What is a Certificate of Incorporation?
A Certificate of Incorporation (also known as the articles of incorporation or the corporate charter) is a document that establishes the legal existence of a corporation. It is one of the first documents a corporation files with its chosen secretary of state. The most common state of incorporation for startups is Delaware, though founders frequently incorporate or organize in the state where the corporation will have its principal place of business.
Certificates of Incorporation are generally required before a corporation can legally operate, which includes simple tasks like banking and contracting and more complex transactions like raising capital and hiring employees.
What information is included in the Certificate of Incorporation?
The information that is typically required in the Certificate of Incorporation includes:
- Corporation Name and Registered Agent: A corporation preliminarily checks with the secretary of state for the availability of their intended legal business name. Additionally, corporations are required to designate a registered agent, which is an individual or business that is assigned to receive legal notifications (like service of process or other official state notices).
- The Nature or Purpose of the Corporation: This section can be as general or as specific as the corporation needs, but typically includes language that allows the corporation to engage in any lawful business within the state in which it is incorporated.
- Stock Authorized to Issue: Often, this is the most important piece of the initial filing of the Certificate of Incorporation. If handled efficiently, the Certificate of Incorporation will authorize enough stock to balance the corporation's franchise tax expenses with its upcoming founder, incentive equity, and capital raise needs. An experienced startup attorney is helpful here to ensure there's no wasted time, effort, or legal spend.
There are some additional provisions that startups and founders should consider when drafting their certificate of incorporation.
- Authorization of different classes of stock: Normally, all stock issued at incorporation is common stock, as the founders will typically be the only shareholders. As outside investors join the corporation, the corporation may authorize one or more classes of preferred stock that carry additional rights for investors.
- Rights and obligations of each class of stock: Generally, common stockholders are the founders and earliest investors who want to retain their voting power and control over the corporation. Outside investors want to protect their investment as much as possible and will therefore choose to receive preferred shares to receive priority in dividend distribution and liquidation, as well as additional blocking rights.
Evolution of the Certificate of Incorporation
At the outset of forming a corporation, the Certificate of Incorporation is usually a formality to allow the business to be legally recognized under state law and to begin its operations. As a general rule of thumb, if there are any inconsistencies in provisions between the governing documents, the Certificate of Incorporation controls what provision will be enforced in a court of law. The Certificate of Incorporation becomes much more than a formality once it contains the various voting and restrictive rights allocated to founders and investors.
An initial Certificate of Incorporation should include provisions that document the name of the corporation, the total amount of stock the corporation is authorized to issue, and a provision regarding the limited liability of the directors. But, as a startup begins to mature and raises capital from outside investors, certain rights and obligations specific to the corporation begin to emerge for each share class, so it is necessary to amend the Certificate of Incorporation to reflect those changes.
This is where Founders can help, answering questions on pacing, raising capital, incorporating, and generally preparing your startup for practical and financial success.
Matthew McElwee is a startup and venture capital attorney based in Chicago, IL. He represents founders, startups and venture capital funds in a wide variety of corporate transactions, including raising capital and navigating issues associated with rapidly-growing startups. He can be reached at firstname.lastname@example.org and 312.508.3287.