A corporation is a legal fiction. Lawyers think of a corporation as a separate person. If you think of a corporation as a separate person it will help in understanding the law as it affects corporations. Corporations can own property, employ people, pay taxes, sue and be sued, and do most of the things a person can do in the world of transactions and business.
Obviously a corporation is not a real person so a corporation acts only through its Shareholders, Directors, Officers and employees. Some of the things these people do affect themselves as well as the corporation, other acts affect only the person or the corporation, but not both. For example, a person may enter into a contract on behalf of the corporation or on his own behalf. Alternatively a person may enter into a contract on behalf of a corporation and then personally guaranty that contract.
One of the many advantages, perhaps the single most important advantage, of running a business as a corporation is limited liability. Limited liability means that if the business concern fails or goes bankrupt, the personal assets of the shareholders will not be at risk assuming the corporate formalities have been followed.
Limited liability is best understood by way of example. Let’s suppose you run a day care business as a sole proprietor without incorporating. Your employee drives from the business establishment to go get 3 gallons of milk at the grocery store. On the way she is involved in a serious collision, is at fault, and the person in the other car is seriously injured.
The injured person can now sue your employee, but the person can also now sue you as the employer due to a principle of law called respondeat superior. Respondeat superior is Latin which loosely translated means the superior responds. Basically the legal principle of respondeat superior means that the employer or principal responds for the negligence of his employee or agent. Let’s suppose the injured person successfully sues and obtains a verdict and judgment for $2,000,000.00. Your business had $1,000,000.00 in insurance coverage so you and your employee are responsible for the excess $1,000,000.00.
Your employee who caused the injury in the first place has no assets so the injured person’s lawyer ignores your employee. However, the lawyer does seize your business assets, for example, your bus, your desks and chairs, your building, etc. The problem does not stop there. The lawyer now seizes your home, your bank accounts, mutual funds, etc.; all your assets. You may be in middle age, may have taken risks to get where you are today, may have accumulated significant assets and now must start all over with a judgment or bankruptcy hanging over your head, and, as a result, no credit.
Bad story so far. The solution is your corporation. If your business is run as a corporation and all the corporate formalities are followed at least your personal assets are not at risk. The key is that your employee is an employee of the corporation and not your employee. The "superior" that responds is not you but the corporation. You may still lose your building, desks, chairs, and other assets that the business owns but your personal assets, your home, your savings, etc. are safe. There are even ways to protect significant business assets from some liabilities, such as discussed in the example. Suppose you have a corporation that runs the business, an operating company, and another corporation that owns the building, a holding company. The first corporation leases the building from the second. If an employee who works for the operating company creates a serious liability for it, you can create another operating company, lease the building from the holding company go on about business as normal and leave the first operating company as a corporate shell. This type of transition may be difficult and assets, such as business relationships, cannot simply be given to the second operating company by the first operating company, however, significant assets may be shielded using this or similar strategies. Further discussion of these strategies is beyond the scope of this primer, suffice it to say, a very significant reason for being incorporated is the limited liability, and the shielding of your personal assets that it brings.
There are, of course, other reasons to incorporate. There may be tax reasons or other business reasons that dictate the need to incorporate. However, limited liability remains the single most important aspect of running a business as a corporation as opposed to a sole proprietorship or a partnership.
The corporate veil is another way of referring to the protection of limited liability from incorporation discussed above. Piercing the corporate veil is what lawyers try to do when they have a judgment against a corporation that has no assets and the shareholders/owners have substantial assets. The keys to avoiding a piercing of the corporate veil are as follows:
Abiding by the foregoing recommendations does not ensure that you will not face a lawsuit in which the plaintiff’s lawyer attempts to pierce the corporate veil. It does not even guaranty that you will prevail in a piercing the veil contest, however, following all the recommendations provides you with an excellent argument and helps ensure that your personal assets will be protected.
The players with regard to your corporation are as follows:
You may be a Shareholder, Director, Officer, and employee of your corporation. A corporation may have as few as one Shareholder and one Director and a single person may hold all the required offices (President or CEO, Treasurer or CFO, and Secretary) within the corporation but this is not really recommended.
Your corporate name is important. It most likely ends with one of the following corporate handles: Inc., Incorporated, Company, Co., or Ltd. Your letterhead should set forth the corporate name exactly as it is set forth on your Certificate of Incorporation. You should execute contracts only in the name of the corporation. A signature line on a contract entered into by your corporation should read, for example, as follows:
This _____ day of March, 1999.
Professional Property Services, Inc.
_______________________________
By: David J. Reed
Its: President
The signature line should not read as follows:
This _____ day of March, 1999.
_______________________________
David J. Reed
For another example of how the signature line should look see Exhibit "A" which is a simple note and for an example of how the signature line should not look see Exhibit "B".
