When Incorporating, Stay Off The “Highway of Sorrow” For There May Be No Turning Back

As an erstwhile player of the five-string banjo, I’m a big fan of Bluegrass music.  One of my favorite songs is the rueful “Highway of Sorrow” as performed by the great flat pick guitar player Doc Watson.  The song includes these mournful lines:

I’m heading for destruction, I’m on the wrong track

Down the highway of sorrow, there’s no turning back

Organizing a corporation can lead you on to the Highway of Sorrow.  Once you’re on the wrong track, it can be costly, time consuming and even impossible to get on the right track.  Over the years, I’ve seen a number of corporate formations that have gotten off on the wrong track.  I’m passing along a few of these in the hope that it will keep some of you off of the Highway of Sorrow:

  • In one case, I happened to notice that one person had signed the articles as the incorporator (Cal. Corp. Code § 200(b)) and a different person had signed the action by sole incorporator.  This is a problem because under Section 210 of the Corporations Code, only the incorporator has the authority to take the necessary steps to complete the formation of the corporation.
  • Specifying the wrong number of directors.  Corporations Code Section 212 is quite specific about the minimum number of directors.  After shares have been issued, the number of authorized may not be less than three with two exceptions: so long as a corporation has only one shareholder, the authorized number of directors may be one; so long as a corporation has only two shareholders, the authorized number of directors may be two.
  • Specifying an incorrect range of directors.  Rather than specifying a fixed number of directors, the bylaws or articles may specify a minimum or maximum number of directors with the exact number to fixed by approval of the board or shareholders as specified in the bylaws.  Section 212 specifies that the maximum may not be more than two times the stated minimum minus 1.  If, for example, the minimum is 5, the maximum may not be more than 9 ((2×5)-1).

You can hear Doc Watson sing the “Highway of Sorrow” on his Riding the Midnight Train album.

 

Topics:  Business Formation, Choice of Entity, Incorporation

Published In: Business Organization Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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