LIFE CYCLE OF A CORPORATION

A corporation is in many ways like a human being. It is born, it lives and grows, and it can die.

Stage 1: Birth

A corporation is “born” when the Certificate of Incorporation is filed with the New York Secretary of State. The person filing should obtain a certified copy of the Certificate of Incorporation and a Filing Receipt from New York State. This is the proof that the corporation exists. But that is just the very beginning.

A young corporation has to be properly nurtured, just like an infant. After it is formed it must be organized. At the very beginning there should be an “Action by the Incorporator” (also called a Statement of Incorporator), a simple, 1-page document by which the person who filed the Certificate of Incorporation appoints the first board of Directors and adopts By-laws. Without this, the company has no directors and cannot, officially, take any action.

Next is a “Written Consent of the Board of Directors” (also called “Unanimous Written Consent” or “Consent in Lieu of Action”). This is one of the most important organization documents, and the one most frequently overlooked.  In it, the Directors adopt a series of "resolutions" that authorize the actions that are necessary to get the company running:  open a bank account, get a Minute Book, issue shares of stock, etc. 

Next are Subscription letters, by which the owners become the owners, by offering (“subscribing”) to buy shares and saying how much they’ll pay for them. The company’s acceptance of the offers is shown by the signed Stock certificates that are issued to the shareholders.

This is the minimum of items that should be prepared for a brand new corporation.  In addition, if there is a lease for office space or other real estate, a copy should be here. The same for equipment leases (computers or copiers, for example), employment agreements (if any), or any other significant contract.

Stage 2: The Early Years, Growth, and Maturity

After the initial organization work is done, the records must continually be maintained. Both the Business Corporation Law and the LLC Law require annual meetings of the owners, and best practices suggest that Directors or LLC Managers meet annually also. At the annual meeting of Shareholders, the only business usually taken up is the (re-)election of directors. At the annual meeting of Directors, the only business that must be taken up each year is the appointment of officers. But: All significant transactions other than those in the ordinary course of business, and even some in the ordinary course, should be approved by the directors, every year.

Examples:

  • If the company has a website, its domain name registration, Terms of Use, and web-hosting agreements should be in the Minute book, and these agreements should be approved by the Directors. 
  • If there's a trademark or trade name that the Company uses (whether by ownership or by license), the proof of the right to use it should be in the minute book; if the business is a franchise, a copy of the Franchise Agreement and any related documents, such as an Operations Manual.
  • If there’s a lease or a significant purchase – real estate, equipment, raw materials on a renewable basis – the contract should be approved and a copy in the Minute Book.
  • Employment or compensation agreements, benefit plans, 401k or other retirement plans.
  • Adoption of policies regarding regulatory matters—anti-harassment, overtime rules, workplace safety, etc.
  • In short, any significant transaction, or asset acquisition, should be reflected in the Minute book, and there should be resolutions approving it. 

The object is to maintain the corporation as a separate being—to prevent an attorney or a government agency from “piercing the veil”. The hallmark of good maintenance is regularity—the habit of documenting actions taken, and of Directors governing.

As the Company grows, its corporate housekeeping gets more complex. Why?

  • More employees means more Labor issues: charges of harassment or discrimination, wrongful termination, failure to keep track of overtime obligations;
  • New partners/shareholders means new Shareholder Agreements, perhaps including new tax issues, maybe a new Director or two; Specialized employees (Finance, HR, Sales, etc.) may mean better or more involved compensation packages to keep them happy and therefore more likely to stay;
  • More employees means more people with access to Trade Secrets, leading to greater need for Trade Secret protection—non-compete and non-disclosure agreements, internet & email use policies, “BYOD” policies, etc.;
  • Last but not least: more employees means more regulation. These are some of the laws that apply to different sizes of companies:
    • 2 or more employees—NYS Workers’ Comp law, Wage Theft Prevention Act notice (in primary language)
    • 3 or more employees—OSHA
    • 5 or more--- NYC Paid Sick Leave Act
    • 20 or more employees – NYC Commuter Benefits law
    • 50 or more “FTEs” – Affordable Care Act (“ObamaCare”)

Companies operating in New York City have the privilege of complying with Federal, State and City laws and regulations; and note that “operating” doesn’t mean headquartered or located. It means just that—any working or doing business in the City.

Stage 3: Termination and Dissolution

The “death” of a corporation is usually referred to as either termination or dissolution, although the statute refers only to dissolution. Dissolution occurs either when (i) the shareholders take action to dissolve under provisions in the Certificate of Incorporation, or (ii) if a majority of the board or of the shareholders finds that the assets of a corporation are not sufficient to satisfy its liabilities. A dissolution provision in the Certificate of Incorporation is unusual, but might be included if the business venture has a definite or somewhat predictable life span.

Dissolution under insolvency can be initiated not only by the shareholders or directors, but also by the corporation’s creditors. The creditors may be concerned that the company’s assets will not be distributed fairly (or at all!), and so seek a dissolution supervised by a court. This kind is called an involuntary dissolution.

In either case –voluntary or involuntary – the corporation retains its rights and abilities during a period of “winding up”. This enables the corporation’s directors to wrap things up, taking action even after a certificate of dissolution has been filed. Although the wind-up period is indefinite, it extends only to the amount of time necessary to wind up.

Conclusion

The parallels between a corporation and a human being are not unintended. In fact, in many laws the definition of “person” includes corporations. Corporations pay taxes, can make contracts, make charitable contributions, own property, sue and be sued, etc. etc. And like humans, corporations need to be taken care of, so that they grow and thrive—and live long, healthy lives.

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