Trade names are names that a business uses that are not the corporate name. They are d/b/a’s (doing business as) of the corporation. For Professional Property Services, Inc. examples of d/b/a’s or trade names are "Professional Property" or "PPS". However, Professional Property Services, Inc. could also do business as "Green Trucking".
If Professional Property Services, Inc. had the telephone answered "Good Morning, PPS" it would probably not have to register "PPS" as a trade name but if "PPS" appears on the letterhead, a business card, on signage, or is used in some other way in the business then it should be registered as a trade name. This is a relatively simple process; a form is filed with the Clerk of the Superior Court in the county in which your business is located and a fee is paid; consult counsel.
The process of incorporating usually starts with your lawyer contacting the Secretary of State’s office, Corporations Division, (404) 656-2817, and inquiring whether the name you have selected for your corporation is available. The person answering the telephone will tell you whether a basic computer check determines that the name is available. If the name is available then typically your lawyer will give his name, address, and telephone number and the Secretary of State’s office will reservation number for use in future dealings. Thereafter a more senior staff member in the Corporations Division will review the name to confirm that it does not conflict with a name given to another corporation. Note however, that being issued a name by the Corporations Division does not mean that no other business uses that name or that you have an absolute right to that name. See section on trademarks.
The next step in incorporating is to fill out a form from the Secretary of State’s office and return it with the Articles of Incorporation for your corporation. The Articles of Incorporation are like the Constitution of your corporation and the bylaws are like the statutes governing the operation of your corporation. The Articles of Incorporation are typically short, they are filed by your lawyer in the early stages of incorporation, and they are signed by your lawyer. The Articles of Incorporation must be filed with the Secretary of State’s office in duplicate with the prepared BSR-227 form as well as the $60.00 fee. They may be amended which is a relatively simple process, but it is not quite as easy to amend the Articles as it is to amend the Bylaws.
At the same time that your lawyer submits Articles of Incorporation to the Secretary of State’s office he will submit a Notice of Intent to Incorporate to the appropriate newspaper. The publishing of a Notice of Intent to Incorporate is required by law. The publication fee is $40.00.
Approximately 2 to 4 weeks after submission of the Articles of Incorporation to the Secretary of State’s office your lawyer will be sent a Certificate of Incorporation which is a document bearing the Secretary of State’s seal and certifying the creation and existence of your corporation.
The first order of business for your corporation is to conduct an organizational meeting of the Board of Directors. This is usually accomplished without a formal meeting and instead all of the directors sign off on an Action of Directors in Lieu of Meeting. The Action of Directors in Lieu of Meeting accomplishes several tasks, the Articles of Incorporation are approved, the seal and the form of the share certificates are approved, the officers are elected, the officers are authorized to obtain a bank account for the corporation, the bylaws are approved, and other formalities are confirmed in writing. Confirming such mundane details may seem unnecessary in a closely held, small corporation, and such documentation is usually anathema to the typical entrepreneur. However, it is not only necessary to avoid the piercing the corporate veil problem, but documentation is the only way a corporation can ever act. This is because a corporation does not have a memory. You can ask a person who runs the business, and who owns the business. But a corporation speaks only through documents. A corporation does not have a memory like a person and the only way it can "remember" that it took an act is to have it confirmed in writing.
The Bylaws of your corporation are the statutes or rules pursuant to which your corporation’s shareholders and Board of Directors will operate. In new, closely held, small capitalization companies it seems sometimes odd to set down a specific set of rules pursuant to which you must operate. Failure to do so, however, can result in piercing the corporate veil, see above. The bylaws will specify such items as when meetings of shareholders will be held, and will specify the duties of the President of the corporation as well as many other items.
Your lawyer will obtain a corporate minute book for your corporation. It will come with the corporate seal and the share certificates as well as a share transfer ledger. The cost of the book is approximately $65.00. You will be issued a certificate for your shares in your corporation. You will sign an investment letter or share subscription agreement for the shares you purchase in your corporation. This document will bring the issuance of the shares in your corporation into compliance with federal and state securities laws.
This primer does not purport to be anywhere near a complete guide to accounting and taxation. We could say, hire an accountant, and leave it at that. However, an effort will be made to say something a little more helpful here.
You should obtain a Federal tax ID number and a State of Georgia tax ID number. Consult your accountant for assistance with these forms.
You must file Federal and State of Georgia corporate income tax returns. You will be required to file payroll tax returns if you have employees or if you pay yourself. You may be required to file returns as often as weekly if you have several employees.
