Definition: A charter is a legal document that turns a business into a legal entity. It is written with the purpose of creating a corporation.
What Does Corporate Charter Mean?
Corporate charters, also known as articles of incorporation, are the next step for a business to be considered a formal, individual entity, apart from its founders. Under normal circumstances, a business starts with an individual or group of individuals that decided to pursue a given idea. These individuals might group themselves as sole proprietors or partners, which are different forms of organization. But over time this structure would not fit the legal needs of the business and that would drive them to consider incorporating the business through this previously mentioned charter.
A charter will be drafted to obtain legal status for the business, allowing it to issue shares, deal as a separate entity from its shareholders and structure itself around corporate guidelines. The charter will serve a legal purpose, since the document will describe to the state authorities each of the following information: the name of the business, the nature of it (profit or non-profit), the place where it will conduct its operation from, the shareholder’s names, the number of shares being issued, the value and class of each share; among other relevant data that might be required by the state to effectively register the business.
After this charter is filed, the state will issue a certificate of incorporation to confirm the creation of the new legal entity.
Example
Mr. Louis and Mr. Paul are the founders of a business called FlexiChairs. This business produces flexible chairs that make the user feel much more comfortable since they can shape the chair the way they want to stay comfortable during work. The business has been growing rapidly and they need to issue shares for new incoming investors. The company needs to apply for a certificate of incorporation and, in order to do that, they asked their lawyer to draft a corporate charter.
This charter, as their lawyer explained, will incorporate the business under the name FlexiChairs. The company will issue 2,000,000 shares at $3 a share. Mr. Louis will get 50% of the company and Mr. Paul will get the other 50% and Mr. Paul will serve as Chairman of the Board while Mr. Louis and other 5 members will serve as the company Directors. This document will be filed with the state authorities in order to get the certificate of incorporation.
