How to Operate Your New Corporation Print E-mail
Written by Kerry S. Doolittle   
Monday, 05 December 2011

    This article will provide important information regarding the operation of your new corporation as well as sample forms routinely required in corporate matters.  As always, I focus on Georgia’s law and procedures.  Some variation may exist between different states.

 

Completing the Setup.

    If you took the D.I.Y. route to set up a new corporate entity, chances are good that you missed one or more important steps.  Many assume that once they file online with the Georgia Secretary of State that they are done.  They have an official piece of paper saying “Certificate of Incorporation”.  When your children were born you received a Birth Certificate.  In both cases, the certificate just marks the beginning, and a lot of work ahead.

    Here is a quick outline of the steps:

1.    File Articles of Incorporation with the Georgia Secretary of State.  The online form covers the basic requirements, but did you make use of the large box for “optional provisions”?  I add six useful provisions.

2.    Obtain a Federal Employer Identification Number (a/k/a FEIN).  The easiest way is to go to www.irs.gov, click on the business tab, then look for the Apply Now link.  That form asks for a lot of information about the type of business entity, the nature of the business, will it be subject to sales tax, will it manufacture or sell firearms.  I recommend printing out a paper version of the form and filling it out beforehand.  Making a mistake and starting over online runs a risk of more than one number being assigned and nobody wants to create confusion with the IRS.

3.    Most small businesses will elect to be treated as a Sub-S corporation.  To make that election you will need to fill out IRS form 2553, then fax it to the number given in the instructions for your state.

4.    Next, you need to organize the corporation.  If a number of shareholders are involved, a formal meeting is held and the minutes of that meeting creates the record of that formal organization.  If only one or two shareholders are involved, written minutes of the organization, in lieu of a formal face to face meeting, may be subtituted.  During the organizational meeting, the initial board of directors is established, the articles of incorporation are adopted and approved, formal Bylaws of the corporation are adopted, a corporate seal is adopted, officers are elected, an election of Section 1244 status is made, the stock certificates are adopted and issued, a bank is selected, the incorporation is ratified, the payment of expenses is ratified or authorization to reimburse is given, fiscal year, state qualification, and a general authorizing resolution is made.  These steps are required to get the corporation organized, capitalized and ready to do business.

5.    In preparation for the organizational meeting, you will need to prepare share subscription agreements, a certificate as to the form of the corporate seal, a section 1244 notice letter for each shareholder, an explanation of section 1244, a gross receipts test form, as well as the Bylaws of the corporation. 

6.    You will need a corporate minute book, stock certificates, and a corporate seal.  These can be purchased individually, but buying a kit from a supplier like Blumberg is easier.

7.    Of course, at some point you need to open a bank account in the name of the corporation.

    Now that you are organized and ready to commence, lets cover a few things about how to operate.  At some point I hope to have samples of the forms mentioned in this article available through my web site. 

Annual Meetings Required.

    In order to maintain the corporation, you must conduct at least one annual meeting of the shareholders and one annual meeting of the board of directors.  Your official corporate records should include a formal notice of each meeting and minutes of the conduct of each meeting.

    You may use a unanimous written resolution in lieu of a formal meeting if all of the shareholders and directors sign the resolution. 

    The bylaws generally call for the annual meetings to be held sometime in January of each year, unless you choose a different date.  The meetings can be conducted back to back, with the shareholder’s meeting first, followed by the director’s meeting. 

Annual Registration.

    You will also need to file an annual registration form with the Secretary of State’s office.  A small fee is required.  I recommend putting a reminder on your calendar for each January to hold your annual meetings and then update your corporate registration.  The annual registration may be updated on-line.

Maintain the Corporate Shield.


    Good business practices are essential to maintaining the "Corporate Shield" protecting you from personal liabilities to the greatest extent allowed by law.  Failure to follow the corporate formalities can result in loss of this protection under a theory of a law entitled "Piercing the Corporate Veil." 

    I offer a few suggestions for maintaining the protection of the corporate shield, as follows:

1.    Never commingle corporate money or assets with personal money or assets, or those of another corporation.  You must always treat the corporation as if it is a separate person.

2.    Never use the corporate accounts to pay personal expenses (such as home mortgage or utilities), or personal accounts to pay corporate expenses (such as vendor invoices).  If you need to transfer money to or from the corporation, do so by way of paying earned income or extending a loan.  Transfer the funds from one account to the other, then pay the expense out of the appropriate account. 

3.    Any checks written to any officer or director should be clearly recorded as earned compensation (salary, bonus, dividend), repayment of a loan to the corporation, or as a loan from the Corporation to the individual subject to repayment. 

4.    Any checks written to the corporation by any officer, director, or shareholder should be clearly recorded as repayment of a loan from the corporation, the making of a loan to the corporation, or the payment of capital to acquire additional stock.

5.    All loan transactions between you and the corporation must be backed up by a promissory note, and should also have a corporate resolution explaining the purpose and terms of the loan.

6.    All paperwork including, but not limited to, letters, invoices, bids, proposals, contracts, leases, and other business transactions should always be made in the name of the corporation exactly as it appears in your certificate of incorporation.  Avoid the use of trade names or variations of the corporate name.  The paperwork should always look like the following examples:

    a.    When named as a party, the name should read: “Fake Groceries, Inc., a Georgia corporation,”.  The words “a Georgia corporation” are optional on less formal documents, but should be included in deeds and important contracts. 

    b.    In formal documents, such as deeds and large contracts, the signature line should look like this:

                        Fake Groceries, Inc.

