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Forming a Corporation

Forming a Pennsylvania corporation involves specifically following the Corporation Laws of Pennsylvania. Because a corporation is a separate legal entity created by statute, certain formalities must be followed. The first of these is a basic corporate document known as the Articles of Incorporation.  This document is prepared by your attorney and includes such important items as the name of the corporation, its official address, and the number of shares and the type of stock that can be issued by the corporation. The documents is filed with the Corporation Bureau of the Pennsylvania Department of State as a public record.

Not all corporate names will be acceptable by the Corporation Bureau.  Your attorney should check with the Corporation Bureau prior to filing the Articles to see whether the desired corporate name is permissible under the law or whether is already in use by another corporation.

 A Docketing Statement must be prepared and filed with the Articles of Incorporation. The Docketing Statement sets forth further information about the corporation, such as a contact person for the corporation to receive correspondence from the Commonwealth. Furthermore, the Docketing Statement is used by the Commonwealth to advise other Commonwealth departments that a new corporation exists.  Thus, the Docketing Statement gives such offices as the Department of Revenue and the Department of Labor the corporation’s address, so that appropriate forms can be sent from the Department to the Corporation.  Once the Articles of Incorporation and Docketing Statement are filed, the existence of the corporation begins (unless a later start date is specified). 

Upon filing Articles of Incorporation with the Commonwealth, notice of the filing must be advertised in a local newspaper and the legal journal.

The corporation may need to complete the Pennsylvania Enterprise Registration Form (PA-100) in order to register for certain taxes and services administered by the Pennsylvania Department of Revenue and the Pennsylvania Department of Labor & Industry. The PA-100 would be completed, for example, to obtain a sales and use tax license.

 Incorporation is a preferred vehicle for many businesses because of the limited liability generally afforded the corporation’s shareholders. The formal requirements of a corporation must be met to preserve its separate existence and the unique characteristic of limited liability.  Limited liability in general means that the shareholders, or corporate owners, will not be personally liable for  debts of the corporation.  With some exceptions, only the corporation itself, as a separate entity, will be liable. Thus, a corporation limits the potential losses of the shareholders to the money which they invested in the corporation in exchange for their shares of stock. Failure to adhere to the formalities of a corporation exposes the individual shareholders of the corporation to a claim that the corporation does not properly exist and that the limited liability of the owners of the corporation should be disregarded.

 Also, it should be understood that creditors of a corporation may require the shareholders of the corporation to guarantee the financial obligations of the corporation.  In such a case the shareholder would become personally liable for obligations of the corporation that the shareholder guaranteed which may include all of the corporation’s obligations.  It is very common for commercial lenders to require that its loans to a corporation be personally guaranteed by the shareholders.

 Another characteristic of a corporation is the fact that it is a separate legal entity for income tax purposes. Thus, the corporation must file a separate tax return.  The Internal Revenue Code allows the corporation either to pay taxes directly on the income it generates or if an election is properly filed, to have the corporation treated as if it is not a separate legal entity for tax purposes and thus have the taxable income and expenses of the corporation flow through to the individual shareholders.  This election is known as a “S” election. A similar election is available for Pennsylvania Corporate Income Tax purposes.  However, Pennsylvania may also require the corporation to pay a capital stock tax even if a “S” election is made.

The corporation’s shareholders adopt bylaws which generally provide the rules for the formal operation of the corporation. The shareholders also vote for directors of the corporation who are responsible for the management of the corporation.  The directors in turn vote for officers who are generally responsible for the day to day operations of the corporation.  Periodic meetings of shareholders and directors are required and a summary of those meetings needs to be written by the secretary of the corporation and placed in a corporate minute book.  Careful attention must be paid to the details of forming and operating a corporation in order to ensure the separate legal nature of the entity.  Without the separation of the activities of corporation from the activities of the shareholders, the limited liability of the corporation’s shareholders could be challenged by a creditor, exposing the shareholders to personal liability.

Other matters should also be considered by those forming corporations.  For example, where there is more than one shareholder of the corporation, the shareholders should consider entering into an agreement among themselves restricting the transfer of the corporations’ shares under certain circumstances, such as death, disability, divorce of a shareholder, or when the employment of a shareholder is terminated, voluntarily or involuntarily.  These agreements are often referred to as shareholder agreements or buy/sell agreements. 

The limited liability of shareholders from creditors and lawsuits is perhaps the major reason for the decision to form a corporation rather than a partnership or sole proprietorship. Other reasons include the more formal businesslike structure of corporations with officers and directors, the ease of transferring an interest in a corporation simply through stock certificates, and the flexibility in how corporations are taxed. However, these advantages to corporations are jeopardized or non-existent unless proper corporate procedures are carefully followed with your attorney when forming and operating a corporation.

Many of the advantages of a corporation can also be obtained by the creation of a limited liability company.  A limited liability company is also a separate entity with liability protection afforded to its owners which are called members.  The operational requirements for a limited liability company are less formal than for a corporation, which make it an attractive option for many small businesses. For example, a limited liability company can be managed by its members rather than by a board of directors. In addition, a limited liability company is a pass-through entity, meaning that the profits or losses of the business pass through the business to the members without being taxed at the corporate level. The profits are taxed only at the member level.

Forming a corporation or limited liability company is a significant business decision. It is important that you seek guidance from a knowledgeable attorney to ensure that you select the best entity for your business, that it is properly formed, and that you understand and can satisfy the operational requirements of obtaining and maintaining limited liability protection.

If you need to consult with an attorney or would like more information on forming a corporation, please contact the Erie County Bar Association's Lawyer Referral Service.