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Legalities You Must Know Before Starting a Company in the US

In the US, it is the states which have power to enact corporate laws. Companies incorporated in each state has to follow its own state law relating to its incorporation and operations.


However, thankfully the situation is not that chaotic as appears in first glance. The Model Business Corporation Act, 2002 is used and followed by 22 states in the US.

Learn all about the legalities of starting a corporation in the US


This helps promote uniformity and provides business owners and startup enthusiasts, a sense of clarity as to the law that applies to their organisation when their business operates in more than one state.


Starting a corporation in the US is a great business legal structure. However, there can be some legal compliances involved. Read on to find out!

Before going to the entire aspect of the act, it is important to understand some of the definitions covered by the statute.


§ 1.40 of the Act provides the definitions of certain words used in the Act. In order to understand the statute, you need to understand the definitions provided in the Section. For the ease of going through this article, I am listing out some of the important definitions, here.


“Articles of incorporation” means the original articles of incorporation, all amendments thereof, and any other documents permitted or required to be filed by a domestic business corporation with the secretary of state under any provision of this Act except section 16.21. If an amendment of the articles or any other document filed under this Act restates the articles in their entirety, thenceforth the “articles” shall not include any prior documents.


“Authorized shares” means the shares of all classes a domestic or foreign corporation is authorized to issue.


“Corporation”, “domestic corporation” or “domestic business corporation” means a corporation for profit, which is not a foreign corporation, incorporated under or subject to the provisions of this Act.


“Entity” includes domestic and foreign business corporation; domestic and foreign nonprofit corporation; estate; trust; domestic and foreign unincorporated entity; and state, United States, and foreign government.


“Eligible entity” means a domestic or foreign unincorporated entity or a domestic or foreign nonprofit corporation.


“Employee” includes an officer but not a director. A director may accept duties that make him also an employee.


“Foreign corporation” means a corporation incorporated under a law other than the law of this state; which would be a business corporation if incorporated under the laws of this state.


“Owner liability” means personal liability for a debt, obligation or liability of a domestic or foreign business or nonprofit corporation or unincorporated entity that is imposed on a person: 

(i) solely by reason of the person’s status as a shareholder, member or interest holder; or 

(ii) by the articles of incorporation, bylaws or an organic document under a provision of the organic law of an entity authorizing the articles of incorporation, bylaws or an organic document to make one or more specified shareholders, members or interest holders liable in their capacity as shareholders, members or interest holders for all or specified debts, obligations or liabilities of the entity.


“Individual” means a natural person.


“Person” includes an individual and an entity.


“Shares” means the units into which the proprietary interests in a corporation are divided.


“Shareholder” means the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation.

“Subscriber” means a person who subscribes for shares in a corporation, whether before or after incorporation.


“Voting power” means the current power to vote in the election of directors.


"Secretary" means the corporate officer to whom the board of directors has delegated responsibility under section 8.40(c) for custody of the minutes of the meetings of the board of directors and of the shareholders and for authenticating records of the corporation.

Why did I stress on the definitions?


Well, because sometimes they don't follow the usual meaning that you and me are aware of. However, for the operation of this statute, they are crucial. For example, you may think employee includes a director and therefore when running a company may cause your directors to follow the stuff that is intended for employees to follow.


Since the Act tells beforehand, that employees are not directors, you can be aware of that and prevent having the directors do something that is meant for employees and vice-versa.

Incorporating a Company - The Basics

What you need to know about the US Company Law Before Starting a Corporation


As provided by Section 2.01, one or more persons may incorporate a corporation by signing and delivering the articles of incorporation to the to the secretary of state for filing.

Section 2.03 provides that when the articles of a company are filed effectively, its corporate existence begins. Section 2.02 provides for the contents that the proper articles of incorporation must have.

However, the corporation must have a corporate name containing any of the words - “corporation,” “incorporated,” “company,” or “limited,” or the abbreviation “corp.,” “inc.,” “co.,” or “ltd.,” or words or abbreviations of like import in another language.

Section 4.01 provides some more limitations on the name, a corporation can have.

Directors of a Corporation

Unless a shareholders' agreement eliminates the board of directors, or restricts their powers, Section 8.01 makes it mandatory for every corporation to have a Board of Directors who shall exercise the corporation's corporate powers.

It is the Board that superintend the management and operations of the Corporation.

Section 8.02 provide that the a director must be a major being at least 19 years of age. Apart from that, any qualification may be set by the by-laws of the corporation, itself.

Section 8.03 provides that the directors need to be appointed via election among the shareholders and their number shall be as prescribed by the by-laws or the articles.

A board of directors shall consist of one or more individuals, with the number specified in or fixed in accordance with the articles of incorporation or bylaws. The number of directors may be increased or decreased from time to time by amendment, or in the manner provided in, the articles of incorporation or bylaws.

A director may resign at any time by delivering a written notice to the board, its chairman or directly to the corporation. The resignation becomes effective as soon as the notice is delivered, unless the notice provides for a later date. (Section 8.07)

Officers of the Corporation

Officers of the Corporation have certain legalities behind them. They are regulated by the Company's bylaws.


Now, that's out of the way, there are some key provisions that you need to keep in mind relating to officers of a corporate body. 