                        By:_______________________________________
                        Its President - John Doe

                        Attest:____________________________________
                        Its Secretary - Jane Doe

                                [CORPORATE SEAL]

    c.    In less formal documents, such as letters, bids, invoices, and smaller contracts, the signature line can look like this:

                            Fake Groceries, Inc.

                            By:_________________________________
                                John Doe, President

    d.    You may also change “Its President - Name of President” to “Name, President”.  The important point is to clearly show that the document is being executed by and on behalf of the corporation through its officers, by providing the correct corporate name and your title.

    e.    Whenever in doubt, apply the corporate seal to the document.  All business should be conducted in the name of the corporation.

    f.    If you use a trade name for advertising and name recognition, you must disclose the full corporate name somewhere in such advertising, and you should use the same signature methods shown above but adding immediately after the corporation’s name the phrase “, d/b/a Trade name” as shown in the example below.  This is very important because any confusion about who is d/b/a (doing business as) the trade name can result in a legal conclusion that you personally were using the trade name rather than the corporation.  You always want to make clear in any letter or document that it is the corporation that is conducting the business.

                        Fake Groceries, Inc. d/b/a Pit Stop Gas

                        By:_______________________________________
                            John Doe, President

    You should always be vigilant to avoid these traps for the unwary.  The Corporation must always be treated and act as a separate and distinct entity, not as the alter-ego of its principal.  Careful and detailed record keeping is essential.  You want to avoid anything that might cause confusion over who is being dealt with, i.e. misstating the corporate name and failure to disclose your representative capacity.

Debt Collection.


    Inevitably, debt collection will be an issue you will face in the future.  Before that time comes, it is wise to prepare and understand the procedures and documents needed to handle debt collection matters as efficiently as possible.  This area is fraught with traps such as the Fair Debt Collection Practices Act and strict Uniform Commercial Code requirements.  For example "Self-help" repossession is illegal and could subject the company and individuals to unnecessary liability. 

    Fortunately, Georgia law favors creditors much stronger than many other states.  The best way to avoid problems is to have a well thought out plan, procedure and forms ready, and always follow the procedure exactly.  When you are ready to deal with this subject, I will be happy to assist in setting up your forms and procedures.  The best advise I can give on debt collection is as follows:

    1.    Get the best security/collateral available and maintain the highest priority possible.  In the event of debtor bankruptcy, secured creditors fare better than unsecured creditors, and first lien holders better than junior lien holders.

    2.    Be constantly vigilant.  When an account debtor does not pay when expected, pick up the telephone and find out why.  As difficult as it may be, you may have to cut future credit to prevent future losses.  Dealing on a cash only basis with a slow pay debtor may keep the debtor from taking you with him into bankruptcy.

    3.    He who hesitates loses.  The longer you wait to initiate collection efforts, the less likely you are to recover anything.  Many creditors worry that they might push the debtor into bankruptcy.  If the debtor is paying a reasonable amount on a regular basis and not incurring additional debt, it may be okay to wait, but once the debtor fails to pay, waiting will not help the debtor, but will hurt your business.

    4.    Keep all envelopes, letters, receipts and other scraps of paper and photocopy all checks (front and back) received in each file.  These can yield important clues about a debtor's location and where his bank account can be garnished.  If you cannot find a debtor and his money, you will not be able to collect.

    One suggestion, debt collection is far less burdensome in commercial transactions.  Consumer transaction have longer grace periods and more burdensome requirements.  It will be a very good idea to have each customer, when applicable, sign a certificate of business use.  This would prevent any issue arising whether the transaction was commercial or consumer.  If you deal in commercial transactions, ask me for a sample form.

Commercial verses Consumer Transactions.


    Also consider that home solicitation sales are subject to a three day right of rescission.  This may apply when you go to someone's home and solicit their business, even if they called you first.  Wherever possible, have a contract or work order signed at least three days before delivery of the goods or performance of the work.  This way the rescission period will expire before you invest time or money which cannot be recovered in the event of rescission.

Boilerplate Terms.

    If you have not done so already, your standard contract forms, invoices, bid proposals and the like should be reviewed by me for completeness.  The single most common mistake of homemade documents is the absence of standard “boilerplate” language (the so called “fine print”) which provides many of the terms that you do not usually think about, but which can help you tremendously in the event of collection problems or litigation.  This is a situation where you may never notice the absence of important boilerplate until the one instance when you need it.  It never hurts to have it, but it always hurts to not have it when needed.

    Boilerplate deals with obvious things like recovery of attorney fees in the event of collection, interest on past due payments, and late charges, all of which are intended to help compensate you for the additional time, expense and aggravation of a slow pay customer.  For example, your invoice form should always contain language that payment is due within so many days and that interest will accrue on late payments at a specific rate.  In consumer transactions I suggest 12% annually or 1% per month.  In commercial transactions I suggest 18% annually or 1.5% per month. 

    Boilerplate also includes less obvious things like:

    1.    this is the entire agreement, no oral representations not embodied herein will be enforceable;
    2.    no modification unless in writing signed by both parties;
    3.    time is of the essence;
    4.    no waiver of strict compliance.

    These terms make litigation much easier by precluding the other party from arguing that other terms existed outside the written contract, or that a subsequent oral modification was made.

Conclusion.


    I hope you find these suggestions helpful.  I offer them as a courtesy to show my appreciation for your business.  But please do not consider these suggestions exhaustive.  I am sure many more ways exist to improve the company's performance.

    Whenever I can be of service please call on me.


Kerry S. Doolittle, Attorney at Law
47 Greensboro Highway                 Telephone   (706) 769-0591
Post Office Box 949                          Facsimile   (706) 769-0593
Watkinsville, GA 30677                    Email This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
 

Last Updated ( Monday, 05 December 2011 )
 
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