Forming A Corporation

Forming a Corporation in Pennsylvania

Selecting a Corporate Name

There are several steps that need to be taken in forming a corporation in Pennsylvania.  Of course, this discussion assumes that you have decided that a corporate legal entity is the right entity for your business.

You need to select a corporate name.  While you may fall in love with a certain name, you need to be sure it is available and not being used by another company.  You can contact the Pennsylvania Bureau of Corporations to determine if the name is available.  If there will be some delay in forming a corporation, it would be wise to reserve the corporate name.  You simply complete the form to reserve the name.  The Name Reservation Form (DSCB:15-208) can be found at https://khneticlegal.com/wp-content/uploads/2017/01/15-20820Reservation_Transfer20of20Reservation.pdf.  The fee to file for reservation of a name is currently $70.00.

Design Corporate Structure

When forming a corporation in Pennsylvania, you will need to design the corporate structure of your business.  This involves looking at various components:

Board of Directors

You should determine the number of directors.  Hint:  pick an odd number in the event of a stalemate in voting.  You should also determine whether the Board of Directors will be a classified board.  This simply means that some directors will be up for election in one year and the rest of the directors will be up for reelection in a subsequent year.  Generally speaking, it is a good idea to have a classified board, so that there is continuity on the board.

You will also need to decide if cumulative voting will be permitted.  Cumulative voting allows a minority of shareholder to have more control over the outcome of the election of directors.  You should also decide whether there will be any Board committees.  For closely held (smaller) corporations, this is generally not necessary.  Your corporate documents should also contain provisions regarding indemnification of directors if you have decided that the corporation will indemnify directors.  It is much easier to find people willing to serve on the Board of Directors if the corporation will indemnify them in the event they are sued.

Capitalization

The capitalization for the corporation which will be set forth in the Articles of Incorporation.  The capitalization is the number and class of shares the corporation is authorized to issue.  Do you want to have blank check preferred stock that can be issued at a later date, with the terms of such stock determined by the Board of Directors?  You should also decide whether you want to offer preemptive rights to existing shareholders.  Preemptive rights gives existing shareholders the right to purchase shares if the corporation is issuing stock to another person or entity.  This is tricky and whether you want to eliminate such a provision really depends upon the situation, so legal guidance is recommended.

Shareholder Rights

In today’s busy world, you may want to permit the shareholders to act by a written consent, without the necessity of holding a meeting.  This is probably advisable so that it gives the corporation more flexibility to get things done.  Will the shareholders be permitted to call special meetings of the shareholders?  Can changes to the corporation’s Articles of Incorporation be proposed by the shareholders?  Do you want to include supermajority or unusual quorum requirements for certain actions of the corporation?

Tax Issues

Should you elect for your corporation to be treated as an S corporation?  This would mean that the income would pass through to the shareholders.  In addition, determine whether section 1244 of the Internal Revenue Code of 1986 would be applicable.  This would permit what is referred to as 1244 stock.  If the stock qualifies as 1244 stock, you are permitted to deduct losses from the sale of shares as ordinary losses instead of capital losses, up to certain maximum amounts.

Transfer Restrictions

Will any restrictions be placed on the transfer of the shares?  For most smaller corporations, the shareholders would want this protection.  A corporation that has fewer than 30 shareholders is automatically a closely held corporation.  However, you may make an election to be a “statutory close corporation.”  The Articles of Incorporation of a statutory close corporation act much like a shareholders agreement.

File Corporate Documents

In forming a corporation in Pennsylvania, you will need to complete Articles of Incorporation.  The Articles of Incorporporation will contain some of the information listed above.  You will also need to file a docketing statement.  Include a transmittal letter to the Pennsylvania Department of State, along with the filing fee of $125 (as of the date of this blog).  Be sure that you have properly documented the actions of the Incorporator.  Prepared minutes appointing the initial Board of Directors.  In addition, prepare minutes of the initial Board of Directors’ meeting and the first shareholders meeting.

Actions to Take After Articles of Incorporation Have Been Filed

It is extremely important that you advertise the fact of incorporation in the county where the registered office is located right after you have filed your Articles of Incorporation.  You must advertise in two publications.  If there is a legal newspaper, advertise in that and also a newspaper of general circulation in your county.  You will receive proofs of such advertisements and you should keep them in the corporate record book with the minutes.

File online for an Employer Identification Number for the corporation.  Once you have that, open a bank account for the corporation.  If you have decided to be treated as a pass through entity, file Form 2553 to receive treatment as a Subchapter S corporation.  The Form 2553 must be filed within 75 days of incorporation in order to receive Subchapter S treatment for the first year.

As you can see, there are a lot of decisions to be made in establishing your corporation, which is why an online service cannot provide the service that an experienced business lawyer can.  Start out smart and consult an experienced business lawyer.

 

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