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How to Form an Arizona Corporation Memorandum

Memorandum to Officers & Directors of a Newly Formed Arizona Corporation

by Richard Keyt

December 29, 2001

The following is a Memorandum that KEYTLaw sends to the officers and directors of corporations that it forms.  The memo briefly discusses many issues that arise from forming a new corporation in Arizona.  See the related KEYTLaw article called How to Form an Arizona Corporation.

The legal formalities associated with the incorporation of Newcorp, Inc., have been satisfied.  Your corporate minute book and stock records are current and complete.  Your Articles of Incorporation have been filed, and your Bylaws have been adopted.  Shares of stock of the corporation have been issued, and the minutes of your Board of Directors reflect appropriate authorization for these initial steps.

The operation of your business in the corporate form may seem to be complex.  To make it easier and more understandable for you, your employees, and your advisors, we urge you to read this memorandum with care.  

This memorandum does not constitute an opinion of law.  It is designed to serve only as a broad outline.  Specific questions should be directed to your attorney or accountant.

As a matter of sound practice, your accountant and your attorney should meet with you at least annually, preferably early in the last month of each fiscal year, to make certain that all necessary corporate steps are taken.  

1.  Lawful Activity.  Note that your Articles of Incorporation state that the corporation may engage in the business of making widgets, by and through its officers, agents, and employees.  If you have any questions regarding the lawfulness of any activity of your corporation, do not hesitate to call us.  

2.  Accounting.  The officers and directors of the corporation are responsible for making certain that the accounting practices and auditing procedures customarily followed by similar businesses are observed in proper and timely fashion by the corporation.  Accordingly, your accountant should be kept currently and consistently informed regarding all of your corporation’s business activities. 

We have not filed an application for the corporation's federal employer identification number.  You should contact your accountant and ask him or her to file an application for a federal employer identification number and a state employer identification number, if necessary. 

Your accountant is familiar with the state, federal, and local tax requirements concerning the reporting of all transactions by your corporation.  He or she will, moreover, assist you in meeting all record-keeping requirements imposed upon your business by reason of its incorporation.  For example, your accountant will set up a new set of books.  Your accountant will prepare necessary budget and cash forecast data to enable you to determine when your corporation should pay salaries.

You should resolve with your accountant questions regarding tax elections, transfers of accounts receivable, and the payment of your accounts payable.   All assets transferred by you to the corporation should be appropriately entered upon the books of the corporation by your accountant.  Any assets so transferred become the property of the corporation.  In the event that you contribute additional cash or other assets to your corporation, please notify us so that we  can prepare an additional stock certificate for you.  Preparing a new stock certificate is an important step in evidencing your tax basis in your stock and preserving your right to claim ordinary losses on your investment under the Internal Revenue Code, should the need arise.

All of your business insurance (public liability, disability, workmen’s compensation, and general) must be acquired by the corporation in its name as the insured, either by assignment or binder.  Accordingly, an analysis of your insurance requirements should be made by your accountant, and your insurance agents should be instructed to make any necessary transfers or purchases of new coverages immediately upon commencement of business by your corporation.  

Your accountant will advise you of when your first fiscal year will end, of what tax elections should be made by you at that time, and of all matters related to the preparation and filing of tax returns and the Annual Report to the Arizona Corporation Commission.    

3.  Preliminary Steps to be Taken.  With the assistance of your accountant and, where necessary, with the assistance of your attorney, the following initial steps must be taken immediately:

a.  Your letterhead, billheads, etc., if any, should reflect the full name of the corporation, including the expression denoting corporate existence.  

b.  All of your business cards should be similarly changed to reflect the corporate name.  

c.  Your bank account should reflect the corporate name.  A new bank account opened in the name of the corporation on bank signature cards and forms provided by your bank has been authorized in the action by consent or minutes of the first meeting of your Board of Directors. 

