Top 10 Legal Issues Facing Entrepreneurs in Pennsylvania

Topic 1: Forming a Legal Corporation

Forming a legal corporation can be a massive undertaking depending upon the initial goals, size, and complexity of the underlying business (See Topic 2 for a more detailed list on common steps a business might take when forming a legal corporation). However, the State of Pennsylvania, like most other states, only requires a minimal threshold showing for a person or entity to form a legally recognized corporation. The purpose of this subtopic is to inform the business entrepreneur as to what minimal actions are required by the State of Pennsylvania in forming a corporation.

In Pennsylvania, a person or entity (called an Incorporator) need only file “articles of incorporation” with certain required information and submit this to the state to secure corporate status.  The purpose of the articles of incorporation is to form a contractual relationship not only between the corporation and its shareholders, but also between the corporation and the state. In accordance with Pennsylvania law, the articles of incorporation must be signed by each of the incorporators and must include the following information:

• A statement that the corporation is formed under the Business Corporation Law of 1988
• The corporate name¹
  
• The name of the registered agent and the address of registered office (the registered agent is the corporation’s legal representative, in charge of accepting service of process)
• It may include the names and addresses of incorporators and/or the initial board members
• A statement of duration is needed only if it is less than perpetual existence (if there is no statement of duration, the state will assume perpetual existence)
• It also may include a general statement of purpose (if one is not included, it is assumed by the state that the corporation’s purpose is to engage in all lawful activity, after first obtaining the necessary state agency approval), or may state a specific statement of purpose²
• It must include information on the capital structure (authorized stock and information on par value, if any par shares, voting rights and preferences of each class of stock).³

Once you have completed accurate articles of incorporation, all that remains is to file same with the Pennsylvania Department of State and pay the required fee.⁴ Upon filing of the articles of incorporation with the Department of State, or upon the effective date specified in the articles of incorporation, whichever is later, the corporate existence shall begin.⁵ At this point, a legal corporation is successfully formed. Now the board of directors can hold an organizational meeting, where officers can be selected, bylaws adopted, and other business discussed.

The legal significance of forming a corporation is that the corporation is considered a separate legal person. It can sue and be sued, hold property, be a partner in a partnership, pay income taxes (as an entity), and is otherwise treated as a separate legal entity apart from the people that comprise it. Therefore, officers and directors, generally, are not personally liable for what the corporate entity does. Similarly, shareholders are not personally liable for the debts of the corporation (this is the principle of limited liability, which means that shareholders generally are liable only for the price of their stock). Therefore, the corporation alone is liable for what the corporation does as opposed to the various people that comprise it. It is only in very limited circumstances that the people within the corporation can be held liable for corporate acts. (See Topic 3 entitled “How to Avoid Personal Liability”).

As discussed, the State of Pennsylvania, like most states, does not require an in depth showing or a complex process before granting corporate status. In reality, however, the vast majority of businesses looking to incorporate will go through much more complex preparation and planning. Therefore, to understand some of the practical and realistic pre-incorporation planning steps that should be on the mind of any business planning for incorporation, (See Topic 2) which represents a more exhaustive list of steps to be taken.

¹ The corporation’s name must have one of the following seven words within it:  corporation, company, incorporated, limited, association, fund, or syndicate (the first four of these words can be abbreviated, the last three cannot).

² It should be noted that a specific statement of purpose is not required, but if it is included in the articles and the corporation acts outside or beyond the scope of that specific purpose, this is called an “ultra vires act” and shareholders can seek an injunction and hold officers and directors of the corporation liable for any losses incurred pursuing these actions beyond the scope of the specific statement of purpose.

³ 15 Pa. C.S.A. §1306.

⁴ 15 Pa. C.S.A. §1308.

⁵ 15 Pa. C.S.A. §1309.

Topic 2: Steps in Forming a Business Corporation ›