Initial Actions by Business Owners
Setting up the Business Entity
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Table of ContentsWhat are the Initial Actions to be Taken by Company Owners when Setting up the Business? What actions do the organizers of a partnership take?What actions do the organizers of the LLC take?What actions do the incorporators and initial board of directors of a corporation take?What actions do the shareholders of the corporation take?
What are the Initial Actions to be Taken by Company Owners when Setting up the Business?
The actions that need to be taken will depend on the type of business entity. Below, we address the actions taken by Partners, LLC Owners, and Boards of Directors/Shareholders.
What actions do the organizers of a partnership take?
GPs arise by default, while LPs and LLPs must be filed with the state. The formation of the partnership, however, is only one aspect of setting up the business entity. The next step is for the individual partners to enter into a detailed partnership agreement outlining the rights, authority, ownership, and liability of the individual partners.
Each partner must sign the agreement for it to be effective against that partner. The partnership may also ratify and agree to hold the organizer harmless for any activity in establishing the partnership.
What actions do the organizers of the LLC take?
Organizers of a LLC must undertake procedures similar to that of a partnership that files with the state. The LLC is not required to have formal meetings, but the members should act quickly to adopt an operating agreement.
Like the partnership agreement, the operating agreement should cover all of the important structural, financial, and operational aspects of the business.
The LLC may also ratify or agree to hold the organizer harmless for activities undertaken in forming the LLC.
What actions do the incorporators and initial board of directors of a corporation take?
The Secretary of States Office will review the application for incorporation and either accept or reject the application. If the application is rejected, the department will indicate the deficiency in the application and allow amendment.
Once the corporate charter is issued, the corporation now exists. Now the incorporator has to take steps to set up the corporate structure.
The first step is to call a corporate meeting. In this meeting the incorporator will appoint the initial directors and the corporate secretary. The corporate secretary will record this action in the minutes and may prepare a resolution for the incorporator.
At this point the board of directors has authority. The board prepares and signs the Actions of Incorporator, which adopts or ratifies all previous actions taken by the incorporator and relieves her from her responsibilities.
Next the board will approve all expenses associated with formation, including any funds paid to the incorporator.
Now the board of directors must take numerous actions to completely setup the entity structure.
The next task for the board of directors is to adopt the corporate bylaws. This is done by identifying the bylaws in the initial meeting and voting on their acceptance. Again the corporate secretary may prepare a resolution for the boards signature.
At this point the board will proceed with the meeting in accordance with the rules for director meetings as laid out in the bylaws. The board will then address the following tasks in any given order:
- Authorizing the principal office or place of business;
- Preparing and filing of qualification to do business as a foreign corporation in any other states;
- Designating the corporate fiscal year;
- Ratifying the corporate Employer Identification Number;
- Designating the size of the board of directors (which is generally included in the bylaws);
- Undertaking the election of officers;
- Designating of management powers as appropriate;
- Authorization of corporate stock (number of shares and classes of shares if there are multiple classes);
- Approving the issuance of founders stock (common stock) to the business founders;
- Approving any stock option grants to founders (if applicable);
- Approving the minutes;
- Authorizing the corporate seal and stock certificates;
- Approving the subchapter S tax election for the corporation (if applicable);
- Authorizing the management to open bank accounts;
- Approving any proprietary information and inventions agreements;
- Approving any indemnification agreements with officers and directors;
- Approving any stock option or issuance plans or option agreements
Many of the actions of the board are authorized in the articles of incorporation and bylaws.
The board can only act within the bounds of these governing documents.
What actions do the shareholders of the corporation take?
The initial meeting will generally conclude by a call for the shareholders (i.e., founders) to vote to formally elect the board of directors. Remember, the initial board of directors was appointed by the incorporator.
It is important to have the newly minted shareholders to follow the bylaws and formally elect the standing members of the board.
Generally, the shareholders will also vote for secondary tasks, such as approving the indemnification agreement for officers and directors and approving the stock option or issuance plans.
Note: Many of these actions (by directors or shareholders) may be taken outside of a formal meeting through signed consents. When this happens the consents must generally be unanimous, unless the bylaws expressly indicate otherwise.
Corporate formalities require that the company maintain records of all corporate meetings, resolutions, stock issuances, and initial capitalization data.
Most corporations use commercial software to track this information.