The charter includes the following information: (1) name of the proposed corporation, (2) types of activities it will pursue, (3) amount of capital stock, (4) number of directors, and (5) namesand addresses of directors. The charter is filed with the secretary of the state in which the firm will be incorporated, and when it is approved, the corporation is officially in existence. Then, after the corporation is in operation, quarterly and annual employment, financial, and tax reports must be filed with state and federal authorities.
The bylaws are a set of rules drawn up by the founders of the corporation. Included are such points as (1) how directors are to be elected (all elected each year, or perhaps one-third each year for three-year terms); (2) whether the existing stockholders will have the first right to buy any new shares the firm issues; and (3) procedures for changing the bylaws themselves, should conditions require it. The value of any business other than a very small one will probably be maximized if it is organized as a corporation for these three reasons:
1. Limited liability reduces the risks borne by investors, and, other things held constant, the lower the firm’s risk, the higher its value.
2. A firm’s value depends on its growth opportunities, which, in turn, depend on the firm’s ability to attract capital. Because corporations can attract capital more easily than unincorporated businesses, they are better able to take advantage of growth opportunities.
3. The value of an asset also depends on its liquidity, which means the ease of selling the asset and converting it to cash at a “fair market value.” Because the stock of a corporation is much more liquid than a similar investment in a proprietorship or partnership, this too enhances the value of a corporation.