Washington For-profit Corporations

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Using For-Profit Corporations to Pursue Social Objectives
The for-profit form of organization can and frequently is used as a vehicle for conducting a business that also has a social mission or objective.  Although for-profit corporations are usually formed for the purpose of making money and distributing it to managers and shareholders, there is no reason why a for-profit corporation cannot include a social mission in the purposes clause of its articles of incorporation.

Though incorporating a social mission in the purpose of the organization would authorize the corporation to pursue social objectives, it would not require the corporation to do so—only the shareholder/ owners have this power. And unless all shareholders agree to pursue social aims, dissenters could sue the corporation’s directors and managers for failing to operate the corporation in the best economic interests of the shareholders.

A shareholders’ agreement is probably the best way to address this problem. Such an agreement, entered into by all shareholders and the corporation, would require the corporation to be managed and operated so as to pursue specified social objectives thereby overriding fiduciary duties and similar legal principles that govern “normal” behavior of for-profit corporations.

But even the most skillfully drafted shareholders’ agreement is not a perfect solution because agreements can always be abrogated and amended and the owners of the shares can change via sale, gift or inheritance. Moreover, a tightly drafted shareholders’ agreement which makes it difficult to respond to business changes over time would tend to render the for-profit corporation much less attractive to investors (potential new shareholders).

The Washington Business Corporation Act (the “WBCA”) governs the formation, operation and dissolution of for-profit corporations in Washington.  One or more persons may act as the incorporator or incorporators of a corporation by filing articles of incorporation with the Washington Secretary of State.  The articles of incorporation must set forth the following:

Corporate Name
The corporate name must satisfy the requirements of RCW 23B.04.010 – it must include the word “corporation,” “incorporated,” “company,” “inc.,” “co.,” or “ltd.”  The name must be distinguishable from other existing or reserved corporate, limited partnership or limited liability company names.  The name must not imply that the corporation is organized for a purpose other than those permitted by the WBCA and the corporation’s articles of incorporation.  The name must not contain any of the following words or phrases: “banking,” “bank,” “banker,” “trust,” “cooperative,” or any combination of two or more of the words “building,” “savings,” “loan,” “home,” “association,” and “society.”  Incorporators should inquire with the Corporations Division of the Secretary of State to determine if a name is available in Washington.  You may reserve a name with the Corporations Division for up to 180 days before deciding to use it.

Authorized Shares
The articles of incorporation must set forth the number of shares the corporation is authorized to issue.  

Registered Agent and Office
The articles of incorporation must include the street address of the corporation’s initial registered office and the name of its initial registered agent at that office.  

The articles of incorporation must include the name and address of the incorporator(s).

Either the articles of incorporation or the bylaws must either specify the number of directors or explain the process by which the number of directors will be fixed.  The board of directors must consist of one or more individuals; there is no maximum number. The articles of incorporation may provide for a range in size (for example, no fewer than three and no more than seven directors).

The articles of incorporation must be executed by the incorporator(s) and filed with the Washington Secretary of State.  Unless a delayed effective date is stated in the articles of incorporation, the corporate existence begins upon the filing.  Incorporators may file the articles of incorporation online (at http://www.secstate.wa.gov/corps/), in person or by mailing the articles together with any necessary filing fees to:  Secretary of State, Corporations Division, 801 Capitol Way South, P.O. Box 40234, Olympia, WA 98504-0234.  The cost of filing the articles of incorporation with the Washington Secretary of State is $180 (plus an additional $20 for expedited service).  The corporation should also promptly file a master business application with the Washington State Department of Licensing, which requires a $20 filing fee plus $5 for each trade name registered.  The corporation should determine whether local business licenses or permits are required, each of which may require additional fees.

Generic forms of articles of incorporation are attached.  The Washington Secretary of State also offers sample forms online at: http://www.secstate.wa.gov/corps/registration_forms.aspx.

Management and Control
A for-profit corporation has a hierarchical control structure. It is managed by or under the direction of a board of directors and its officers, although its shareholders vote on important corporate issues, such as election of directors, mergers, sale of all assets and dissolution.  The board of directors must consist of one or more individuals.  
Similar to a nonprofit corporation, once the for-profit corporation has been established, the initial board of directors meets (in person or by consent), ratifies the acts in connection with initial formation of the corporation and  adopts bylaws which set forth the rules and procedures governing the operation and management of the corporation consistent with the applicable statutes of Washington and the articles of incorporation.

In general, the bylaws of a for-profit corporation contain provisions governing director and officer qualifications, powers and duties; voting; meetings of shareholders, directors and officers; filling of vacancies; committees; property holding and transfer; indemnification of directors and officers; bank accounts; fiscal year audits and financial reports; conflicts of interest; and amendment, merger and dissolution procedures.

Certain significant corporate events require shareholder approval.  For example, the WBCA requires shareholder approval of election of directors, certain mergers, a sale of all or substantially all of the corporation’s assets and the voluntary dissolution of the corporation.

A generic form of bylaws is attached.          

