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formation in Delaware (or any state other than the site of the corporation‟s principal place of business)
will subject the corporation to additional, unnecessary expense. It is, thus, usually advisable to
incorporate in the company‟s home state.
The charter sets forth the corporation‟s name (which cannot be confusingly similar to the name of
any other corporation operating in the state) as well as its principal address. The names of the initial
directors and officers of the corporation are often listed. Most states also require a statement of
corporate purpose. Years ago this purpose defined the permitted scope of the corporation‟s activities.
A corporation that ventured beyond its purposes risked operating ultra vires, resulting in liability of its
directors and officers to its stockholders and creditors. Today, virtually all states allow a corporation
to define its purposes extremely broadly (e.g., “any activities that may be lawfully undertaken by a
corporation in this state”), so that operation ultra vires is generally impossible. Still, directors are
occasionally plagued by lawsuits brought by stockholders asserting that the diversion of corporate
profits to charitable or community activities runs afoul of the dominant corporate purpose, which is to
generate profits for stockholders. The debate over the responsibility of directors to corporate
stakeholders (employees, suppliers, customers, neighbors, and so forth) currently rages in many forms,
but is normally not a concern of the beginning entrepreneur. Issues of corporate governance are further
discussed in Chapter 10.
Corporate charters also normally set forth the number and classes of equity securities that the
corporation is authorized to issue. Here an analysis of a bit of jargon may be appropriate. The number
of shares set forth in the charter is the number of shares authorized, that is, the number of shares that
the directors may issue to stockholders at the directors‟ discretion. The number of shares issued is the
number that the directors have in fact issued and is obviously either the same or smaller than the
number authorized. In some cases, a corporation may have repurchased some of the shares previously
issued by the directors. In that case, only the shares that remain in the hands of shareholders are
outstanding (a number obviously either the same or lower than the number issued). Only the shares
outstanding have voting rights, rights to receive dividends, and rights to receive distributions upon full
or partial liquidation of the corporation. Normally, we would expect an entrepreneur to authorize the
maximum number of shares allowable under the state‟s minimum incorporation fee (e.g., 275,000
shares for $275 in Massachusetts), and then issue only 10,000 or so, leaving the rest on the shelf for
future financings, employee incentives, and so forth.
The charter also sets forth the par value of the authorized shares, another antiquated concept of
interest mainly to accountants. The law requires only that the corporation not issue shares for less than
the par value, but it can, and usually does, issue the shares for more. Thus, typical par values are $0.01
per share or even “no par value.” Shares issued for less than par are watered stock, subjecting both the
directors and holders of such stock to liability to other stockholders and creditors of the corporation.
Corporations also adopt bylaws that are not filed with the state but are available for inspection by
stockholders. These are usually fairly standard documents, describing the internal governance of the
corporation and setting forth such items as the officers‟ powers and notice periods for stockholders‟
meetings.
Formation of Limited Partnerships