Most of the corporations MBBA services were started by the incorporation of small sole proprietorships, or small partnerships. Although the basic principles are the same regardless of the size, larger incorporations can become quite complicated.
Once the corporation has been formed, a first meeting is held, By-Laws are adopted, directors and officers elected, bank accounts, are authorized, form of stock certificate adopted, etc. The amount of authorized capital has been set forth in the Articles of Incorporation. Other items will be included, possibly related to the amount and nature of capital contributions. This missive will not cover wording of “minutes;” only what “should ” take place” in starting the corporate business.
Many lawyers (hopefully not CPA’s”) just issue stock as part of forming the corporation in the total authorized amount and shares as set forth in the Articles of Incorporation. This is WRONG.
The Articles set forth the MAXIMUM capitalization of the corporation. It is wise to not issue the maximum authorized; one might wish to increase the shares outstanding at a later date for various reasons not to be covered in this limited missive.
How the corporation is to be capitalized is a subject for careful planning, and relates to what assets and or liabilities are to be CONTRIBUTED to the new corporation.
Assets contributed will be “some cash,” and usually all of the equipment used in the business before incorporation. If there is debt related to equipment, that would normally be contributed, also. Sometimes accounts receivable and accounts payable. If the business has been profitable, it might be desirable to set up “goodwill” as one of the startup assets to give a realistic value to the business on its balance sheet.
Depreciable assets can be contributed at “fair market value,” which might be more than “book value.” These assets may be worth far more than book value, and it is good accounting to have realistic values on the books in order to present a proper balance sheet to bankers, investors, and others.
If assets are contributed at more than the depreciated value for tax purposes, it is necessary to have separate depreciation schedules for taxes than for financial statements.
Because of this most owners of SMALL closely held corporations elect to use book value to keep “things simple.”
Once the total net value of ALL start up assets has been decided upon, it is THEN necessary to give thought to how this will be handled in “capitalizing” the corporation.
The simple way, if for example this total equals $35,000, is to issue, for instance, 35,000 shares valued at $1 per share. This rarely is the best way.
Once capital is put into the corporation as permanent capital, it cannot be removed, until all creditors have been paid, etc. It is there until the corporation is dissolved.
It might be better for instance, to only issue 5,000 shares of stock, and $30,000 in notes payable to shareholders with interest to be paid to the shareholders on this debt.
Further, one might want to issue the stock at a stated value of $10 per share, but only issue 35 shares, which would show issued and outstanding stock of only $3500 with “Paid in Surplus” (on the total $35,000 investment) of $31,500.
Using this method allows flexibility in taking in new investors, or for selling a part of ones shares to another party. The stated value would always be the $5 per share, but the price for either selling additional shares or selling part of your shares can vary “all over the place.” (Paid in Surplus can be either positive or negative.)
This is rather a short presentation, but the primary purpose is to alert business owners to the need to carefully consider how the capitalization will be completed BEFORE the stock is issued.
