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Formation - People


See Also:

Foundations of Law: Formation - Acts
Foundations of Law: Formation - Paper

Terms:

Incorporator: 
The person or persons who perform the task of actually forming the corporation are known as incorporators. It is the incorporator’s duty to insure that all of the requisite forms and information required by the state of incorporation are accurately and fully completed and filed with the appropriate state agency. It is important to note that the incorporators do not, themselves, need to be the individuals who own or will ultimately manage the company. 

Promoter: 
Promoters enter into contracts with third parties who are interested in becoming shareholders to the corporation once it is formed. Promoters have a fiduciary relationship with each other and the corporation they are forming. This duty includes a duty of good faith and fair and honest disclosure.

Formation: Introduction

The formation of a company, be it a corporation or other business form, is one of the most integral tasks in the dossier of the professional paralegal. The actual incorporators of the vast majority of businesses in the U.S. are paralegals. Attorneys will often have paralegals use their own names and personal information to form the company, and the paralegal will hold the first meeting of the board where he or she will elect the actual board of directors and turn the company over to the charge of the new board.

EXAMPLE: Atty. X has Joe, his paralegal, create a new corporation for his client Ralph. Because the managers of the new company, including Ralph, are out of town, Joe uses his own name as the incorporator of the company. This is a legally sound procedure and Joe will simply have to elect Ralph and his board as the corporation's managers at the first meeting.

Keep the above anecdote in mind as you follow through the next few sections on the formation of the company, as it highlights the central role that paralegals play in this process. More importantly, however, this anecdote also points to the fact that a great deal is resting on your shoulders as you move the client company through this early process. While much of the work informing a company is mechanical, such as filing forms with various state and federal agencies, certain acts must be done, such as the initial meeting of the board. It is imperative that the rule of law be followed and that all the steps are carried out properly and with the utmost care.  Failure to do so may expose the company and those who control it to liability or added legal expense at a future date.

Also, note that each state has a different system of steps in the incorporation and formation process. Thus, just because you are familiar with the methods used in one state, you do not necessarily know them for all states. While states are generally similar in their requirements, it is your obligation to make sure you have complied with the applicable state’s law.

EXAMPLE: Tommy, a paralegal, has incorporated two dozen corporations in State R. When asked to incorporate a new company in State S, Tommy follows all his usual procedures. The corporation is denied a state charter in S, and it costs the company additional funds and time while it goes to refile. Tommy did not act correctly because he assumed State S had the same rules as State R.

The next three sections will detail the process of incorporation for the corporation. In Chapter Two, we will discuss how the formation procedure differs for other types of business entities. For now, keep in mind the following three elements that are required for the formation of a corporation:

  • People: The formation of a company requires, in each state, a certain number of people who fit a set of characteristics. Make sure that the people who are to act as incorporators for your company meet those requirements.
  • Paper: All states and several federal agencies require the filing of certain documents that allow the state/agency to identify the company and the rules that it has either set for itself or that will be imputed to it by the state.
  • Acts: When the people are chosen and the paper has been filed, there is the final requirement that the incorporators act in certain ways to formally create the company. Failure to act as prescribed by law can force the company to waste valuable time and to incur expenses to correct its mistakes later on.

Formation: People

One who signs the articles of incorporation is referred to as an incorporator. In most states, incorporators may be natural persons or artificial entities (such as a corporation). In many cases, promoters are also the incorporators.

Promoters help form the corporation by entering into contracts with those who are interested in becoming shareholders of the corporation. Promoters may also enter into contracts for services or goods for the corporation after it is formed. Promoters have a fiduciary relationship to each other, and to the corporation to be formed.  The duties include good faith and honest and fair disclosure. Promoter may not secretly profit from transactions with or for the corporation. 

Under the RMBCA, promoters are personally liable for contracts between third parties and the unformed corporation. This liability is only extinguished through a novation, releasing the promoter and substituting the corporation.