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Understanding Your Corporation | By: Multiple Speaker(s)

Understanding Your Corporation by Dyches Boddiford

Dyches (pronounced “Dikes”) Boddiford is one of the great undiscovered treasures of the world of real estate education. I , like others, once had an unreasonably difficult time understanding corporations, LLCs, and other entities and how they differed or worked together. After a single 2-hour presentation with Dyches, much of my confusion was cleared up. Dyches is a successful real estate investor from Atlanta, Georgia and a prolific author with books on corporations, IRAs, mobile homes, and bankruptcy, among others. This article is excerpted from “The Corporate Fortress”. You can get Dyches’ informative e-letter for free by going to www.assets101.com
There are many benefits to incorporating. From tax advantages to liability protection to ease of estate planning, corporations provide benefits that many real estate investors and small business owners should and do take advantage of.
Unfortunately, many people don’t understand their own corporations. They simply have an attorney draw up the paperwork and begin operating. But operating a corporation without understanding how it works can result in problems from the practical (not being able to keep accurate books) to legal (the corporation’s asset protection benefits can be destroyed by improper record keeping) to IRS issues (having the corporation disallowed for tax purposes).
That’s why it’s important that, even though you probably had an attorney draw up and file your corporate paperwork, you understand the basic building blocks of a corporation and how they affect the running of that corporation. Here’s a primer on some of the important definitions you need to know.
The Incorporator is the person (or persons) who handle the initial filings required by the state and the initial formation meeting of the corporation. Once this initial meeting is over, the incorporator turns over the new corporation to the board of directors and ceases to exist, except in one important way: in most states, the incorporator is a matter of public record. If you want to maintain a low profile, let someone else be the incorporator. Your attorney is a good choice.
The Stockholders, or Shareholders, own the corporation. They invest money (or property or office equipment or something else of value) in the corporation, and in return receive stock in the amount they invested. At the beginning of a corporation, the stockholders purchase stock to provide the initial capital to begin operations.
After the initial meeting, stockholders generally meet once a year as required by state law to be informed of the state of the corporation and elect directors. Stockholders do not vote directly on policy matters, but do control the corporation by electing (and un-electing) directors. This means that even if you are the only stockholder of your corporation, you should “meet” yearly and record the results of the meeting in your corporate book.
The Registered Agent (AKA Resident Agent, Statutory Agent) is the person designated to receive legal documents, such as subpoenas or lawsuit filings, for the corporation. You can be your own Registered Agent, or, for intimidation benefits, use an attorney.
The Directors oversee the affairs of the corporation according to what they think best. They set policy and elect officers, but do not get involved in the day-to-day running of the corporation. Because directors have certain legal immunities from lawsuits against the corporation, they should approve—in writing—important decisions like entering into long-term contracts (mortgages, for instance). A Board of Directors can consist of just 1 director—you.
The Officers are employees of the corporation and are charged with the duties and responsibilities of managing the business on a daily basis, including carrying out resolutions of the board of directors.
The President has overall day-to-day responsibility for operation of the business and is viewed as having the ultimate responsibility for the success of the corporation.
The Vice President can act for the President and is often delegated some tasks.
The Secretary keeps corporate records. Often, the Secretary must “certify” that another officer has the authority to take a certain action, such as opening a bank account or entering into a contract.
The Treasurer manages the financial affairs of the corporation and is responsible for keeping an accurate accounting of the business of the corporation.
Most states allow a single person to fulfill all of these roles. However, you must be sure to clearly designate the capacity in which you are acting when signing any documents. For instance, if you are signing the corporate minutes, it should be as “John Doe, Secretary, DoeCorp.” In signing a mortgage, the signature should read, “John Doe, President, DoeCorp.
The Articles of Incorporation are submitted to the state by the Incorporator as part of the application for corporate status. These articles must contain certain information required by the laws of the state. When the new corporation is granted existence by the state, a Certificate of Incorporation or Charter is issued as evidence.
The Bylaws are the rules that govern shareholders, directors, and officers of a corporation on a day-to-day basis. They govern things like how many votes are required to pass a motion and how much officers are to be paid. Unlike Articles of Incorporation, Bylaws are customized to the needs of the specific corporation. They can be changed by the directors at any meeting, but if any of the Bylaws are at odds with state law, the law prevails.
The Corporate Veil is an abstract concept referring to the invisible wall of protection between you and your corporation. When someone tries to sue you personally for actions of the corporation, this is referred to as an attempt to “pierce the corporate veil”. If you as an individual (as opposed to you as an officer or director) sign corporate documents, you make it easier for someone to sue you personally, claiming that the corporation is a sham.
To minimize the chances of this, you as a shareholder should not “run” your corporation. Instead, you should change hats and let your “officers” (which might also be you) and “directors” (ditto) do it for you. Always designate which hat you’re wearing, and make sure your corporation’s name is on the document. This is true even of checks!
This may seem silly, but remember that most corporate laws were drawn up for large corporations where different individuals held each position. You must follow and adapt these rules even in your small corporation.
Stock (or Shares) represents the ownership of a corporation and is represented physically by a Stock Certificate. One of the most common mistakes that allows the corporate veil to be pierced is failing to issue stock. The legal argument is that since no stock was issued, there are no stockholders, and therefore no directors could be elected. Since there are no directors, no officers could be appointed, and therefore everyone acting on behalf of the corporation did so personally, not as a protected officer or director of the corporation. Be sure to issue your stock certificates!
Buy-Sell Agreements specify how stock can be bought and sold between stockholders or third parties under different situations. This is VERY important, because I’ve seen many closely held corporations destroyed for lack of such an agreement.
This agreement should cover issues like: does the stockholder have the right to sell to anyone he wishes, or just to other stockholders? How will the stock be valued in a sale? What happens if one stockholder dies, becomes incapacitated, or divorces? If the corporation dissolves, how will the assets be split up?
Without such an agreement, problems between the stockholders can destroy the business. Don’t let this happen to you. Understand your corporation and the necessary formalities, and you can take advantage of the benefits for years to come.
Excerpted from The Corporate Fortress homestudy course, copyright Dyches Boddiford. To order, call 770-428-7846.

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