IV. Formation of Corporations

IV. Formation of Corporations

No corporation can exist without the consent or grant of the sovereign, or the state. The power to create corporations is one of the attributes of sovereignty, this power is a legislative function, and laws, rules, regulations, and procedures for creating a corporation are established by the legislature through the enactment of statutes. Implementation of these procedures is a function of the executive branch of the state and is usually delegated to the office of the secre­tary of state or some other administrative officer.

1. Promotion or Incorporation

Promotion is comparatively a process of a wide range,while incorporation is only the last step of the whole promotion process. The process of promotion and incorporation involves three essential steps ; Articles of Incorporation or Certificate of Incorporation, also called Corporate Charter or Corporate Memorandum, must be prepared according to the requirements of state law; one or more incorporators must sign the articles; the signed articles must be submitted to the state’s secretary of state for filing.

1. Articles of Incorporation(Articles of Association)

Most modem statutes, based on the Model Corporation Act, require the following items in the articles;

1. Name of the corporation;
2. Period of duration;
3. Purpose or purposes for which the corporation is being organized;
4. Number,amount,description,and nature of shares of stock authorized;
5. Names and addresses of officers, directors, incorporators, and resident agent.

The articles of incorporation must substantially comply with the requirements of the stat­utes as to both the form and contents. The courts have not hesitated to declare attempted incor­porations invalid for failure to do so (See the specimen related). .

2. Corporate Purposes

The laws usually require a statement in the articles concerning the purpose ( s) for which the corporation is formed; the corporate powers which prove the business range, limitation or grant the rights that the corporation may have when conducting business as well as the ways and methods to realize the purposes. Vague or general specifications of purposes are not sufficient. The character of a corporation is usually determined by the objective of its formation and the nature of its business as stated in its articles.

Most statutes provide for the formation of a corporation for any lawful business purpose or purposes. Naturally, one may not legally form a corporation and use it for the purpose of con­ducting illegal activities or other purpose contrary to the laws. However, a corporation may be legally organized for the specific purpose and intent of escaping or limiting personal liability of the individual,or avoiding taxes. In fact,these axe the primary purposes for forming private cor­porations. An honest,law - abiding person may form a private corporation and carry on honest, lawful business activities and escape personal liability. A bad - faith formation of a corporation to carry on fraudulent, dishonest, or unlawful activities will not be approved by the courts.

( 3 ) Ultra Vires Doctrine

1. Definition.

When an agent undertakes an action on behalf of a corporation which the corporation is not empowered to undertake, the action is referred to as" Ultra Vires. "Actions which are merely Ul­tra Vires should be distinguished from ones which are illegal, such as payment of a bribe to a public official. Limited occasions where ultra vires arises. The combination today of most corpo­rations having very broad corporate purposes and the doctrine of implied powers means that the incidence of ultra vires acts is very low. Only acts which have no possibility of contributing to the profitability of the company even in the long run are likely to be considered ultra vires. Such acts are referred to as" corporate waste. " Technically, although the Courts refer to waste as ultra vires, the problem is not corporate incapacity. Rather, waste entails action of the board or of cor­porate agents that are" unauthorized" in the sense that they entail breaches of fiduciary obliga­tion. In general, the validity of a corporate action may not be challenged as ultra vires. This means that the ultra vires contract either by the corporation or by the other party to the con­tract.            _f                                                                          .

2. The Decline of the Doctrine of Ultra Vires

Modem corporation law has sought to remove the possibility that ultra vires acts may oc­cur. Multiple purposes clauses and general clauses that permit corporations to engage in any lawful business are now included in the articles of incorporation. In addition, purposes clauses can now be easily amended if the corporation seeks to do business in new areas,e. g. ,under traditional ultra vires doctrine, a corporation that had as its purpose the manufacturing of shoes could not,under its charter,manufacture motorcycles. Under modem corporate law,the purposes clause would either be so general as to allow the corporation to go into the motorcycle business, or the corporation would amend its purposes clause to reflect the new venture.