What Is a Charter?
A charter is a legal document that formally establishes a corporate entity. Charters are issued by national or provincial governments. Before being chartered, the company may have existed as a partnership, sole proprietorship or similar structure. Most charters include the corporation's name, the location of its head office, the date of incorporation, the amount or type of stock to be issued, and any restrictions on areas of business activity or further share issuance.
A charter may also be referred to as articles of incorporation.
- Exempt transactions do not require registrations.
- Exempt securities are tax-exempt.
- There are some regulations for exempt transactions, such as anti-fraud provisions.
How Charters Work
The charter stipulates a corporation’s business purpose, profit or nonprofit status and designation, with name and address, of the company's registered agent. A registered agent is a person who can sign or accept legal documents on behalf of the business. Other charter information includes data on the company’s assets, board composition, and ownership structure.
The business must file its charter in the jurisdiction where it is headquartered, though it may operate elsewhere. The charter will list only the central office. In the U.S., a state's secretary of state office handles charter filings and maintenance. The business pays a chartering fee to the state and annual franchise taxes.
The business must file its charter before legally transacting business as a corporation. Failure to do so exposes owners to personal liability for debts and damages.
Charters for Nonprofit Organizations
Nonprofit organizations also receive charters, which confer credibility on its programs and services. To qualify as a nonprofit and receive tax-exempt status the organization must further religious, scientific, charitable, educational, literary, public safety, or cruelty-prevention causes. It must also generate some public benefit. The nonprofit charter also limits the liability of 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 that the organization’s activities are limited to purposes outlined in section 501(c)(3) of the Internal Revenue Code. The charter will also describe how assets are dealt with upon the dissolution of the organization.
Key Roles in a Charter
The incorporator oversees setting up the company, prepares and files the charter, and supervises the creation of other corporate documents. The incorporator may also select members to sit on the board of directors and organize the initial board meeting. Other than these responsibilities, the incorporator has no official duties.
The designated registered agent will receive relevant documents and legal papers on behalf of the corporation. The agent must be available during regular weekday business hours. The registered agent is the only person authorized to sign for court orders or notices of litigation concerning the business.
A corporate charter may change for several reasons. For example, if the par value of issued shares changes, or the focus of the business changes, the corporation will submit a request to change the charter with the secretary of state. The business may also propose an amended charter if the number of directors changes, the board members themselves change, or the corporation moves its primary location.