Common Errors In Proposed Articles Of Incorporation – What To Avoid [Infographic]
If you want to incorporate an S corporation or C corporation, you must file the articles of incorporation to do so. These articles are certification of formation or a charter that establishes a public record of your company’s existence.
They contain essential information such as the company’s name, where it is based, and how official bodies can find authorized shares or invalid articles of the incorporation.
Once the articles of incorporation have been accepted, they are made public. Due to avoidable mistakes, many firms fail to make it to the point where this is possible. Depending on their challenges, these errors can vary from company to company. Most common mistakes while filing articles of incorporation are incorrect names, inaccurate number of shares, etc. This article will discuss some of the most typical blunders companies make while filing articles of incorporation.
How Do You Avoid Common Errors In Proposed Articles Of Incorporation?
1. Not Following The Requirements Of State-Specific Forms.
Articles of incorporation requirements differ slightly from state to state. Basic needs may not be met by incorporation documents valid in one state. As a result, state-specific paperwork must be filled out. The method of filing is equally essential. Many states now allow electronic filing, although some still require that articles be mailed in.
When completing paperwork, corporations must utilize the same language as the state’s Secretary of State or Commissioner of Commerce. If you don’t use the same terminology as other states, it could lead to misunderstandings or change some designations’ meaning. Take help from a professional company formation agency to avoid such mistakes.
2. Wrong Corporation Names
The company’s full name should be included in the documents when incorporating a new business. The company must also include one of the following words in the official name in most states:
There can be no words or phrases in a company name that imply anything other than incorporation’s stated purpose.
It is not uncommon for businesses in the related industry to seek to file articles of incorporation under the same name. In many cases, the newly constituted company is entirely unaware of the existence of the existing entity.
The Secretary of State can reject articles of incorporation with names that are ‘deceptively similar to those already in use. Check the availability of the desired company name in advance if you have any doubts. Several states provide easy-to-use databases, including the names of all companies that have been registered. This easy action can help prevent the rejection of a company’s charter.
3. Not Opting For Registered Agent Services.
According to a company’s charter, the registered agent is essential to its structure. Official government notifications, such as tax forms or notices, are sent to this designated individual by the Secretary of State. In litigation, authorities can serve paper on the registered agent. During normal business hours, the agent should be readily available.
An individual or a business might serve as the registered agent. If the agent is an individual, they must be a state resident where the articles are filed to act as an agent. For registered commercial agents, further actions may be necessary. For example, commercial agents must be registered with the Division of Corporations and Business Code.
All approved articles of incorporation are public records, so registered agents should consider this when providing their clients with contact information and names. As a result, sensitive information should not be included in this document. A registered agent agrees to accept and forward official correspondence on behalf of a business or other organization.
4. Mentioning Post Office Boxes As Registered Office
A company must include a registered agent and a registered office in the articles of incorporation. While the primary place of business does not have to be the registered office, it must be a virtual office. Many states allow potential business owners to register their registered office address as a post office box. As a result, the company’s registered office should be located physically. The registered office should be in a central location so that the registered agent can receive letters from the Secretary of State regularly.
5. The Wrong Type Of Business Structure
The articles of incorporation for corporations, such as S corporations or C corporations, are designed particularly for this purpose. The articles should emphasize the difference between corporations and other organizations by highlighting authorized shares. You will need to file articles of organization if you want to incorporate an LLC instead of a corporation. This document is known as a certificate of organization in some states, frequently to avoid confusion between the two forms of legal documentation.
6. Not Listing Your Entity’s Intended Duration.
Corporations are required by law in some states to specify how long they plan to operate. What is the answer for most corporations? For the vast majority, the answer is “perpetual.” A few businesses want to stick to a specified time frame, such as a defined date or a set number. When asked to select the intended length of an entity, corporations should pick ‘perpetual’ in the vast majority of circumstances.
7. Authorizing An Incorrect Number Of Shares
Articles of incorporation are incomplete without mentioning the importance of stock. Every company should include this information in the company’s corporate charter.
