A corporation needs to keep a permanent record of its legal affairs. This includes:
- the original articles of incorporation
- minutes of all meetings
- records of the stock issued, transferred, and cancelled
- fictitious names registered
- any other legal matters
The records are usually kept in a ring binder. Any ring binder will do, but a specially prepared corporate kit, which has the name of the corporation printed on it and usually contains some forms, such as minutes and stock certificates.
This must be specially made for each corporation. Most corporations use a metal seal like a notary's seal to emboss the paper. The corporate seal should contain the full, exact name of the corporation, the word "SEAL," and the year of incorporation. It may be round or rectangular.
Stock Certificates and Offers to Purchase Stock
In some states, corporations are no longer required to issue stock certificates to represent shares of ownership. However, as a practical matter, it is a good idea to do so. This shows some formality and gives each person tangible evidence of ownership. If you do issue shares, the face of each certificate must show the corporate name; the state law under which the corporation is organized; the name of the shareholder(s); and, the number, class, and series of the stock. The certificate must be signed by one or more officers designated by the bylaws or the board of directors.
If there are two or more classes or series of stock, the front or back of the certificate must disclose that, “upon request and without charge, the corporation will provide to the shareholder the preferences, limitations, and relative rights of each class or series, the preferences of any preferred stock, and the board of director’s authority to determine rights for any subsequent classes or series.” If there are any restrictions, they must be stated on the certificate, or a statement must be included that a copy of the restrictions is available without charge.
The stock certificates can be fancy and intricately engraved with eagles and scrolls, or they can be typed or even handwritten. If you purchase a corporate kit, you will receive certificates printed with your company's name on them.
Before any stock is issued, the purchaser should submit an Offer to Purchase Stock. The offer states that the offer is made pursuant to Section 1244 of the Internal Revenue Code. The advantage of this section is that in the event the business fails or the value of the stock drops, the shareholder can write off a portion of the loss as ordinary income, rather than as a long-term capital loss, which would be limited to a specific amount set by federal law.
Some thought should be given to the way in which the ownership of the stock will be held. Stock owned in one person's name alone is subject to probate upon death. Making two people joint owners of the stock (joint tenants with full rights of survivorship) would avoid probate upon the death of one of them. However, taking a joint owner's name off in the event of a disagreement (such as divorce) could be troublesome. If a couple jointly operates a business, joint ownership is best. But if one person is the sole party involved in the business, the desire to avoid probate should be weighed against the risk of losing half the business in a divorce.
Most states allow securities to be registered in pay on death or transfer on death form, similar to bank accounts. This means the stock can be owned by one person, but designated to pass to another person at death without that person getting any current rights in the stock. Check with your stock broker, attorney or in your state statutes. The law is called the Uniform TOD Securities Registration Act.
Some states levy a tax on the issue or transfer of stock. The amount and means of calculating the tax vary from state to state. Check with an attorney or tax professional to find out if any such tax is charged, how to calculate the amount of tax, and how to go about paying it.
This is a tax you can easily lower, but do not avoid paying it. If you do, someone may use this to pierce the corporate veil and hold you liable for debts of the corporation. You can keep this tax low by structuring your corporate stock to the minimum tax. In some states, this means fewer shares, and in other states, it means lower par value.