DEFINITION of 'Charter'
A charter is a legal document that provides for the creation of a corporate entity. A corporation's charter is issued by a federal or regional government and effectively creates a legal entity out of the business, which existed only as a partnership, sole proprietorship or similar business before incorporating. Most charters usually include the corporation's name, the location of its head office, the date of incorporation, the amount/type of stock to be issued and any restrictions on areas of business activity or further share issuances.
BREAKING DOWN 'Charter'
A charter sets forth a corporation’s basic information, including profit/nonprofit status, purpose, name and office address of the registered agent, financial data pertaining to the company’s assets, board composition and ownership structure. The charter is filed with the secretary of state for the state in which the corporation is headquartered. A chartering fee is typically paid. Annual franchise taxes also apply.
If the application meets the jurisdiction’s standards for content and presentation, the secretary of state approves the application. The application becomes a corporate charter, confirming the corporation exists. The secretary of state signs the charter, retains a copy and issues a certificate of incorporation, confirming the company filed the charter with the state.
A corporation’s charter must be prepared and filed before legally transacting business. Failure to do so exposes owners to direct, personal liability for incurring debts and causing damages during that time.
Key Roles in Creating a Charter
The incorporator is in charge of setting up the company and prepares and files the charter along with other corporate documents. The incorporator may also select members for the board of directors or organize an initial board meeting. Otherwise the incorporator has no official duties.
The registered agent receives important documents and legal papers on the corporation’s behalf. The agent must be available during regular business hours every weekday.
A corporate charter can change for various reasons. For example, if the par value of issued shares or the focus of the business changes, the corporation submits a request to change the charter with the secretary of state. The business may also have to submit an amended charter if the number of directors on the board is changed, the people serving on the board change or the corporation changes its primary location.
Example of Creating a Charter
When setting up a nonprofit organization, having a charter gives credibility to its programs and services. The charter limits liability for the organization’s officers and directors. Organization documents and governance policies are required when applying for tax exempt status. The charter must include language stating the organization’s activities are limited to purposes set in section 501(c)(3) of the Internal Revenue Code and that upon dissolution of the organization, remaining assets will be distributed to another nonprofit, a government agency or other public purpose.