230 Planning and Forecasting
chapter. Also, formation in Delaware (or any state other than the site of the
corporation’s principal place of business) will subject the corporation to addi-
tional, unnecessary expense. It is thus usually advisable to incorporate in the
company’s home state.
The charter sets forth the corporation’s name (which cannot be confus-
ingly similar to the name of any other corporation operating in the state) as
well as its principal address. The names of the initial directors and officers of
the corporation are often listed. Most states also require a statement of corpo-
rate purpose. Years ago this purpose defined the permitted scope of the cor-
poration’s activities. A corporation which ventured beyond its purposes risked
operating “ultra vires,” resulting in liability of its directors and officers to its
stockholders and creditors. Today virtually all states allow a corporation to de-
fine its purposes extremely broadly (e.g., “any activities which may be lawfully
undertaken by a corporation in this state”), so that operation ultra vires is gen-
erally impossible. Still directors are occasionally plagued by lawsuits brought
by stockholders asserting that the diversion of corporate profits to charitable
or community activities runs afoul of the dominant corporate purpose, which
is to generate profits for its stockholders. The debate over the responsibility
of directors to so-called corporate “stakeholders” (employees, suppliers, cus-
tomers, neighbors, and so forth) currently rages in many forms but is normally
not a concern of the beginning entrepreneur.
Corporate charters also normally set forth the number and classes of eq-
uity securities that the corporation is authorized to issue. Here an analysis of a
bit of jargon may be appropriate. The number of shares set forth in the charter
is the number of shares authorized, that is, the number of shares that the di-
rectors may issue to stockholders at the directors’ discretion. The number of
shares issued is the number that the directors have in fact issued and is obvi-
ously either the same or smaller than the number authorized. In some cases, a
corporation may have repurchased some of the shares previously issued by the
directors. In that case, only the shares which remain in the hands of sharehold-
ers are outstanding (a number obviously either the same or lower than the
number issued). Only the shares outstanding have voting rights, rights to
receive dividends, and rights to receive distributions upon full or partial liqui-
dation of the corporation. Normally, we would expect an entrepreneur to au-
thorize the maximum number of shares allowable under the state’s minimum
incorporation fee (e.g., 200,000 shares for $200 in Massachusetts) and then
issue only 10,000 or so, leaving the rest on the shelf for future financings, em-
ployee incentives, and so forth.
The charter also sets forth the par value of the authorized shares, another
antiquated concept of interest mainly to accountants. The law requires only
that the corporation not issue shares for less than the par value, but it can, and
usually does, issue the shares for more. Thus, typical par values are $0.01 per
share or even “no par value.” Shares issued for less than par are watered stock,
subjecting both the directors and holders of such stock to liability to other
stockholders and creditors of the corporation.