What a Corporation Is

At its core, a corporation is a legal person — an entity that exists independently of its owners and continues regardless of changes in ownership. This separateness is the source of both its primary benefit (liability protection) and its primary tax burden (double taxation).

A corporation has three constituencies that must work together:

• Stockholders — the owners. They own shares of stock, elect the board of directors, and vote on certain major decisions. They generally do not manage day-to-day operations.
• Board of Directors — the governing body. The board is responsible for strategic oversight and major decisions. It appoints and oversees the officers. Under Delaware law, the board has authority over all corporate management unless otherwise provided in the certificate of incorporation. See DGCL § 141(a).
• Officers — the managers. Officers (CEO, President, CFO, Secretary, etc.) are appointed by the board and manage day-to-day operations. They have authority to bind the corporation within the scope of their positions.

Delaware vs. Oklahoma: Where to Form

The first formation decision for a corporation is where to incorporate. This choice has significant implications.

Why Delaware Is the Default for Corporate Formation

Delaware has been the preferred state of incorporation for corporations — especially publicly traded and investor-backed companies — for over a century. The reasons are well established:

• Sophisticated corporate law. The Delaware General Corporation Law (DGCL) is the most comprehensive and refined corporate statute in the United States. It has been interpreted by decades of case law from Delaware's specialized business court.
• The Court of Chancery. Delaware has a dedicated business court — the Court of Chancery — with judges (called Chancellors) who specialize in corporate law. Cases are decided by judges, not juries, and the decisions are predictable, reasoned, and consistent.
• Investor preference. Institutional investors, venture capital firms, and sophisticated acquirers expect Delaware corporations. Deviating from this standard can create friction in fundraising and M&A.
• Path to IPO. The securities markets and their infrastructure are built around Delaware corporations. Any company that might someday go public should almost certainly be a Delaware corporation.

When Oklahoma Formation Makes Sense

For CLF clients, an Oklahoma corporation often makes more sense when:

• The business is local and will never seek institutional investment or pursue an IPO.
• Simplicity and cost are priorities — Oklahoma corporate law is simpler and filing fees are lower.
• The client is familiar with Oklahoma law and prefers local counsel to govern any disputes.
• The entity will conduct primarily Oklahoma business and foreign qualification in Oklahoma would be an additional cost if formed in Delaware.

Formation Mechanics

Forming a corporation involves several sequential steps. The following applies to a Delaware corporation; Oklahoma formation is similar but uses different document names and has different fee and timing rules.

Step 1: Choose a Name

The corporation's name must be available (not already in use by another Delaware entity), unique, and include a corporate designator — "Inc.," "Corp.," "Incorporated," or "Corporation." Precision matters: "NewCo Inc." and "NewCo, Inc." are technically different names.

Step 2: Appoint a Registered Agent

Delaware requires every corporation to have a registered agent with a physical Delaware address to accept legal documents. Many companies use commercial registered agent services. The same service often handles the filing itself.

Step 3: Prepare and File the Certificate of Incorporation

The certificate of incorporation (in Delaware; most states call this the "articles of incorporation") is the founding document filed with the Delaware Division of Corporations. It establishes the corporation's legal existence. At minimum, it must contain:

• The corporation's name.
• The address of the registered office and the name of the registered agent.
• The nature of the business (typically broad — "any lawful business").
• The total number of authorized shares and the par value per share (or that shares are without par value).
• The name and mailing address of the incorporator.

The certificate may also include optional provisions — exculpation of director liability for duty of care breaches (DGCL § 102(b)(7)), indemnification rights, and other governance customizations.

Step 4: Draft the Bylaws

Bylaws are the corporation's internal governance rules. They regulate the operation of the board of directors and stockholder meetings, define officer positions and authority, and address a host of practical governance matters. Your firm will almost certainly have standard bylaws precedents — ask for them and study their structure before you are asked to modify or review bylaws.

Step 5: Hold the Organizational Board Meeting

The incorporator appoints the initial board, and the board then takes organizational actions typically including:

• Adopting the bylaws.
• Appointing the officers.
• Authorizing the issuance of initial shares of stock.
• Selecting a bank and authorizing a bank account.
• Setting the fiscal year.
• Approving the form of stock certificate.

