations, which are legal entities incorporated in the state in which they conduct business. A business must incorporate in order to be legally recognized as a corporation by following certain actions and making certain decisions as required by corporate law.
The filing of articles of incorporation is one of these steps. Articles of incorporation are a document that serves as a charter to acknowledge the formation of a corporation and is required to register a corporation with a state.
The document outlines the essential facts required to form a corporation, corporate governance, and corporate statutes in the state where the articles of incorporation are submitted.
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Special Considerations
In the U.S., articles of incorporation are filed with the Office of the Secretary of State in the state where the business chooses to incorporate. Some states offer more favorable regulatory and tax environments and, as a result, attract a greater proportion of firms seeking incorporation.
For example, Delaware and Nevada attract about half of the public corporations in the U.S., in part because of the state laws that protect their corporations. Once established, the articles become a public record and provide important information about the corporation.
Requirements for Articles of Incorporation
The articles in the document vary by state, but the following “articles” are typically included:
- Name of corporation
- The name and address of the registered agent
- type of corporate structure (e.g., profit corporation, nonprofit corporation, non-stock corporation, professional corporation, etc.).
- Names and addresses of the initial board of directors
- The number and type of authorized shares
- Duration of the corporation, if it wasn’t established to exist perpetually.
- Name, signature, and address of the incorporator, who is the person in charge of setting up a corporation.
Most states also require the firm’s objective to be stated in the articles, though the company may define its purpose broadly to ensure operational flexibility.
The corporation’s goal, according to Amazon’s certificate of formation, is “to participate in any lawful conduct or activity for which companies may be constituted under the General Corporation Law of Delaware.”
Other clauses in a company’s articles of incorporation may include the directors’ liability limit, stockholder actions without a meeting, and the authority to summon special stockholder meetings. Certain necessary provisions must be included in the articles of incorporation in each state, as well as optional provisions that the company can choose to add.
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Many states levy filing costs to any company that incorporates in their state, regardless of whether or not the company operates there. A company that is incorporated in one state but operates or is physically situated in another must register in that state as well, which includes paying the state’s registration costs and taxes.
As of 2020, filing fees range from $50 (as in Iowa, Arkansas, and Michigan) to $275 (as in Massachusetts) depending on the state of incorporation. Depending on whether the articles of incorporation were submitted online or by mail, the fees may differ.
The bylaws, which explain how the corporation is to be governed, are another important corporate document. The legal backbone of the business is formed by the bylaws, which function in tandem with the articles of incorporation.
Purpose of Incorporating
The following are some of the advantages that accrue to a business that operates as a corporation:
1. Establishment of perpetual existence
The term “perpetual existence” refers to the fact that the company will continue to operate even if the owners and executives leave or die.
It gives companies a longer lifespan than unincorporated businesses, which can be terminated by the death or withdrawal of all or portion of their owners. Incorporation also makes it simple to transfer the company’s ownership to another entity.
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2. Tax advantages
Incorporating a business in certain states enables firms to enjoy tax cuts on some of their operating costs. Some of these costs include the cost of production, employee wages, insurance costs, retirement benefits, and investments in green energy. The tax cuts help the corporation reduce its overall tax liability substantially.
3. Protection from liabilities
An incorporated entity functions independently of its owners, which means that the owners’ or founders’ personal assets are safeguarded from business obligations.
For example, if the corporation owes money to creditors, the creditors are unable to sell the owners’ personal assets, such as homes, cars, and bank accounts, to pay the business debts. If the company is run as an unincorporated corporation, however, the owners risk losing their personal assets to pay off the company’s debts.
4. Enhanced corporate image
Operating a business as a corporation adds credibility and trust to the company. Customers tend to trust businesses with the terms “Inc” or “Incorporated” at the end of their brand name.
Trading as a corporation also helps gain the trust of investors and banks that are planning to invest in or finance the business.