d.  Any loans that you have made relating to your business should be transferred to and assumed by the corporation when and if your accountant determines that no adverse tax consequences will result from the assumption of liability.  New loans made after you commence business in the corporate form should be made in the name of the corporation, even though you may be required to enforce or guarantee the same personally.  Whenever a loan is made, it should be approved by a meeting of the Board of Directors of your corporation and an appropriate resolution should be adopted and inserted in the minute book of the corporation.  

e.  Your business telephone listing and your listing in all trade journals and business directories should be changed to reflect the corporate name, as the opportunity arises.  

f.  All leases, contracts, and other arrangements that you have regarding your equipment, supplies, office premises, or furniture, or any other contracts or arrangements that you have previously entered into in connection with your business should be modified, assigned, or rewritten to reflect that the corporation has replaced you entirely as the contracting party to each lease, contract, or obligation.  

g.  The name on the door of your office and any directory or any other signs that you exhibit should be changed to reflect the new corporate name. 

h.  New workmen’s compensation insurance, as noted above, on all of the principals, including yourself, and on all other corporate employees should be acquired in the corporate name.  All insurance policies, except personal policies on your life and health, should be transferred to the corporation.  After careful study by your accountant and insurance advisers, you may elect to transfer certain personal life insurance obligations and contracts to the corporation.  

4.  Corporate Formalities.  It is critical that you take appropriate steps to maintain the formal integrity of your new corporation.  The corporation has a life and existence of its own separate and apart from all other entities and individuals.  All important corporate business transactions should be approved by the Board of Directors or shareholders, either at a meeting of the directors or shareholders or by the unanimous consent of all the directors or shareholders without a meeting.  The decisions adopted at meetings of directors and shareholders should be memorialized in written minutes of meetings or in resolutions adopted by the unanimous consent of the Board of Directors or shareholders when action is taken without a meeting.

All contracts, including employment contracts, buy-sell agreements, profit sharing plans, pension plans, trust agreements, loans, leases, purchase contracts, and corporate brokerage and investment accounts should be made in the name and on behalf of the corporation and should be memorialized by appropriate minutes or resolutions of unanimous consent in the corporate minute book.  When signed, these documents should be kept in the minute book or in corporate files, appropriately identified in your minute book.  

Without limiting the significance of the foregoing general admonitions, it is most important to realize that you are going to be required to formally consider, review, and act upon the following:

a.  Salary and Bonus.  It will be essential for you to establish and adjust, from time to time, the salaries and bonuses of all employees of the corporation, including yourself.  If your corporation adopts an employee pension benefit plan, e.g., a pension or profit sharing plan, you are also going to be required to make regular contributions to the plan based upon the total amounts of compensation paid to employees who are plan participants during the year for which contributions are made.  If the amounts to be contributed under the plan are discretionary, the amounts should be fixed by an appropriate resolution of the Board of Directors adopted before the end of the fiscal year of the plan.  

b.  Issuance of Additional Shares of Stock.  The Board of Directors has the exclusive power to authorize the issuance of additional shares of corporate stock.  Any time corporate stock or securities are issued, the transaction must be memorialized by appropriate minutes or unanimous consents of the Board of Directors.

c.  Corporate Minute Book.  If you need to change the number of directors, shareholders, or officers, please call us for guidance in handling the necessary corporate changes and preparing the appropriate corporate minutes or unanimous consents.   

d.  Use of Corporate Seal.  We have provided you with a corporate seal, which is found in the front of your minute book.   Although there is no legal requirement that a corporate seal be used on any documents under Arizona law, some financial institutions require that you use this in connection with corporate resolutions, loan documents, notes, and the like.  You will observe that there is a place for the corporate seal, for example, on your stock certificates. 

5.  Corporate Disagreements.  Most questions concerning corporate formalities can be resolved by referring to the Bylaws, employment contract(s), and other documents that are in the minute book or that are being prepared and which will be to you in the near future.  If any serious dispute arises among the shareholders and/or directors of your corporation, legal counsel should be sought before the matter escalates to the point of causing irreparable damage to the business.  

