Making Your Corporate Structure Effective

By Jay W. Henderson

Now that your attorney has filed your corporate articles with the State and received your Certificate of Incorporation, it is time to address the structure of the corporation. Without attention to the following matters, your corporation is not effective and will not protect you from liability. It might even generate personal tax liability if there are certain “holes” in the structure.

I. Mandatory Items. The concept is that you MUST hold your corporation out to the public as an entity completely different and separate from you, the individual. This means your vendors, customers and the public. You do that by:

A. Opening a corporate bank account, or at least transferring your present account to the corporation and signing new authorization cards at the bank showing that you are a corporation. Remember that your bank is a vendor/creditor, too.

B. Print your corporate name everywhere:

  1. on your checks
  2. on the door and the building directory
  3. on all communication media, like stationary, business cards, publicity, etc.
  4. on your invoices and statements

C. Be sure that all contracts are made out to the corporate name and that you sign them with your name and then a comma and the word “Pres”. Do not ever forget this step. If there is a dispute and you signed an agreement with your name only, you will be named individually as being liable on that agreement.

D. Transfer assets to the corporation and issue stock for the value of those assets, even if it’s only a little cash. You must notify the Corporation Commissioner when you do this step.

E. First Meeting. The corporate Shareholder(s) should meet and elect the corporation's first Board of Director(s). At that meeting many structural considerations should be met. Here are most of them:

  1. Elect the corporation's directors. These are the people that will hire the officers and give direction to the company. They are usually elected each year. The corporation cannot legally accomplish any business without these people directing the effort.
  2. Adopt the Bylaws. These are the laws and rules by which business is done in your organization. The most important part of them is the duties and obligations assigned to each office.
  3. Hire the Officers. In this state there are three mandatory officers, a President or Chief Executive Officer, a Secretary and a Financial Officer. These people conduct day to day business activity and report to the directors.
  4. Authorize the acquisition of Officers' and Directors' liability insurance. If you can find someone to sell you this kind of insurance, it is wise to have it.
  5. Approve the tokens of corporateness. These are a seal, which is worthless in this state except that the common law of Banking requires it on the signature cards (state law and Federal law does not), and the Share Certificate which is required by state law to show that stock has been issued.
  6. Issue Stock. See Item I,D above. Until this is done, there are no owners of the corporation and the corporate structure is not complete. You must file the proper paperwork with the State to make this issue valid.
  7. Authorize IRC Section 1244 treatment of the stock. In conjunction with the issue of the stock, you must elect to have it treated specially if you expect to claim a loss if the corporation does not succeed. This is done by electing Section 1244 treatment.
  8. Authorize the opening of the corporate bank account.
  9. Authorize the corporation to do business from a specific location. This is usually the headquarters office of the corporation, but may just be the county in which your corporation will have that office.
  10. Authorize the use of a fictitious name. If your corporation expects to operate under a name other than the corporate name, you need to authorize that use and the filing of paperwork to legally establish that use.
  11. Authorize the return of the incorporation costs to whoever paid them.
  12. Authorize employment contracts with the people, if any, whom the corporation wants to employ on contract. This decision has many ramifications, tax and otherwise, so talk to your attorney about it.
  13. Authorize the execution or assignment to the corporation of the lease for the corporate facility.
  14. Authorize whoever is going to drive corporate vehicles to do so. You must also detail the record keeping requirements which are laid out by the IRS.
  15. Authorize the corporation to lease any equipment that it needs but will not own. Spell out the terms of the lease.
  16. Authorize the corporate book keeping (fiscal) year. Be careful to comply with current IRS rules regarding the kind of fiscal year you must run on based on your inventory and other considerations.
  17. Authorize the corporation to purchase and keep in effect medical, dental and optical insurance.
  18. Mandate the corporation to receive reimbursement of any payments made to an officer which are disallowed as deductions to the corporation. Talk to your tax attorney about the reasons for this mandate.
  19. Authorize the acquisition, in the corporate name, of credit cards and the reimbursement to officers of expenses used for entertainment promotion.
  20. Authorize the officers to take all actions necessary to effectuate the actions authorized in the minutes.

F. Make a record of the decisions and actions you take on behalf of the corporation. These are usually called "Minutes." While a file folder with little pieces of paper dropped in it might work, it isn't good. You should keep a real Minute Book, in a businesslike manner which will record each election of directors and officers, approval of contracts, bank account authorizations and other such things.

G. Buy your insurance in the corporate name. Workers’ Compensation is mandatory. So is insurance of your automobiles. Other insurance are not mandated by law, but, if you have them, buy them in the corporate name. Health, medical, life (death), vision, dental, disability, key man and “widow buy out” insurance should all be in the corporate name.

H. Get corporate credit cards. Then, charge corporate (ordinary and necessary business) expenses, not personal expenses on them.

Now, go use your corporation to make your dreams come true!

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