This post addresses three of the most frequently asked questions regarding a corporation’s Articles/Certificate of Incorporation:
1. What are Articles of Incorporation/Certificate of Incorporation? Is there a difference between an “Article of Incorporation” or a “Certificate of Incorporation”?
The Articles of Incorporation or Certificate of Incorporation establishes the corporation as a legal entity under the laws of the state in which the corporation is formed. Whether this document is called the “Articles of Incorporation” or “Certificate of Incorporation” depends primarily upon the state in which it is formed. For example, in Delaware, the term used is “Certificate of Incorporation,” whereas in California the term used is “Articles of Incorporation.” Both terms describe the exact same document and are often used interchangeably. A broader term that is also used to describe the document is “Charter Document.”
Once the Articles/Certificate of Incorporation is drafted, it is filed with the Secretary of State or Department of Corporations for the state in which the corporation is being formed. Once filed in the state, the corporation legally exists.
2. When I start my corporation, what information do I need to put in the Articles/Certificate of Incorporation?
The requirements of what needs to be set forth in the Articles/Certificate of Incorporation are governed by the law of corporations of the state in which the corporation is formed. Many corporations are formed in the state of Delaware, which requires the following to be included in the Certificate of Incorporation:
- The name of the corporation
- The address (which shall include the street, number, city and county) of the corporation’s registered office in Delaware, and the name of its registered agent at such address
- The nature or purpose of the business to be conducted or promoted
- The total number of shares of stock that the corporation shall have authority to issue and the par value of each of such shares
- The name and mailing address of the incorporator
In addition, a corporation may include other provisions, especially as the corporation matures and different classes of stock are issued. This may include provisions relating to establishing different classes of stock, expanding or limiting the rights of stockholders of different classes, increasing the number of votes required for actions by stockholders or directors, or setting forth the indemnification obligations of the company to its directors, among other provisions.
If necessary or desirable, the Articles/Certificate of Incorporation can be amended by the stockholders at any time.
3. What exactly does the “authorized capital” mean and is there a set number of shares that I should authorize at the outset?
The authorized capital of a corporation is the number of shares of stock the company is allowed to issue in total. This does not mean the corporation has to issue all of the authorized capital. The authorized capital simply establishes the reserve that the corporation may tap to issue stock. There is no magical number that must be included when first establishing the number of shares of authorized capital. In Silicon Valley, the authorized capital established at the outset is often 10 million shares of common stock. This is usually enough to issue the initial founder shares and create a stock option pool. Additional capital may be authorized by filing an amendment to the Articles/Certificate of Incorporation with the applicable state authority.