Kathryn McCall walks through forming a corporation: filing incorporation papers, drafting bylaws, electing directors, and appointing officers. She explains why you might need both a President and CEO, how founders get shares through cash or services, and why board resolutions matter for officer duties.
Chapters
What does the president do? The president and the CEO are generally the same thing. It used to be that corporations had a president, secretary, and treasurer, and those were the offices. CEO and CFO are relatively newer terms. And by newer, I mean like last 30, 50 years, but they're newer terms. So usually it's CEO slash president. Sometimes you can have people, a CEO and a president, and if that happens, you need to define what each person's going to do and set that up and do it in your bylaws or do it in an agreement or maybe the board will adopt resolutions saying this person is the CEO, these are her responsibilities. This person is the president, these are her responsibilities. Here's how we're going to separate those 2 roles. So, you can have both. But usually it's CEO/president. And what I usually do with companies I form is because there's some language in both the Delaware Corporations Code and the California Corporations Code where it will say the president shall do this. Or this— like a merger requires a certificate signed by the president. signed by the president. And if you only have a CEO and you have something, you'll get a stickler in the Secretary of State's office who's like, well, Joe Smith signed as CEO. It has to be signed by the president. And you're like, well, they're really the same thing. Like, come on. Really? I mean, I've been in like situations where I've had to call an emergency board meeting to elect somebody as president to sign the stupid certificate. And it's just a leftover and a hangover in the corporations codes that they haven't quite caught up to date. And if you get— most people who take your filings in Delaware and California will just be like, yeah, whatever. But you get that one stickler or somebody who they're having a bad day and they're like, oh, I can get this. It can be a real pain. So, I have clients who are like, but I'm CEO. Why did you make me CEO and president? Like, because there might be that one time where I need you to sign something and it has to be signed by a president. And we don't want to be running around to the board holding a board meeting to elect you as president in that instance. So that's why. It's a hangover, you know, holdover. And it— as I go through the— more I go through the corporations code, every time they update it or change it, I see this changing a little bit. But in some of them, you get to some provision and it's like, must be signed by the president or must be done by the president. And then you're like, we don't have a president. We're kind of screwed.
When you incorporate and let's say you're a one-man army right now, so you incorporate and you have to write the operating agreement.
The bylaws?
All right.
The operating agreement is with the LLC.
The similar thing would be the bylaws?
The bylaws are similar but much less complex for a corporation. And generally your bylaws are pretty standard across the board. They don't change a whole heck of a lot.
So my question is, if I do that, should I write them as I'm incorporating or should I wait for it?
Well, you would— you can do it all at the same time. The first The first step to form the corporation is filing the certificate of incorporation. That's step number 1. Then after that, you draft your bylaws, elect your directors, appoint your officers, issue stock, do those sorts of things. So, your first step— because you're not going to exist, your corporation is not going to exist until you file with the Secretary of State. And once that happens— Now there's a corporation. Now you have to form and organize that corporation by getting it bylaws, directors, officers, shareholders. Shareholders are the owners. Shareholders elect the directors. Directors appoint the officers. Although in the beginning, the incorporator appoints the directors who then issue stock, appoint the officers, and all. But after that, once you get shareholders or stockholders, Those are the owners. Okay? Clear as mud? Other questions? All right. So you're going to issue stock to owners. So the board of directors is who approves the sale and issuances of stock. So that's done by the board of directors. Then the stock is purchased by the stockholders. They sign a stock purchase agreement. to purchase their stock. The stock purchase agreement designates the number of shares being purchased, what's the price, what are the restrictions on those shares, and if there's any vesting. And we'll talk about vesting later. Yes?
So as like the founders, can the price per share be zero?
Not quite zero, but there's a lot of zero— there's a decimal point and a lot of zeros before there's a 1. My typical, I'm like, 0.0001 is my purchase price.
Okay.
Yeah. So it's really, really low. It's essentially almost zero. So it's very low in the beginning. And then you can structure that in different ways. So let's say you've been maybe a partnership until now. You're working with your 2 buddies. forming your entity, getting your idea together. At that stage, you're a partnership. Then you decide— is that your— that's your guy?
Yes.
And that's your guy? Okay. Then you decide it's time to incorporate. Let's go incorporate. You can say, you know, we've been spending all this time and energy developing our idea. Now, like, here's our corporation. We're going to get shares. You can purchase your shares with those services you've already done. That's called services rendered. So your past services, your sweat equity, you can do— use that to buy your shares. You can also— there's another method is assignment of rights. Let's say you've developed some technology. You've got some code. You've got some hardware. A trade name, maybe a trademark, you know, some intellectual property, you can assign all that intellectual property over to the corporation as payment for your purchase price. So in those 2 instances, you wouldn't be actually writing out a check. You can do a combination— services rendered and assignment of rights, combination of the 2. Keep in mind though that If you're doing services rendered and then you get stock in exchange for your services rendered, you have now been paid for those services and that's taxable. So hopefully it's just a couple hundred bucks, so it's not that big of an income— of a tax hit. But just keep that in mind that there are some tax consequences. To that. And I get a lot of founders who are like, what do you mean? We're selling our shares for $0.0001. This is a $10 billion company. Like, this is a— this is huge, a huge opportunity. I'm like, oh, so you're going to write me a check for $5 million for your shares? Oh yeah, I know. Oh, but all my services rendered, we're gonna— Oh, and are you going to pay income taxes? On $5 million. And they very quickly— that's a really good purchase price. I like— can we add another zero after that decimal point in there? Like, let's bring it even lower. So think about— again, everything has repercussions. So you've got to think about the taxes. Think about these things. And hopefully you're working with somebody— I would recommend an attorney— who can guide you through these issues or let you know What the repercussions are going to be, so you don't get a nasty surprise.
