What is Articles of Incorporation and a Certificate of Formation?
A Certificate of Formation, formerly referred to as “Articles of Incorporation,” is the organizational document filed with the Texas Secretary of State that is required when a new corporation or limited liability company is formed. A Certificate of Formation provides the basic information needed to register your new organization with the Texas Secretary of State.
Who should file a Certificate of Formation? Limited liability companies, for-profit corporations, non-profit corporations, professional corporations, and close corporations.
The main purpose of a Certificate of Formation is to give the state a written document to keep on file. This document can be as short and simple or as long and complicated as you want it to be. There are certain pieces of information required in order to get approval from the state (more, if you are filing a series LLC).
Is it Similar to Articles of Incorporation?
Like its predecessor, Articles of Incorporation, the minimum requirements for a Certificate of Formation are:
- Company Name. The name you choose must be sufficiently unique that it will not cause confusion to the public between your company and that of another with a similar name. To reduce the chances of another company claiming first use of the name, check the Texas Secretary of State’s website, the U.S. Patent and Trademark Office’s online trademark database, and Google to check if anyone else is using the name you want to use.
- Name and Address of Registered Agent. Texas requires all entities doing business in the State of Texas to maintain a registered agent, which is a person or business entity that has consented to accept legal documents on behalf of your company. Only a resident of Texas or a business entity registered with the state can be appointed as a registered agent, which can be someone at your company, a third-party agency service, or your attorney.
- Physical Address. You must include the address of the registered agent in your Certificate of Formation. This address is the place where the registered agent can be reached during business hours. It must be a physical address, not a post office box or mail service.
- Names and Addresses of Directors/(Managing) Members. Directors/ (Managing) Members are the individuals chosen by the shareholders/members to oversee the management of the corporation or the LLC. You must include the names and addresses of the initial directors and the Managing Members (or, if all the members will be managing the LLC, then all the Members). When providing each director’s address, remember that the Certificate of Formation will become public record, so consider listing a business address or P.O. Box instead of the individual’s home address.
- The Total Number of Shares the Corporation has been Authorized to Issue. This applies to corporations, not LLCs. Not all shares have to be issued, which provides the flexibility to add more shareholders at a later date without any of the then existing shareholders having to relinquish any of their current shares, but must be listed in the Certificate. The shareholders must also determine if the shares are to have a stated par value or if the shares will be without a stated par value. “Par value” means the stated dollar amount or value per share. For example, if the par value is $2/share then the corporation should receive $200 when it sells 100 shares of stock to an investor. Otherwise, the organization documents can declare that the shares are to be without a stated par value. These shares can then be issued for whatever is determined by the board of directors.
For-profit and professional corporations may also choose to issue more than one class of shares (e.g., Class A, Class B). In this case, the Certificate must list the specific classes and their par value or a statement that each class is without par value; and the preferences, limitations, and relative rights of the shares. Further, if classes of shares consist of more than one series, the Certificate must detail for each series: its designation; the aggregate number of shares authorized; any preferences, limitations, and relative rights of the shares to the extent provided in the Certificate of Formation; and any authority vested in the board of directors to establish the series and set and determine the preferences, limitations, and relative rights of the series.
- The general type of business being formed. Commonly, a corporation will simply say that it is formed to perform any lawful purpose. This is important because if the corporate documents state one type of business purpose, such as real estate development, and later the corporation decides to start a roofing or plumbing or framing division, those activities will be outside the company’s charter unless the Certificate is modified.
What other documents might be needed in a Certificate of Formation?
If your corporation has more than one shareholder or director, you should also consider having Bylaws and if your LLC will have more than one member, you should consider an Operating Agreement. Commonly, a lender or banker may require Bylaws or an Operating Agreement so they know what powers are granted to whom, such as the authority to bind the company or open a bank account. Unlike the Certificate of Formation or Articles of Incorporation, the Bylaws or Operating Agreement is an internal company document not filed with the state that governs the affairs and many aspects of the life of the company (such as membership terms etc.).
Recommended for inclusion in the Bylaws/Operating Agreement are: when and how a shareholder/member may be added or removed; sales of shares or interests (and first right of refusal); what happens if a shareholder/member finds his or herself in bankruptcy; tax treatment; and the sale or dissolution terms for the corporation. Both documents – the Certificate of Formation and Bylaws/Operating Agreement – are necessary for each business structure to function optimally in the business community. Due to their complexity and importance for your business, we recommend the Certificate of Formation and Bylaws/Operating Agreement be prepared by an attorney following consultation regarding the goals of the shareholders.
Incorporating minutes will be the first minutes your company takes. These will set up the officers of the company (President, Secretary, Treasurer, etc.), if any, ratify the Organizer’s actions (the organizer is the person who filed the Certificate of Formation formally known as Articles of Incorporation), adopt the Bylaws/Operating Agreement, and any other preliminary matters.
Depending on the nature and location of your business, you may have to obtain state or local business licenses. Contact the Texas Department of Licensing and Regulation to find out more. If you are planning to sell goods and collect sales tax, you must register with the state’s Comptroller of Public Accounts. You will also need to apply for an Employer Identification Number (EIN) from the IRS.
Remember too that all entities registered to do business in the State of Texas must file yearly Public Information Reports (PIRs) with the Texas Secretary of State and a Franchise Tax Report with the Texas Comptroller. Failure to do so will result in forfeiture of the entity’s right to do business in Texas and renders the shareholders personally liable for the debts of business.
If you’d like additional information about what is Articles of Incorporation or what a Certificate of Formation is, please reach out to us! We’re happy to help and have the expertise you need.
© Karen Ensley and Brian Benitez, Ensley Benitez Law, PC, 2021. All rights reserved. This article is provided for educational reasons exclusively and is not meant to be construed as legal advice. Ensley Benitez Law, PC, will represent you only after being retained and that agreement is made in writing.