Reading 3: Company formation

Lawyers play important roles in the formation of a company, advising clients which entities are most suited to their needs and ensuring that the proper documents are duly filed.

You are going to read a conversation between an American lawyer, Ms Norris, and her client, Mr O'Hara. The lawyer describes how a specific type of corporation is formed in the state of Delaware.

5. Read the conversation and tick the documents required for formation that the lawyer mentions.

M s Norris: So, based on all the background information you provided me with, my strongest recommendation is for you to incorporate for the reasons we discussed.

Mr O'Hara: All right. Of course, I trust your judgment. But I'm completely new to this. How does it work exactly? I mean, I assume that the paperwork has to be drafted by you and filed with the State...

Ms Norris: Well, um, let me begin by telling you about how the process works in our state, in Delaware. You know, quite a few large corporations choose to incorporate here due to our highly developed corporate legal system.

Mr O'Hara: Right. So what do we have to do first?

Ms Norris: The first thing you have to do is select a name – but the incorporator has to check whether that name is available in the State.

Mr O'Hara: The incorporator?

Ms Norris: That’s the person who prepares, files and signs the articles of incorporation and everything necessary for incorporation. Of course, that’s something I could do for you.

Mr O'Hara: Got it. Go on.

Ms Norris: Well, I mentioned the articles of incorporation: that’s the first main document that needs to be filed. It includes information like the name of the corporation, the address of the corporation and of the corporation's registered office, and the name of the registered agent at that office - um, that’s the person to be served if the corporation is sued.

Mr O'Hara: OK, right. What else do the articles of incorporation include?

Ms Norris: They must state the purpose of the corporation and length of time that the corporation is to exist. The duration can be either perpetual or renewable. Another thing you’d have to provide is information about the capital structure: how much common stock, how much preferred stock, and what are the rights and responsibilities of each. This would be stated in the stock ledger. The stock ledger and the stock certificates are kept with the company records. Any questions?

Mr O'Hara: Could you explain what a stock ledger is?

Ms Norris: Sure, that's just a record of each shareholder's ownership in a corporation.

Mr O'Hara: I understand. So, is that all? Are there any other documents we have to file?

Ms Norris: Of course, the other document necessary for the company to function as a corporation is the bylaws...

Mr O'Hara: Those are the rules of the corporation?

Ms Norris: Exactly: the bylaws are the rules and regulations adopted by a corporation for its internal governance. There's one more thing: you’re also required to file the organisational board resolutions.

Mr O'Hara: What are those?

Ms Norris: Well, they're drawn up after the articles of incorporation have been filed and the bylaws created. That's the time when the first organisational meeting of your corporation will take place. At this meeting, the bylaws are then approved and adopted, officers are elected, and directors are appointed, among other things. All of these decisions are made during this meeting and then set down in the organisational board resolutions, and these resolutions are then filed. Then the incorporation process is complete.

 

	DBA filing	□
	articles of incorporation	□
	stock ledger	□
	general partnership agreement	□
	stock certificates	□
	IRS & State S Corporation election	□
	bylaws	□
	organisational board resolutions	□

:

5. Company types (USA ) Look at the following table, which provides information on the documents, required to form and operate the different company types in the United States. Based on what you read in Exercise 4, which type of business association was the lawyer discussing with her client?

US entities	Documents required for formation and operation
sole proprietorship	DBA filing
general partnership	General Partnership Agreement local filings if partnership holds real estate
limited partnership	Limited Partnership Certificate. Limited Partnership Agreement
C corporation	Articles of Incorporation. Bylaws. Organisational Board Resolutions, Stock Certificates, Stock Ledger
S corporation	Articles of Incorporation. Bylaws, Organisational Board Resolutions, Stock Certificates, Stock Ledger, IRS & State S corporation election

6. Company types (UK) The table on page 20-21 contains information about five types of common UK business associations, covering the aspects of liability of owners, capital contributions and management. (In many jurisdictions in the world, there are entities which share some or all of these characteristics.) Look at the table and decide which entity (a-e) is being described in each row (1-5).

a private limited company (Ltd)

b general partnership

c public limited company (PLC)

d limited partnership

e sole proprietorship

 

