Corporate Lawyers on the Formation and Operation of Corporations

A corporation is a form of business ownership. The owners of a corporation are called shareholders. Shareholders generally are not personally liable for the debts and liabilities of the cor­poration. The shareholders risk only the investment they make in the business to purchase their shares. Thus, the owners of a corporation (its shareholders) have only limited liability. It is the concept of limited liability that makes a corporation a good form of business ownership for someone starting a business who wants to shield his personal assets from the debts of his business.

Formation of a Corporation

One or more persons may form a corporation in Arizona. The persons forming the corporation are called “incorpora­tors.” The incorporators must file Articles of Incorporation and a certificate of disclosure with the Arizona Corporation Commission. The corporation commission charges a filing fee, which at the time of this writing is $60 for regular filing and $95 for expedited filing.

Articles of Incorporation

The Articles of Incorporation must include the name of the corporation, a brief statement of its initial business, the number of shares the corporation will be authorized to issue, the address of the known place of business in Arizona, and the name and address of each incorporator, initial director and the statutory agent. (The statutory agent is the person who receives legal papers for the corporation.)

The Articles of Incorporation may include other provisions “not inconsistent with law” that the incorporators may elect to set forth. In some instances, the incorporators will include pro­visions in the articles limiting the liability of directors for actions taken by them on behalf of the corporation.

The Articles of Incorporation must be signed by the incor­porators and the statutory agent.

Certificate of Disclosure

The second document required to form a corporation—the certificate of disclosure—must state whether any person asso­ciated with the corporation has been convicted of a felony involving certain crimes within the past seven years: has been involved in the violation of securities laws, consumer fraud laws or antitrust laws within the past seven years; or has ever served in a similar capacity in another corporation that was placed in bankruptcy, receivership, or had its charter revoked. If the answer to any of these questions is “yes,” additional detailed information must be provided to the corporation commission before the Article of Incorporation will be approved. The certificate of disclosure must be signed by the incorporators under penalty of perjury, and updated at least annually when the corporation files its annual report.

Organizational Meeting & Publication

After the Articles of Incorporation are filed, an organiza­tional meeting of directors must be held for the purpose of adopting bylaws (the internal rules of the corporation), electing officers, and transacting other initial business. The corporation must also, within 60 days from the filing of the articles, publish a copy of the articles in a newspaper of general circulation in the county of the known place of business in Arizona, for three consecutive publications. Upon completion of the publication, the newspaper will provide an affidavit of publication. The affidavit must be filed with the Arizona Corporation Commission.

Operation of the Corporation

Stock

The corporation issues shares of stock to its owners. As noted above, the owners of a corporation are known as share­holders, and the shareholders have limited liability. Under Arizona law, stock may be issued in exchange for any property or benefit to the corporation, including cash or services performed. However, stock may not be issued in exchange for future services or promissory notes. The board of directors has the power to determine the amount of consider­ation that is adequate in exchange for shares issued by the cor­poration. If the corporation issues stock to the public, state and federal securities laws impose numerous regulations on the manner in which the stock may be issued. Public issuance of securities is beyond the scope of this chapter.

Shareholders

The shareholders have the power to elect directors, amend the bylaws, and approve fundamental changes to the corpora­tion. As noted earlier, a corporation’s initial directors are named in the Articles of Incorporation. The shareholders may, however, elect new directors to replace the initial directors. Both the board of directors and the shareholders generally have the power to amend the bylaws. The shareholders must approve all fundamental changes to the corporation, such as a merger, a sale of corporate assets outside the ordinary course of business, and dissolution.

Directors

Corporations are required to hold annual meetings. At these annual meetings, the shareholders elect directors. The board of directors will consist of one or more persons, as spec­ified in the corporation’s articles or bylaws. The board of direc­tors has general responsibility for the management of the business and affairs of the corporation. The board may hold regular or special meetings for the purpose of conducting its affairs. If a quorum is present (generally a majority of direc­tors), the affirmative vote of a majority of directors present is the act of the board, unless the articles or bylaws require the vote of a greater number. Any action required or permitted to be taken at a directors’ meeting may be taken without a meeting if the action is taken by all directors, each of whom must sign a written consent.

The directors are fiduciaries of the corporation. This means that they have to put the corporation’s interests ahead of their own. If they fail to do so, they may be personally liable to the shareholders or the corporation for damages.

Officers

The directors usually delegate their day-to-day manage­ment duties to the officers. Most corporations have a presi­dent, vice-president, secretary and treasurer. The board can appoint such other officers or assistant officers as may be required. The duties of the officers are set forth in the corpora­tion’s bylaws, or as specified by the board. The officers are agents of the corporation and act on its behalf. The president generally has the authority to enter into contracts and other­wise act on behalf of the corporation in the ordinary course of corporate affairs.

The board determines the salaries paid to the officers, and the other terms of the officers’ employment. It is not unusual for the officers to have employment contracts with the corpo­ration.

Annual Reports

The corporation is required to file an Annual Report & Certificate of Disclosure with the Arizona Corporation Com­mission. The document is furnished by the corporation com­mission and may be filed by the corporation electronically. As of this writing, the annual report filing fee is $45. For addi­tional information, the reader may wish to visit the Arizona Corporation Commission’s Web site, www.cc.state.az.us, or call the annual reports section, (602) 542-3285.