When forming a corporation, too many people simply visit the Secretary of State's website, or a form provider's website, download an inexpensive or free sample charter, and file it with the Secretary of State. Using such forms without careful consideration of the many variables that go into forming and operating a corporate entity, however, does a great disservice to you and your corporation.
A charter is the document that you file with the Secretary of State that creates your corporation. It, along with the corporation's bylaws and shareholders' agreement, are the documents that govern how your corporation must be run, with the provisions of the charter having priority over contrary provisions of the bylaws and shareholders' agreement.
In this article, which is part of a series of articles regarding entity formation, we are going to apply Tennessee law; however, many of these same benefits are provided in other states. Let's start with the general rule that your corporation's charter cannot be inconsistent with applicable law. T.C.A. §48-12-102. In other words, if Tennessee law requires the shareholders to vote to take a particular action, the charter cannot choose to have the directors vote to take that action. Building upon the general rule, Tennessee law accords certain powers or rights to a corporation that can only be taken advantage of by exercising those powers in the charter.
A charter can limit a corporation's purpose, which is by default "any lawful business". When would a corporation want to limit the business it can engage in? Perhaps when it is required by law to have a limited purpose. For example, there are prohibitions, or at least certain complications, in financial advisor businesses engaging in actions other than providing financial advice. If a director or officer attempts to take such actions on behalf of the corporation that would cause hardship for the shareholders, those shareholders could have the corporation, or the director/officer, stopped from taking such an action and have the action "set aside" under T.C.A. § 48-13-104.
A charter can further limit the power of the board of directors and even, if it has 50 or fewer shareholders, bestow upon another position some or all of the duties of a board of directors. T.C.A. § 48-18-101. This can greatly simplify the operations of small corporations.
In the second article of this series, I will complete the discussion of how a charter can be used to your benefit and therefore requires careful consideration in drafting.
It should be clear that it is not in your best interest to just print a form charter and file it. Instead, please consult with counsel before forming your next company. Further, if you used a form or simple charter when you formed your company, please consider contacting an attorney to have it revised to take advantage of all of the opportunities provided by law so that the charter can be carefully tailored to your unique circumstances.
This blog is not intended to create an attorney/client relationship or provide legal advice. Please contact the author if you have any questions or comments regarding the subject matter.