6.  Basic Responsibilities of Directors and Officers. 

a.  Employee Salaries.  The officers of the corporation who are responsible for paying salaries must see that salaries are paid by the corporation or they may be subject to criminal penalties under Arizona law.

b.  Payroll Taxes.  All payroll taxes must be paid by the corporation.  Nonpayment may subject the officers and directors personally to civil and/or criminal liability.  

c.  Loans to Directors.  The corporation may loan money to the directors of the corporation only with the prior approval of the shareholders.  If the corporation loans money to any of the other directors, you should remember that you can be personally liable for that loan if it is not repaid. Loans to shareholders should be scrutinized carefully because of potential adverse tax consequences.  In this regard,  you should consult your tax advisor about interest rates and how to structure the loan any time the corporation proposes to borrow or lend property or services to its shareholders, directors, employees, or others who perform services for the corporation.  We suggest that you contact us regarding the proper documentation of the loans by or to the corporation.

d.  Duty to Inspect.  A director has the absolute right to inspect all corporate books, records, documents, and property at any time.  If he does not exercise that right, he may be held liable for negligence if the corporation suffers a loss or its creditors suffer a loss because the director fails to exercise proper diligence.  

e.  Distinction between Officers and Directors.  Directors control the policy of the corporation, and officers put that policy into effect.  This difference must be understood. A director may not delegate his authority.  For example, a director may not give his proxy to vote at a meeting of the Board of Directors.  An officer, generally, may delegate his responsibility and authority.

The officers of the corporation serve at the pleasure of the Board of Directors.  Even though an officer may have an employment contract that provides him with compensation rights, he may be removed from office at any time by the Board of Directors. A director, on the other hand, may be removed only by the shareholders.  A director or officer may resign at any time.  A resignation is effective when notice of the resignation is delivered to the corporation.  A resignation does not have to be accepted by the Board of Directors, the shareholders, or by an officer.  The remaining directors may appoint a new director or fill a vacancy without approval of the shareholders. The shareholders may also elect a director to fill a vacancy that has not previously been filled by the Board of Directors.  Directors (not the shareholders) establish salaries.  

f.  Dividends.  It is the directors who have the power to declare dividends, not the officers.  Before declaring dividends, however, you should consult with both your accountant and your attorney because of the tax implications.  

g.  Duties to Corporation and Shareholders.  A director or officer may not compete with his own corporation or take business opportunities of the corporation for his own benefit. In any event, all such transactions will probably have to be disclosed, as a general matter, to the shareholders of the corporation in any corporation where there is a difference between the officers and directors, on the one hand, and the shareholders on the other.  A director ordinarily is not entitled to compensation for his services as a director unless the compensation is payable under a contract, by an appropriate by-law, or by a corporate resolution.  Remember, the directors have the additional power to fix the salaries of all of the officers.  

h.  Other Liabilities.  The director of a corporation must be concerned not only with the ordinary sources of liability, which include improper declaration of dividends or repurchase of corporate shares, fraudulent entries in the corporate books or reports, failure to properly supervise the operations of the corporation, and failure to pay compensation to employees or properly withhold payroll taxes.  In addition, the director of a corporation must also be concerned with compliance by the corporation with all of its obligations under the statutes applicable to it as a corporation.  Each director should make certain that the corporation is in good standing with the taxing authorities and the Corporation Commission of the State of Arizona; that each of its officers, directors, shareholders, and employees is appropriately licensed, to the extent that licenses are required by law; that the affairs of the corporation are conducted in compliance with laws and all applicable rules and regulations of any agency regulating the business in which the corporation is engaged; and that the corporation makes appropriate reports to any agency regulating the business of the corporation within the required time.

7.  Termination and Dissolution of Corporation.  The corporation should not be terminated or dissolved without consulting with the accountant for the corporation and with us. No pension or profit sharing plan or other compensation agreement should be terminated or altered without careful review and study by the advisers of the corporation.  

We hope that the foregoing will prove helpful.  If you have additional questions, please call us.  

KEYTLaw, L.L.C.

ATTORNEYS AT LAW

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This page was last modified on July 22, 2007.

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