These actions are documented in board meeting minutes or, more commonly, a written consent in lieu of a meeting.

Step 6: Issue Shares and Obtain an EIN

Shares must be issued to the founders (and any other initial stockholders) against payment of the consideration — cash, property, or services. The corporation must apply to the IRS for an Employer Identification Number (EIN), which is required for tax filing, banking, and most other purposes.

Stock Fundamentals

Corporate ownership is divided into shares of stock. Understanding the basics of stock structure is essential for anyone working on corporate matters.

Authorized vs. Issued Shares

The certificate of incorporation authorizes a maximum number of shares the corporation may issue. This is the "authorized" share count. The corporation does not have to issue all authorized shares — it issues what it needs. "Issued and outstanding" shares are those actually held by stockholders.

Why authorize more shares than you issue? Because issuing new shares later (to investors, employees, or in acquisitions) requires only board approval if shares remain available in the authorized pool — but increasing the authorized share count requires amending the certificate, which requires stockholder approval. Founders typically authorize a large pool at formation to preserve flexibility.

Common vs. Preferred Stock

A C corporation may issue multiple classes of stock with different rights and preferences, subject to the certificate of incorporation. The two basic types:

• Common stock is the basic equity interest. Common stockholders have residual rights — they receive dividends and liquidation proceeds after all preferred holders are paid. Founders and employees typically hold common stock.
• Preferred stock has contractual preferences over common stock — typically a priority in dividends and liquidation, and often various protective rights (vetoes over certain corporate actions, anti-dilution protection, board seats). Outside investors (venture capital, private equity) typically take preferred stock.

Par Value

Par value is a minimum price below which shares cannot be issued. It is largely a historical artifact with little practical significance today. Most Delaware corporations set par value extremely low (often $0.0001 per share) to minimize Delaware franchise taxes while maintaining technical compliance with the DGCL. The stock's actual issuance price and fair market value are entirely separate concepts from par value.

Corporate Governance Structure

The Board of Directors

The board is the corporation's governing authority. It does not manage the day-to-day business — that is the officers' job — but it sets strategy, hires and fires the CEO, approves major transactions, and has fiduciary duties to the corporation and its stockholders.

Key board mechanics:

• Directors are elected by stockholders, typically at annual meetings.
• The board acts by majority vote at a duly noticed meeting with quorum, or by written consent.
• The board may delegate authority to committees (audit, compensation, nominating) and to individual directors or officers for specific purposes.

Stockholder Approval Requirements

Certain major decisions require stockholder approval beyond the board — typically by majority vote of outstanding shares, though some require a supermajority. Under the DGCL, stockholder approval is required for:

• Mergers and consolidations. DGCL § 251(c)
• Sale of all or substantially all of the corporation's assets. DGCL § 271(a)
• Dissolution. DGCL § 275(b)
• Amendments to the certificate of incorporation. DGCL § 242

Fiduciary Duties of Directors and Officers

Directors and officers owe fiduciary duties to the corporation and its stockholders. These duties are the bedrock of corporate governance law and arise in virtually every significant corporate transaction or dispute.

Duty of Care

Directors and officers must act on an informed basis, in good faith, and with the care that an ordinarily prudent person in a like position would exercise under similar circumstances. This means making decisions based on adequate information and deliberation, not acting impulsively or without review.

Duty of Loyalty

Directors and officers must act in the best interest of the corporation and its stockholders, not in their own personal interest or the interest of a third party. The duty of loyalty is implicated whenever a director or officer has a personal financial interest in a transaction being considered by the board — a so-called "interested director" situation.

The Business Judgment Rule

Delaware courts apply a presumption called the business judgment rule: a director's decision is presumed valid if the director acted on an informed basis, in good faith, and with the honest belief that the action was in the corporation's best interest. If a plaintiff challenges a board decision, they bear the burden of rebutting this presumption.

The business judgment rule protects directors from liability for poor business decisions, as long as the decision-making process was proper. It does not protect against decisions that involved self-dealing, bad faith, or gross negligence.