You should consider an S election for your corporation. If you have an S corporation, and you have some capital at risk, it may be possible to reduce your overall tax burden by calling some of your income dividends as opposed to salary. You should consult closely with your accountant and you should have your lawyer prepare an appropriate corporate resolution declaring the dividends. If done properly and in compliance with all law this can save substantial FICA tax payments.
As with taxation this primer cannot pretend to offer more than a few remarks about trademark law. However, a few principles are important. A trademark can be words or a symbol. The word McDonald’s and the symbol, the golden arches, are both trademarks. The cardinal principal in trademark law is that the person that uses the trademark first in commerce has a right to that trademark. You could incorporate, start using a name, grow your company into a substantial going concern, only to find out that a tiny little business has been operating under your name for 20 years down in a corner of the state and you could be forced to give up your name. This is rare, but it is difficult to protect against. To have rights in a trademark you do not need to register the mark. Registering your trademark does not guaranty that you are the first to use it in commerce and are the rightful owner as someone else that has not registered the mark may be using it before you in commerce.
The best advice is to choose a name that it unlikely to cause confusion with any known business names. Trademarks can be generic, descriptive, suggestive, arbitrary, fanciful, or coined. Home Depot is a descriptive trademark. America’s Most Eligible is suggestive of the dating service business in which it engages. House of Seven Gables Restaurant is an arbitrary trademark because the name has nothing to do with food or the restaurant business. Victoria’s Secret is arguably a fanciful trademark as it does not necessarily suggest the type of business but conjures a fanciful image of the nature of the business. Xerox and Kodak are two of the best known coined trademarks. There is increasing protection for the various types of trademarks. Generic business names et little or no trademark protection, descriptive get more protection, suggestive get more protection, and coined trademarks get the most protection from the courts. If you can come up with a good coined trademark for your business, do so.
To ensure you are not using some other business’ name, look in the telephone book, on the Internet, or anywhere else you can, for names that may be similar to the name you are thinking about using in your business.
You must obtain a business license. Each county has a business license office. You should contact the business license office in the county where your corporation has its principal place of business.
You must obtain worker’s compensation insurance if you have more than 2 employees. It is dangerous to rely on the notion that your employees are "independent contractors" and thus you are not required to obtain workers compensation insurance. An independent contractor typically is paid by the job, and has control over the time, place, and manner of performing his function. A painter you sign a contract with to paint your house is a typical independent contractor. A secretary, administrative assistant, or other staff person in your office is typically not an independent contractor.
PROMISSORY NOTE
$100,000.00
State of Georgia
County of Fulton
This _____ day of March, 1999.
FOR VALUE RECEIVED, Professional Property Services, Inc., promises to pay to John Doe, or order, at Atlanta, GA the principal sum of $100,000.00, with interest on the unpaid principal balance from the date of this Note at the rate of 8% per annum.
The principal sum shall be due and payable in 24 equal monthly installments of $* the first installment being due and payable 2 months from the date of this Note. Installments of accrued interest on the unpaid principal balance shall be due and payable simultaneously with the payment of the principal.
This note may be prepaid in whole or in part prior to its due date. Any prepayment shall be without prepayment premium or penalty.
The whole of the principal sum and accrued interest shall become due at the option of Seller after a default in the payment of any installment, if the default is not cured within 10 after written notice specifying the default is delivered to Maker. Presentment for payment, notice of dishonor, protest, and notice of protest are waived.
This Note has been given pursuant to a Contract for the purchase of shares of corporate stock, dated between Maker and Seller and is subject to all of the terms and conditions of that contract.
This note is not negotiable and may not be changed or altered orally.
MAKER:
Professional Property Services, Inc.
_______________________________
By: David J. Reed
Its: President
PROMISSORY NOTE
$100,000.00
State of Georgia
County of Fulton
This _____ day of March, 1999.
FOR VALUE RECEIVED, Professional Property Services, Inc., promises to pay to John Doe, or order, at Atlanta, GA the principal sum of $100,000.00, with interest on the unpaid principal balance from the date of this Note at the rate of 8% per annum.
The principal sum shall be due and payable in 24 equal monthly installments of $* the first installment being due and payable 2 months from the date of this Note. Installments of accrued interest on the unpaid principal balance shall be due and payable simultaneously with the payment of the principal.
This note may be prepaid in whole or in part prior to its due date. Any prepayment shall be without prepayment premium or penalty.
The whole of the principal sum and accrued interest shall become due at the option of Seller after a default in the payment of any installment, if the default is not cured within 10 after written notice specifying the default is delivered to Maker. Presentment for payment, notice of dishonor, protest, and notice of protest are waived.
This Note has been given pursuant to a Contract for the purchase of shares of corporate stock, dated between Maker and Seller and is subject to all of the terms and conditions of that contract.
This note is not negotiable and may not be changed or altered orally.
MAKER:
_______________________________
David J. Reed