Positives and Negatives of Corporations in Pennsylvania

Forming a Corporation in Pennsylvania

Pennsylvania Corporation

Corporations are a complex form of business structure, but performed correctly can be a smart way to organize your company.

Previously, we explored the business entity called an LLC. We explained why LLCs can be advantageous here in Pennsylvania.  Another business form that can be extremely useful is the Corporation. Our focus in this article is on a for-profit business. The corporation can be a C corp. or an S corp..

Why Corporations?

Corporations are their own legal entities. In other words, they are legally separate from their owners. This separation is useful because it provides the highest level of protection from potential personal liability. Corporations are flexible in terms of capital structure, and if you are seeking venture capital, you are more likely to be successful if you use this business form as opposed to other types of entities. Venture capitalists prefer the corporate structure due to its separate nature.

The Negatives

Corporations are the most formal of business entities. There are many requirements to running one that must be met. Failure to meet the requirements is problematic in terms of both taxes and personal liability. Taxation is a negative in that they experience what is called double taxation. This means that profits are taxed twice and the owners do not get the personal benefits of losses, unlike in LLCs, for example. Record keeping is very formal and has specific requirements.

S Corporation

There are two types of corporations. C Corp and S Corp. S corps. are similar to C corps. The main difference involves forms filed with the IRS related to taxation. S corps. have both profits and losses pass-through and thus avoid double taxation. You must form a C corp. before you can form an S corp. S corporations have limitations that C corporations do not have.  These includes limitations to the capital structure as well as specialized requirements on who may be a shareholder.

Setting up a Corporation in Pennsylvania

The process of setting up a corporation seems straight forward, but the reality is quite different. It is critical to set your business up properly from day one. Due to the formalities, it is easy to make a mistake. If you do, you can lose the protections that are the reason to set up a corporate entity in the first place. Some of the steps include:

  1. Choose a name. Your name must be unique. You are also are required to use the proper designation as part of your name, which might include, incorporated, corporation, limited, corporation and so on.
  2. Create and file the articles of incorporation. These are the documents that must be created and filed with the Pennsylvania Department of State. Every I must be dotted and every T must be crossed in this process.
  3. Appoint a Registered Agent. This is the person or business in the state of incorporation, who is willing to accept legal papers if the corporation is sued. If you incorporate in Pennsylvania, your agent must be in Pennsylvania.
  4. Prepare Bylaws. Corporate bylaws are the documents that detail how you will run your corporation.
  5. Create a Records Book. This is where you will keep all of your documents. Stock certificate and stubs, minutes from meetings and so on.
  6. Appoint Directors. These are the individuals who will serve on the board of the corporation. Frequently you will first pick initial directors and then identify new ones during your first meeting. You will want to purchase insurance to protect the directors and operators of your corporation as well.
  7. Hold Board of Directors Meetings. You will hold your first meeting and, then  you can appoint corporate officers. There are a number of technicalities that must be met during your first directors meeting.
  8. You will issue stock to your shareholders. Small corporations may not be required to follow the same regulations as larger corporations. It is critical to meet the requirements.
  9. Make Certain to Comply with the Law. Tax is complicated for corporations. It is critical that you follow the tax laws. You must also follow any other legal requirements specific to your type of business. This would include obtaining a business license, for example.

As you can see. There are quite a few steps to forming a corporation. The complexity can be worth it though, if you have the type of business which requires the protection and formality a corporation offers.

Hoffmeyer & Semmelman Can Help you Form your Corporation in Pennsylvania

If you are considering forming a corporation in Pennsylvania, our business attorneys can help. We will first explore whether a corporation is the right business entity for you. If it is not, we will help you form the correct kind of entity. If a corporation is the best choice, we will take you through all of the steps, from helping make certain the name is available, to drafting the bylaws and all of the other required parts. In addition, we can maintain a relationship with you throughout the life of your business to make certain you meet all legal requirements. Contact us today for all of your corporation formation and management needs.