Drafting an Agreement to Incorporate

An agreement to form a new corporation, sometimes called an “agreement to incorporate”, should be considered as a valuable opportunity to reduce to writing the understanding of the founders regarding the general terms and conditions associated with the formation and initial organization of the new corporation. The content of an agreement to incorporate will vary depending upon the circumstances; however, the matters commonly covered in such an agreement include the names and addresses of the parties; the proposed name of the corporation and a description of the procedures that will be followed to check the availability of the name and reserve it for future use on behalf of the corporation; a description of the proposed purpose and activities of the corporation; a summary of the place or places where it is anticipated that the corporation will conduct its business, including a statement of the procedures that will be followed in order to qualify the corporation as a foreign corporation; a description of the proposed capitalization of the corporation, including subscriptions by the founders; a list of the incorporators, initial directors and officers of the corporation; and a description of the terms of engagement of any persons required to assist in the incorporation process, such as lawyers, accountants or appraisers. 

Other matters which might be covered in an agreement to incorporate include a description of the terms of any proposed employment relationship between the new corporation and any of the founders; the general terms of any share transfer restrictions and/or buy-sell arrangements among the corporation and its future shareholders; a description of any proposed purchase of assets by the new corporation, which will be relevant whenever the new corporation is going to take over the operations of a going concern; and a description of the procedures that will be followed in offering shares to persons not otherwise affiliated with the founding group, including the preparation of an offering document, engagement of finders and payment of the fees and expenses associated with complying with any securities law requirements. 

The agreement to incorporate is also the place to address specific tax and regulatory issues associated with the formation and operation of the new corporation.  For example, if the new corporation is being formed in the US and the founders wish to have it treated as a Subchapter S corporation for federal income tax purposes, the agreement should contain various covenants regarding the steps that will be taken to perfect and maintain Subchapter S status.  In the case of regulated businesses it will be necessary to ensure that the corporation can obtain the appropriate license or permit.  Compliance with securities laws should also be addressed if shares will be offered to outside parties.  Finally, if an existing legal entity, such as a partnership, is being converted to a corporation, agreement should be reached on the assets that will be transferred to the new corporation and the number of shares that the owners of the old entity will receive in exchange and attention must be paid to ensuring that they achieve the tax treatment they are expecting with respect to the conversion. 

Table 3.1

Matters to Consider in Drafting an Agreement to Incorporate

1. Names and addresses of the parties;

2. The proposed name of the corporation and a description of the procedures that will be followed to check the availability of the name and reserve it for future use on behalf of the corporation;

3. A description of the proposed purpose and activities of the corporation;

4. A summary of the place or places where it is anticipated that the corporation will conduct its business, including a statement of the procedures that will be followed in order to qualify the corporation as a foreign corporation;

5. A description of the proposed capitalization of the corporation, including subscriptions by the parties;

6. A list of the incorporators, initial directors and officers of the corporation;

7. A description of the terms of engagement of any persons required to assist in the incorporation process, such as lawyer, accountants or appraisers;

8. A description of the terms of any proposed employment relationship between the new corporation and any of its organizers and/or promoters;

9. The general terms of any buy-sell arrangements among the corporation and its future shareholders;

10. If the principals wish to have the corporation treated as a Subchapter S corporation for tax purposes, the agreement may contain various covenants regarding the steps that will be taken to perfect and maintain Subchapter S status;

11. A description of any proposed purchase of assets by the new corporation, which will be relevant whenever the new corporation is going to take over the operations of a going concern;

12. When subscriptions will be sought from persons not otherwise affiliated with the founding group, a description of the procedures that will be followed in making the offering, including the preparation of an offering document, engagement of investment bankers and payment of the fees and expenses associated with complying with any securities law requirements; and

13. If an existing business will be incorporated, a description of the assets that will be transferred to the new corporation, the shares that will be issued in exchange for each proprietor's interest and a summary of the tax elections that will be made in connection with the incorporation.

 

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s