Kathryn McCall walks through how to form and run a corporation, from choosing where to incorporate to issuing stock and setting up bylaws. She covers the roles of shareholders, directors, and officers, plus what Delaware and California require differently.
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So now we're to the corporation, which is what most of you are probably going— have formed, going to form, looking forward to forming, maybe not looking forward to forming. So what is a corporation? A corporation is an independent legal entity owned by the shareholders. It's formed under the laws of the state in which it is registered. So if I form a corporation by filing articles of incorporation with the Secretary of State of California, it's a California corporation. If I file a certificate of incorporation in Delaware with the Delaware Secretary of State, it's a Delaware corporation. You can have Illinois corporations, Wyoming corporations, Nevada corporations, all different states. And then once again we get this whole issue of liability. The corporation itself, not the shareholders who are the owners, is held legally liable for the actions and debts of the corporation. It's more complex than other types of business structures because of the administrative fees, complex tax, and other legal requirements. So, a lot of recordkeeping, a little bit more complex. So what are the ownership and governance basics? Essentially, the corporation is owned by its stockholders or shareholders. The stockholders elect a board of directors. The board of directors are responsible for the overall direction and goals of the corporation. So they set the goals. They're like the guys who steer the ship. This is the direction we're going. This is the way we're going. This is what we're going to do. The board of directors appoints the officers— chief executive officer, secretary, chief financial officer. The officers carry out the directions of the board of directors. The officers are responsible for the day-to-day running of the corporation. And then the officers might hire employees who are working for the corporation. Now, one person can be an employee, an officer on the board, and a stockholder. You can have a corporation with just one person. And that one person is the sole shareholder, the sole member of the board, is the CEO, CFO, and secretary, and might be employed. So people can hold multiple roles. You know, if you're a shareholder, doesn't mean you can't be an employee. If you guys work at a startup, you might get a stock option. You exercise your stock option, now you have shares. You're a shareholder and an employee. If you're founding a startup, you're going to hold stock in that startup. You'll probably be on the board. You might also be the CEO. And you're probably going to draw a salary, meaning you're an employee. So I get questions all the time about, you know, well, I'm on the board, so I can't be CEO. Yes. One person can hold multiple roles. You can have somebody be CFO and secretary. People can hold multiple roles. So how do you form a board? That corporation. First, you file with the Secretary of State of the state in which you want to incorporate. And we'll talk about Delaware. Don't worry, it's coming. You draft bylaws. Bylaws are kind of like the operating agreement in an LLC, but not nearly as complex. You elect directors, you appoint officers, and you issue stock to shareholders. That's Kind of it. So what's it take to file articles or a certificate of incorporation? The incorporator— usually I act as the incorporator for companies that I'm forming. It's a one-page document. I file it with the Secretary of State. It's done. The articles— and then that— those articles will contain what's the address of the principal place of business. Who's going to be the agent for service of process? The agent is if that corporation gets sued, that's the person who takes service of process for the corporation. Has to be a real person and it has to be somebody in the state. So if you're filing in Delaware, has to be a person or a corporation in Delaware that has an address in Delaware. There's people that will do— act as that for you. How many shares are you going to issue? 10 million, 20 million? That goes into your certificate of incorporation. And then if you're going to issue anything other than common stock, preferred stock, Series A, Series B, Series C, whatever, that goes into your certificate of incorporation. And then each series of stock— so if you have different series of stock, they have different rights. Preferences and privileges. All that goes into your certificate of incorporation. But if you're in the beginning stages of forming a corporation, generally you're going to stop here. You're not going to need to designate common or preferred or what their rights, preferences, and privileges are. So usually just to form a corporation, it's a one-page document. Then you draft bylaws. Your bylaws are what govern your— how the corporation is going to operate. So how are stockholder meetings going to be held? How do you notify stockholders of a stockholder meeting? When are board meetings going to be held? How do you notify board members of a board meeting? What's quorum for a stockholder meeting? What's quorum for your board meeting? What happens if in the middle of a stockholder meeting you need to adjourn and then start up again? Do you have to re-notify everybody? How is that handled? And it also talks about who are your— how the directors are going to be elected. What are the procedures? What if a director resigns? How do you elect a replacement? That's in your bylaws. And then appointment of officers. What sort of officers are you going to have and what are their roles and responsibilities going to be? What does the CEO do? What does the CFO do? What's the secretary do? How are those people appointed? And then kind of the boring stuff— procedures for management of stock certificates. What if somebody loses a stock certificate? What do you do? Does everybody get a stock certificate? And then indemnification of directors and officers. So this is something that we stick in the bylaws that basically you want your board of directors and your officers to operate freely and without fear of repercussion. So if they're operating in good faith on behalf of the corporation and something goes wrong and they get sued, you want the corporation to indemnify them as long as there was no fraud or intentional willful wrongful acts involved. And then if you're getting outside investors who are going to sit on your board, generally they will insist upon this. So you elect your directors and appoint officers. Again, if I'm the incorporator, I file a certificate of incorporation for a company I'm incorporating. Then immediately after that, I'm going to resign as incorporator and appoint the board of directors. Now the board of directors can take over. Then the board of directors are going to elect the officers— president, treasurer, secretary, or CFO, CEO, secretary. And again, a director can also be an officer. Remember, people can hold multiple roles. And so you don't have to have it all in one. So when— if it's the beginning stages and you're thinking, I'm just one person, how can I form a corporation? I don't have multiple people. One person can be a whole corporation. Yes. In the officer's side, is there someone who leads more? Who leads more? Your CEO. So a CEO can, let's say, can change from— can make change to CFO or things like that? Well, the CEO is going to be appointed by the board. So the board of directors would appoint or remove the CEO. So the CEO answers to the board, but the employees are going to report to the CEO or maybe their supervisor or something. So the CEO is in charge of the day-to-day operations and functioning of the business, but under the direction of the board. Does that answer your question? Yes. Okay.
