Forming a Corporation for a Business
Sometimes a new business will decide that the best legal entity to form based on its goals is to form a corporation. There are some pros and cons to using a corporation as a business entity.
- easy to distribute stock to many shareholders;
- different classes of stock with different voting rights are possible;
- many investors will prefer a corporate entity
- corporate formalities MUST be observed;
- meetings must be held and minutes recorded;
- a board and officers must be appointed;
- many states have annual filing fees and compliance deadlines;
- administrative burdens of upkeep.
But what about an “s” corp? There is no entity that is a “s corp!” “S” refers to subchapter s of the IRS code and is a tax designation. The actual business entity can be a corporation or an LLC that elects to be taxed under subchapter s. For a number of business owners, the s election may save money on federal taxes. However, the s election comes with several requirements and restrictions and the s election must be done properly and timely.
A corporation should also have bylaws and a shareholders’ agreement in place. The bylaws will set forth many legal formalities for the corporation and the shareholders’ agreement will set forth the different rights and duties of the shareholders. One is wise to have these documents drafted by a business attorney.
Should your accountant form your corporation? Many accountants will offer to form a corporation or other entity. This is okay, except we’ve found that in many cases, they form the entity and stop there. Why is that problematic? Because no one has properly issued or logged the stock certificates, the business owner doesn’t understand how to keep meeting minutes, and most disturbingly, no bylaws and no shareholder agreements are drafted. We can’t stress this enough with clients that have or want to form a corporation: these formalities are NOT OPTIONAL when it comes to a corporation. You MUST have them in place to retain the liability protection of the entity. Failing to have the proper formalities can expose the shareholders, officers and directors to personal liability.
If you’d like the help of one of our Pennsylvania or New Jersey business lawyers in forming a corporation, drafting meeting minutes, corporate compliance and filings, or a shareholders’ agreement, please reach out to our center city or main line business law office.