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So, you’ve just incorporated your company – the hard part is over and you’re all set to get back to operating your business, right? Not so fast!
Incorporation is the first step in setting up a new legal entity, but there are a number of post-incorporation tasks that must be done in order to properly complete the incorporation process. Of course, these steps vary by jurisdiction, but the general principles are usually the same.
Once you’ve incorporated, you will have a separate legal entity. But that’s just the first step in the process for properly incorporating a new company. After you have successfully incorporated, you will need to “organize” your company.
Organizing a company refers to the series of steps that must be taken after the incorporating documents have been successfully filed with the relevant government agencies. It can include:
That’s a fantastic question, the answer to which will vary from jurisdiction to jurisdiction, but generally, the three items listed above under the heading “What does organizing a company mean?” are a good starting point outlining the steps that may be required post incorporation.
Just because you have incorporated a company does not mean that you (or anyone else for that matter) is a “shareholder” of that company. Importantly, only those that own shares can be said to be the company owners. Shares are legal rights that represent the ownership interest that a person (i.e. an individual or other legal person, like another company) has in the entity.
Let’s say you are starting a business with a partner and you each want to be 60/40 owners of the company. One or both of you may have done the actual incorporation of the company, but that does not necessarily mean that either of you are yet the “legal owners.” To ensure that you both properly own the company according to how you intend, you must issue shares in the company to each person.
For example, a share issuance might look something like this:
With this simple share issuance, Batman is a 60% shareholder (and in turn, a 60% owner) of the company and Robin is a 40% shareholder.
But there’s more to consider. In this example, Batman and Robin each received common shares. Well, you might ask yourself, what are the rights and privileges that Batman or Robin have by virue of owning common shares in the corporation?
To understand that, you will need to look at the Articles of Incorporation (or similar constating documents) to see exactly what rights and privileges attach to common shares. Although there are certain standard (i.e. typical) rights and privileges and, in some jurisdictions, even mandated ones, for the most part, it is up to the incorporators of a company to decide and negotiate what rights and privileges (and perhaps even obligations) will attach to any share class.
For example, share classes can have various different sets of rights, including:
It is important to know and decide as an incorporator what rights and privileges you want your various classes of shares to hold.
For example, Batman and Robin both agree that they will be 60/40 partners. But, since Batman is putting in all the capital needed to fund the operations of the company, they agree it is only fair that Batman receive a dividend from the proceeds of the company or that Batman have preference on how the assets of the company are distributed should the company ever be sold or go out of business.
In order to accomplish these goals, additional share classes will need to be setup and shares of those classes will need to be distributed to Batman in order to convey those rights to him. One way to do this would be to setup another share class, this time a preferred share class that has different rights and privileges than the common shares already issued. In this case, Batman and Robin want to maintain the 60/40 control and ownership relationship that they already have but they want to ensure Batman receives his dividend and a preference in case the company is sold or has some other liquidation event. To do this, a preferred share class would be setup and that class of shares would have different rights than the common shares. For example, the preferred share class might have a dividend right and a preference or you might choose to make it redeemable or *retractable at a value equivalent to the amount of capital that Batman is putting into the company.
Once the preferred shares have been issued to Batman, he will now have the rights of both preferred shareholders and common shareholders, proportionate to the amount of shares he owns compared to any other persons that may own shares of the same class.
So, how do you best manage legal entities for corporate law? It all starts by making sure your collection is digitized and centralized on a secure online platform, preferably one designed with minute books and corporate records in mind. Make sure all your legal entities are available in one place, digitize all minute book data to ensure it is backed up and never lost and use a tool to help make sharing with clients, accountants and other counsel much easier. Use legal entity management software that works for you. Use these steps and you will find it much easier to manage your corporate law practice.
Of course, if you need any assistance scanning, digitizing or getting your minute books onto a secure legal entity management cloud-based software, we are always happy to help and provide advice. All you need to do is get in touch! –>
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