What is a Charter
A charter is a legal document that provides for the creation of a corporate entity. A corporation's charter, issued by a federal or regional government, creates a legal existence of incorporation for the business. Before the charter, the company 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 issuances.
A charter may also be referred to as the articles of incorporation.
BREAKING DOWN Charter
A charter, or articles of incorporation, spell out a corporation’s basic information, including their profit or nonprofit status, business purpose, and the 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 financial data pertaining to the company’s assets, board composition, and the ownership structure.
The filing of a charter for the state in which the corporation is headquartered is necessary. The state's Secretary of State office handles charter filings and maintenance. A business may have a presence in multiple states. However, the charter will list only the central office. Another requirement is the payment of a chartering fee to the state and annual remittance of franchise taxes. If the application meets the standards of the jurisdiction and fee payments are correct, the Secretary of State will approve the charter application.
Once approved, the application becomes the corporate charter for the business, confirming the corporation exists as a legal entity. The Secretary of State will sign the charter retain a copy, and issue a certificate of incorporation, which is returned to the applicant.
A corporation’s charter must be prepared and filed before legally transacting business as a corporation. Failure to do so exposes owners to direct, personal liability for incurring debts and damages.
Charters for Nonprofit Organizations
When establishing a nonprofit organization, having a charter gives credibility to its programs and services. For an organization to receive a "nonprofit" designation and to qualify for the tax-exempt status, it must further religious, scientific, charitable, educational, literary, public safety or cruelty prevention causes or purposes. It must generate some public benefit also.
The nonprofit charter also 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 outlined in section 501(c)(3) of the Internal Revenue Code. The charter will also describe how assets are dealt with upon 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 named 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 also the only person who is authorized to sign for court orders or notices of litigation for 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 on the board changes, the board members themselves change, or the corporation moves its primary location.