Liability of shareholders, directors and officers    
Directors owe fiduciary duties to the corporation and to the shareholders and may be sued if they breach such duties.  The fiduciary duties of directors of a Washington corporation are enumerated in the WBCA as follows:  a director must discharge his or her duties (a) in good faith; (b) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (c) in a manner the director reasonably believes to be in the best interests of the corporation.  These are commonly referred to as the duty of care and the duty of loyalty. 

The duty of care requires directors to act in an informed manner.  Directors should attend meetings on a regular basis, participate in discussions and deliberations, make thorough and thoughtful inquiries, and seek all relevent information before reaching decisions. Courts generally defer to directors if the directors act on an informed basis, in good faith and with the belief that they are acting in the best interests of the corporation. However, if directors are considering a transaction that could result in a change of control of the corporation, heightened standards apply.

The duty of loyalty requires directors to act in the best interests of the corporation rather than in his or her personal best interests.  If a director acts on his or her own best interests, shareholders may challenge the action.  The WBCA defines a “director’s conflicting interest transaction” as a “transaction effected or proposed to be effected by the corporation, or by a subsidiary of the corporation or any other entity in which the corporation has a controlling interest, respecting which a director of the corporation has a conflicting interest.” A “conflicting interest” is further defined as the interest a director has if at the time of the commitment the director (or certain parties related or affiliated with the director) is a party to the transaction or has a beneficial financial interest in the transaction or is so closely linked that the financial significance would reasonably be expected to exert an influence on the director’s judgment.  

The personal liability of directors may be eliminated or limited pursuant to the articles of incorporation.  Just as a for-profit corporation may indemnify its officers and directors, so may a nonprofit corporation. A corporation may indemnify a director who is defending a lawsuit if (i) the director acted in good faith; (ii) if the director’s conduct stemmed from his or her official capacity with the corporation, the director reasonably believed that the director’s conduct was in the corporation’s best interests (or, in all other cases, that the director’s conduct was not opposed to the corporation’s best interests); and (iii) in the case of a criminal proceeding, the director had no reasonable cause to believe that his or her conduct was unlawful.  Corporations may also purchase director’s and officer’s liability insurance to cover certain claims. Shareholders may be held liable for a corporation’s obligations in limited circumstances.  If a plaintiff can establish that a corporation failed to observe corporate formalities (such as holding shareholder and director meetings, maintaining the required corporate records, maintaining corporate assets separate from shareholder assets, etc) or that the corporation is grossly undercapitalized, a court may “pierce the corporate veil” and hold shareholders liable on a pro rata basis according to their shareholdings.

Raising Capital
For-profit corporations (and LLCs) offer the most flexibility in raising capital, ranging from various kinds of equity (common stock, preferred stock, options, warrants) to numerous types of debt instruments (convertible notes, subordinated notes, bonds, commercial paper).

Recordkeeping and State Reports
Washington corporations must maintain the following records: (i) minutes of all meetings of its shareholders within the last three years, minutes of all meetings of its board of directors, a record of all actions taken by the shareholders within the last three years, records of actions taken by the board of directors without a meeting, and a record of all actions taken by a committee of the board of directors; (ii) appropriate accounting records; (iii) a record of its shareholders, in a form that permits preparation of a list of the names and addresses of all shareholders, in alphabetical order by class of shares showing the number and class of shares held by each; (iii) its articles and bylaws and all amendments to them currently in effect; (iv) the financial statements described in RCW 23B.16.200(1) for the past three years; (v) all communications to shareholders generally within the last three years; (vi) a list of the names and business addresses of its current directors and officers; and (vii) its initial annual report or most recent annual report delivered to the Secretary of State under RCW 23B.16.220. 

All corporations incorporated in Washington are required to file an annual report with the Secretary of State.  The annual report filing fee is $59.  

Unlike sole proprietorships, partnerships and LLCs, for-profit corporations in Washington are subject to double federal taxation. That is, the corporation pays federal taxes on the income it earns and its shareholders pay taxes on dividends distributed by the corporation. S corporations, however, are not subject to double taxation; their income is not taxed, but the income and losses of the S corporation are “passed through” to the shareholders in relation to their owner ship interests. To be eligible for this tax treatment, S corporations must meet certain requirements, including but not limited to having only one class of stock and no more than 100 shareholders.

Unlike many states, Washington does not have a state income tax.  Instead, businesses in Washington are subject to the state and local business and occupation tax (the “B&O tax”).  Washington’s B&O tax is calculated on gross income; there are no deductions for labor, material, taxes or other costs of doing business.  Generally speaking, almost all companies that conduct business in Washington are subject to the B&O tax, including corporations, limited liability companies, partnerships and nonprofit organizations.  However, certain exemptions, deductions and credits may be available depending on the nature of the corporation’s activities in Washington. Please refer to the Recordkeeping, State Reports and State Taxes section of the Nonprofit Corporations section for a discussion of applicable state and local taxes.

See the Secretary of State’s website at: http://www.secstate.wa.gov/corps/ProfitCorporationFees.aspx.
Washington Corporation Law and Practice (Aspen Law & Business).

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