If shares are not stated in the articles of formation, governing bodies could reject them. According to the Wisconsin Department of Financial Institutions, articles of incorporation must allow for “some quantity of shares.” Furthermore, it is critical to have enough shares authorized to support future issuances for the founders and allow for future expansion. In most cases, the idea is to grant just enough authority to prevent the corporation’s charter from being amended in the future. To be clear, a company can authorize many more shares than it can issue initially.
Also worth noting is that some entities may seek status as ‘close’ corporations. These companies prefer to limit their reach to fewer than ten stockholders. Articles of formation should reference the company’s position as a “close corporation.” In contrast to other entities submitting articles of incorporation, some states (such as Nevada) give specific instructions to shutter corporations.
The definition of “too many” shares varies from company to company. Fees aren’t necessarily the problem with issuing too many shares, but rather the lack of acceptance of incorporation documents. This is especially true for companies with tens of thousands of authorized shares in Delaware, where franchise taxes may pile up quickly.
In most states, articles of incorporation must also include information about the number of authorized shares and if there are several classes of shares. In addition, corporations having multiple classes of stock should specify the rights and desires of their shareholders. There should be a list of restrictions on shares from each class in the articles. On the other hand, voting shares are those in which the shareholder has the power to select the company’s board of directors members. Some corporations allow shareholders to vote on corporate policy through their voting shares.
Charters for corporations often specify whether or not the company’s stock is classified as standard or preferred. They usually don’t get to vote, but select investors could get more of the company’s assets. However, the majority of shareholders are given common stock. The articles of incorporation may include exact values for common and preferred shares.
8. Insufficient Statement Of Purpose For Corporations
The articles of incorporation of a nonprofit are critical for stating the organization’s goal. Section 501(c)(3) of the Internal Revenue Code applies to these organizations, and they must contain a declaration to that effect (IRC). Depending on the context, a nonprofit’s mission statement might be broad or precise. Nonprofits seeking tax-exempt status may be required to provide a statement of purpose.
However, while a well-articulated mission statement may benefit some NGOs, it is rarely a good idea to go over the top. Nonprofit organizations’ missions and strategies may change over time. It may be necessary to change the articles of incorporation if the organization’s simple objective diverges from what was stated in the papers.
9. Not Filling Articles Of Incorporation With The Secretary Of State.
If the corporation intends to conduct business in a particular state, its articles of formation are typically submitted to that state’s Secretary of State. In some cases, a third party may be permitted. The Commissioner of Commerce in Minnesota, for example, accepts articles of incorporation from certain corporations.
Although it may sound absurd, many would-be business owners have been found to have completed the articles of incorporation but never submitted them to the Secretary of State. The articles of incorporation do not take effect until they have been properly filed and the required filing fee has been paid.
10. Articles Of Incorporation Not Having A Signature From Any Identified Incorporators
It is a legal requirement that at least one of the named incorporators sign the articles of incorporation. Despite the importance of this, it is frequently omitted from documents. Also, articles that contain signatures from persons who are not permitted to function as incorporators may be rejected. The incorporator must be a “natural person of 18 years or more” in Alaska.
The incorporator must verify the accuracy of all the information in the articles of incorporation before signing them. Lack of accuracy can result in legal charges against someone who signs while aware that the article is “materially incorrect.”
11. Is it possible to fix incorrect articles of incorporation after they have been filed?
Companies can correct some improper articles of incorporation once they have been submitted. Either the articles of amendment or the certificate of amendment from your Secretary of State is required to make modifications. Additionally, you’ll need a copy of the company’s original articles of incorporation.
Your company’s board must approve all amendments to the articles of incorporation of directors. A regular board meeting or a special meeting called solely for amendment can propose these changes. The resolution should be put to the vote by the board.
The board must approve resolutions regarding amendments to the articles of incorporation of directors and the shareholders in some states. Shareholders can cast their votes on the motion during their regular meetings. The types of modifications that require shareholder approval differ from state to state. Determine if shareholder input is needed in your scenario by consulting your Secretary of State.
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