Exculpation and Indemnification

Delaware allows corporations to limit or eliminate director liability for breaches of the duty of care in the certificate of incorporation. DGCL § 102(b)(7). This exculpation does not extend to duty of loyalty breaches, bad faith, intentional misconduct, or transactions in which the director received an improper personal benefit.

Most Delaware certificates of incorporation include a § 102(b)(7) provision to protect directors from personal liability for good-faith mistakes. Corporations also typically indemnify directors and officers for litigation costs arising from their service, subject to limitations.

Double Taxation: The Core Tax Burden

The C corporation's most significant disadvantage for most small business clients is double taxation. Understanding it precisely — and understanding when it doesn't matter — is important.

How Double Taxation Works

When a C corporation earns $100 of profit:

1. The corporation pays federal income tax at the current 21% corporate rate, leaving $79 after tax at the entity level.
2. When the corporation distributes that $79 to stockholders as a dividend, the stockholders pay income tax again — at qualified dividend rates of up to 23.8% for individuals in the highest bracket (20% rate + 3.8% net investment income tax).
3. The effective combined tax rate on that original $100 can exceed 40% in high-bracket situations.

When Double Taxation Is Acceptable

Despite its disadvantages, the C corp's double taxation is sometimes acceptable — or even advantageous — in specific circumstances:

• Retained earnings: If the corporation retains most of its profits and reinvests them in the business rather than distributing dividends, only the first level of tax applies. Founders who don't need current distributions can defer the second level indefinitely.
• Institutional investment: Tax-exempt investors (pension funds, endowments, non-profits) don't pay the second level of tax on dividends, so double taxation doesn't affect them the way it affects individual taxpayers. They often prefer C corps.
• IRC § 1202 exclusion: Stockholders of qualified small business C corporations can exclude up to 100% of capital gains on sale of qualifying stock held for more than 5 years — a massive potential tax benefit on exit. See IRC § 1202.
• Pre-IPO companies: Companies planning to go public are almost always C corps, and the IPO market is built around C corp structure. The tax cost is baked into the model.

Piercing the Corporate Veil

As introduced in Session 01, the limited liability protection of a corporation is not absolute. Courts will pierce the corporate veil — hold stockholders personally liable — when the entity is not being operated as a genuinely separate legal person.

Common Veil-Piercing Factors

Courts analyze multiple factors, typically including:

• Commingling of personal and corporate funds or assets.
• Failure to observe corporate formalities — no board meetings, no minutes, no separate bank accounts.
• Undercapitalization — forming the corporation with essentially no assets to meet reasonably foreseeable liabilities.
• Use of the corporate form to perpetrate a fraud or injustice on creditors.
• Treating the corporation as an alter ego — the stockholder treats the corporation's assets as their own, directing corporate funds for personal purposes.

Oklahoma courts apply a multi-factor analysis to determine whether veil piercing is warranted. No single factor is determinative, but commingling and failure of formalities are the most commonly cited.

Capital Raising

Corporations raise capital primarily by issuing equity (stock) and incurring debt. The flexibility of the C corporation's equity structure — multiple classes and series of stock with different rights — makes it the preferred vehicle for complex capital raises.

Private Placements

Most early-stage corporations raise equity through private placements — sales of stock to a limited number of accredited investors without registration under the Securities Act of 1933. The most common exemptions are Rule 506(b) and 506(c) under Regulation D. You'll encounter this area in Session 11's overview of adjacent topics.

IRC § 1202 Qualified Small Business Stock

One of the most powerful tax benefits available to C corporation founders and investors is the exclusion of capital gains on the sale of "qualified small business stock" (QSBS) under IRC § 1202. Key requirements:

• The corporation must be a domestic C corporation.
• The aggregate gross assets of the corporation must not exceed $50 million at the time the stock is issued.
• The stock must be acquired at original issuance (not secondary market).
• The stock must be held for more than 5 years.
• The corporation must be an active business in a qualifying industry (most businesses qualify; certain service industries, finance, and real estate do not).

If all conditions are met, the stockholder can exclude up to 100% of gain on sale from federal income tax — a potentially enormous benefit for early-stage investors. This benefit does not exist for LLC members or S corp stockholders.

Key Terms — Session 03