This document is significant for a startup. If founders get it wrong, it could be a costly mistake. So, founders should pay close attention to the Action of Incorporator and work with counsel to ensure that it covers all the bases.
Before diving into what is an Action of Incorporator, you have to understand what an Incorporator is.
The Incorporator is the person who files the certificate of incorporation with the Secretary of State. Generally, this is the lawyer or registered agent who incorporated your company. Their name and signature are at the bottom of the certificate of incorporation. Once they file, from the state’s perspective, they are the only person who has the authority to act on behalf of the corporation.
The Action of Incorporator is the document that officially hands that power off to the board of directors of the startup. (It also does a little more, as you’ll see below.)
Generally speaking, the Incorporator should send you an executed copy of the Action of Incorporator, along with the filed copy of the certificate of incorporation. If they don’t, it’s essential that you follow up and request one. If you personally acted as the Incorporator, then you’ll need to make sure you (or your legal counsel) draft an Action of Incorporator.
The common provisions in a startup Action of Incorporator are:
- Adoption of bylaws
- Establishing board of directors
If the Action of Incorporator is not properly drafted and executed, the board has no authority to act on behalf of the company. So, any action they might take, such as issuing shares to founders or even setting up a bank account, would be invalid corporate actions. Though the document isn’t complex, it’s important to do it right.
Adoption of Bylaws
The bylaws serve as the operating system of the company and establish the governance procedures. This resolution officially adopts the bylaws, which are typically attached to the Action of Incorporator as an exhibit. If you’d like to learn more about bylaws, click here.
Establishing Board of Directors
The board of directors is the highest governing body in a corporation. This resolution creates the board of directors, establishes the initial number of directors and names the initial directors. Once the Incorporator signs the document, authority is transferred to the board.
In conclusion, the Action of Incorporator may appear to be a simple document, but it is critical for startups. Without it, the board of directors lacks the authority to act on behalf of the company. By adopting the bylaws and establishing the board of directors, the Action of Incorporator lays the foundation for the company’s governance. With this document in place, startups can move forward with confidence and clarity.
Founders should work closely with their legal counsel to ensure that the document is properly drafted and executed. If you need legal counsel, please feel free to contact us here.