Entity	Liability of owners	Capital contribution	Management
1)...................	Unlimited personal liability for the obligations of the business	Capital needed is contributed by sole proprietor.	Business is managed by the sole proprietor.
2)....................	Generally no personal liability of the members for obligations of the business	No minimum share capital requirement. However, capital can be raised through the issuance of shares to members or through a guarantee.	Company is managed through its managing director or the board of directors acting as a whole.
3)....................	No personal liability; liability is generally limited to shareholder contributions (i.e. consideration for shares).	The minimum share capital of £50,000 is raised through issuance of shares to the public and/or existing members.	Company is managed by the board of directors; shareholders have no power to participate in management.
4)....................	Unlimited personal liability of the general partners for the obligations of the business	Partners contribute money or services to the partnership; they share profits and losses.	The partners have equal management rights, unless they agree otherwise.
5)...................	Unlimited personal liability of the general partners for the obligations of the business; limited partners generally have no personal liability.	General and limited partners contribute money or services to the limited partnership; they share profits and losses.	The general partner manages the business, subject to any limitations of the Limited Partnership Agreement.

 

Law firm structure

28. Linus Walker has applied for a position at a law firm. Read his job interview and answer these questions.

1 What does Mr Nichols say about the atmosphere of the firm?

2 What does Linus say about the size of the firm?

 

Mr Nichols: So, at this point, I'd like to ask you if there's anything you'd like to ask me? About the firm, for example.

Linus: Of course. I do have some questions. I guess I'd like to know what it's like to work here. Um, I wonder if you could describe the firm's culture for me?

Mr Nichols: Well, as you certainly know, we're a relatively commercial firm. We're what's known as a law boutique, since we specialise in two areas of the law: Real Property and Debtor-Creditor. Since we're specialists, we try to maintain high standards in our work. As for the firm's culture, I'd have to say we're pretty traditional. People dress quite formally, in suits, and we don't call partners by their first names. It's a good place to work, definitely friendly, people are serious and work very hard.

Linus: That sounds good to me. Perhaps you could tell me something about the structure of the firm.

Mr Nichols: Well, the firm is headed by the two senior partners Mr Robertson and Mr Michaels. They founded the partnership 30 years ago. They're still quite active, especially with the older clients, but the day-to-day affairs and the finances of the firm are managed by the full partners, that's Ms Graham and myself. We also oversee two departments. But a salaried partner is in charge of each of them.

Linus: I see. And how are the departments structured?

Mr Nichols: Well, in the Real Property Department, there are three associates who report to the partner, and they're assisted by two paralegals. In the Debtor-Creditor department, there are two associates and two paralegals. There's also one secretary for each department who basically assists the partner who heads the department, but who does on occasion do work for the associates as well, since they're responsible for all the clerical work that needs to be done. Of course, there are always summer associates or clerks working at the firm, on average four of them, just during the summer, but also during the term breaks. Right, I guess that's all there is to say about the structure. How does that sound to you?

Linus: Very interesting. Actually, the size sounds ideal -quite as small as the firm I worked for in Cambridge, I did my summer clerkships, but not too big, either. A nowhere nearly as large as the European Commission where I worked last!

 

3. Company Directors and Company Secretaries.

Who can be a director

Only an individual who is at least 18 years old can be a director. If a company has only 1 director, they must ordinarily reside in Australia. If a company has more than 1 director, at least 1 of the directors must ordinarily reside in Australia.

A director must consent in writing to holding the position of director. The company must keep the consent and must notify ASIC of the appointment.

In some circumstances, the Corporations Act imposes the duties and obligations of a director on a person who, although not formally appointed as a director of a company, nevertheless acts as a director or gives instructions to the formally appointed directors as to how they should act.

The Court or ASIC may prohibit a person from being a director or from otherwise being involved in the management of a company if, for example, the person has breached the Corporations Act.

A person needs the Court's permission to be a director if the person has been convicted of certain offences or is, in some circumstances, unable to pay their debts as they fall due.

Generally, a director may resign by giving notice of the resignation to the company. A director who resigns may notify ASIC of the resignation. If the director does not do so, the company must notify ASIC of the director's resignation.