Certificate of formation: Overview, definition, and example
What is a certificate of formation?
A certificate of formation, also known as articles of incorporation or a certificate of incorporation, is a legal document that officially establishes the formation of a corporation or limited liability company (LLC) in a specific jurisdiction. This certificate is filed with the appropriate state or governmental agency, such as the Secretary of State, to legally create the entity and begin its operations. It contains basic information about the company, such as its name, address, business purpose, and details about its structure, such as the number of shares authorized or the names of the initial members or directors.
In simpler terms, the certificate of formation is the official paperwork that creates a company and allows it to operate as a legal entity.
Why is a certificate of formation important?
The certificate of formation is important because it is the official document that legally brings a company into existence. It provides the necessary information to the government and the public about the company's formation and structure. Filing this document is a required step for businesses to operate legally, as it sets the foundation for the company’s existence and protects the owners by establishing a separate legal entity. This separation limits personal liability and allows the company to conduct business, enter into contracts, and be held accountable under the law.
For business owners, having a certificate of formation is essential for protecting their interests and ensuring the company operates within the legal framework of its jurisdiction. For investors, it provides assurance that the company has been properly established and is recognized as a legal entity.
Understanding certificate of formation through an example
Imagine a group of entrepreneurs decides to start a new tech company. To formally establish the business, they file a certificate of formation with the Secretary of State’s office, which includes the company name, purpose, address, and the names of the directors. Once the certificate is filed and accepted, the company is officially formed and can begin its operations, enter into contracts, and hire employees.
In another example, a small business owner decides to transition from a sole proprietorship to an LLC for liability protection. The owner files a certificate of formation with the state to officially form the LLC, ensuring that the business is now a separate legal entity. This step allows the business owner to limit their personal liability and gain other benefits associated with the LLC structure.
Example of a certificate of formation clause
Here’s how a certificate of formation clause might appear in a corporate agreement:
"The undersigned hereby certify that the Articles of Incorporation have been filed with the [appropriate state agency], and the Corporation is duly formed as a [type of entity, e.g., Corporation, LLC], effective as of [date of formation]. The Corporation shall be governed by the terms and conditions outlined in these Articles, and the undersigned have authorized the issuance of shares or interests as specified."
Conclusion
The certificate of formation is a crucial legal document that establishes a business as a separate legal entity, ensuring its existence and providing the necessary framework for operations. Filing this document is a key step in the process of creating a corporation or LLC, and it provides legal protections for the business owners by limiting their personal liability.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.