Basically the officers run the company on a day-to-day basis and are appointed by the Board of Directors. Although the ultimate supervision lies on the Board, the fact of the matter is that they can only superintend via the Board Meeting and therefore a group of corporate executives have to run the daily operations of the company.


These executives are considered as the officers for the purposes of the Act.


The corporate officers usually include-

  1. Chief Executive Officer (CEO) - The CEO is responsible for the overall operations and activities of the corporation, and usually signs the most important contracts and takes decisions on the most important operations of the corporation that can determine its future course. The CEO is however supervised by the corporation's board of directors and is accountable to them as well. 
  2. Chief Operating Officer (COO) manages the corporation's finances and acts as the financial link between the operations of the different departments of the organisation. 
  3. The Chief Operation Officer (COO) usually reports directly to the CEO. 
  4. Secretary - The Act defines the secretary as "the corporate officer to whom the board of directors has delegated responsibility under section 8.40(c) for custody of the minutes of the meetings of the board of directors and of the shareholders and for authenticating records of the corporation."
A corporation has certain officers mandated as required officers, as is provided under Section 8.40 of the Model Business Corporation Act, 2002.

The section provides that required officers are those officers described in the Corporation's by-laws or appointed by the Board of Directors in accordance with its by-laws.

The board of directors may elect individuals to fill the position of one or more required officers of the corporation and if permitted by the by-laws, these individuals may appoint officers or assistant officers to assist them in their dealings.

One or more required officers shall be appointed and entrusted in preparing minutes of the directors' and shareholders' meetings and for authenticating the records of the corporation. An officer can be given more than one responsibility and may be removed with or without cause by any authorised officer or the Board of Directors unless the by-laws provide otherwise.


Section 8.41 which provides for functions of the officers, are very open-ended. Basically, these officers can be provided with any functions by the Board or other officer entrusted by the Board, as are consistent with the Corporation's by-laws.

Standards of Conduct of the Officers

Section 8.42 provides for the standards of conduct of these officers.

The section provides that -
An officer has to act with good faith, keeping the best interests of the corporation in mind. In case it is suspected that he didn't exercise the above two, the test will be to see whether he acted with the care that a person in a like position would reasonably exercise under similar circumstances.

He has also the responsibility to notify his superior officer, Board of Directors or the Board Committee of any actual or probable material violation of law involving the corporation or material breach of duty to the corporation by an officer, employee, or agent of the corporation, that the officer believes has occurred or is likely to occur, as well as any such information that he knows can be of material requirement to his superior or the Board, including the Board Committee.

Meetings

Meetings in a corporation in the US is regulated by Section 7.01- 7.03 of the MBCA.


Section 7.01 - 7.03 deals with organisation of meetings in the corporation among the shareholders. The corporation requires to hold an annual meeting every year at such time and place as provided for in its by-laws. If no place is fixed in the by-laws, then you need to organuse the annual meeting in the corporation's principal office.


However, the board of directors or the shareholders entitled to cast at least 10% of the votes can call for another special meeting of the shareholders. However the corporation can increase the upper-limit of the shareholders demanding a special meeting to 25% from 10% or lower it from 10% via its by-laws.

The Court of a county via Section 7.03 may also call for a court-ordered meeting of the shareholders on application of any shareholder of the corporation if an annual meeting was not held or if the shareholders demand for a special meeting. However, this remains the exclusive opinion of the Court and is rarely exercised.

Section 8.20 provides for the Board meeting. The board of directors may hold regular or special meetings in or out of this state. The meetings may also be regulated by the bylaws or articles of the corporation. The directors may participate in any board meeting through the use of any means of communication by which all directors participating may simultaneously hear each other during the meeting, unless that is restricted by the articles of incorporation or bylaws

A director participating in a meeting by such means, unless restricted has to be deemed present in person at the meeting.

Dissolution of the Corporation

The Corporation may be dissolved by the incorporators, that is the persons who started the company. It may also be dissolved by the initial directors or the board.

Further, the shareholders may also take steps in order to dissolve the corporation.

However, throughout its period of existence, the corporation is bound to keep appropriate corporate records as provided under Section 16.01 of the Model Business Corporation Act.

The corporation is bound by law to keep the following records: 
  1. its articles of incorporation as currently in effect; 
  2. any notices to shareholders referred to in section 1.20(k)(5) specifying facts on which a filed document is dependent if those facts are not included in the articles of incorporation or otherwise available as specified in section 1.20(k)(5); 
  3. its bylaws as currently in effect; 
  4. all written communications within the past three years to shareholders generally; 
  5. minutes of all meetings of, and records of all actions taken without a meeting by, its shareholders, its board of directors, and board committees established under section 8.25; 
  6. a list of the names and business addresses of its current directors and officers
  7. its most recent annual report delivered to the secretary of state under section 16.21.
Apart from the above mentioned records, the corporation also needs to maintain with itself all annual financial statements and the relevant accounting records prepared for the corporation for its last three fiscal years (or such shorter period of existence) and any audit or other reports with respect to such financial statements.

A record of its current shareholders in alphabetical order by class or series of shares showing the address of, and the number and class or series of shares held by each shareholder has also to be kept by the Corporation. However the email may and should be kept secret.

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