Back to the Basics – The Importance of Incorporating a Business

Back to the Basics – The Importance of Incorporating a Business

The early stages of forming a new business involve a number of critical decisions.  Among the most important is whether to incorporate.  Once incorporated, the owners of a corporation (called the shareholders) are normally not personally liable for the obligations of the corporation.  Neither are the directors or officers of the corporation.  Usually, only the corporation itself can be held liable for the corporation’s obligations.  One’s personal assets are protected from such obligations.  Personal assets such as one’s house or vehicles cannot be reached. This post lays out the essentials of incorporating a business.

The Essentials of Incorporating a Business

When it comes time to incorporate a business, the identity of the incorporator or incorporators must first be determined.  Incorporators can be one or more natural persons, eighteen years of age or older, or even an entity, such as another corporation.  Incorporators are necessary because they hold the organizational meeting to elect directors and adopt by-laws.  The elected directors will adopt the bylaws at the organizational meeting.  The basic contents of the bylaws include matters of internal governance such as officers’ duties and meeting times.

Next, the Articles of Incorporation (“Articles”) must be drafted.  The Articles must include the name and address of the registered agent or office, the name and address of the incorporators, the name of the corporation itself and must include the number of authorized shares.  The name of the corporation must not be deceptively similar to that of an already existing corporation.  It must be noted that these are the bare minimum requirements; the Articles may include more, and usually do.  Unless stated otherwise in the Articles, the corporation remains in existence for a perpetual duration, the corporation may engage in any lawful activity and has the same powers as an individual.

From here, the Articles must be filed with the Secretary of State in the state where the corporation sits.  For example, for a Pennsylvania corporation, the Articles should be filed with the Pennsylvania Secretary of State.  Once filed, the corporate entity comes into existence.  Lastly, please note that there are three circumstances where the corporate entity may be disregarded and individuals can be personally liable.  The first way is when the new corporation is grossly undercapitalized so that at the time of formation there is not enough unencumbered capital to reasonably cover potential liability.  The second way is when the corporate entity is used as an alternate ego.  For example, where shareholders treat corporate assets as their own, fail to observe corporate formalities, or commingle personal and corporate funds.  Third, an individual’s personal assets may be reached when necessary to prevent fraud or to prevent one from using the corporate entity to avoid his existing personal obligations.

What Should You do?

There are many additional complexities that should be taken into consideration regarding the workings of a corporate business.  Luckily, in Philadelphia, small business lawyer Stuart A. Mickelberg, Esq. can provide the help you need. Mickelberg’s practice areas are business formation, contracts, copyright and trademark, employment issues, commercial leases and small business exit strategies.  He will proudly and confidently assist in starting one’s business or aid in the business’s running, and can provide help with virtually all of the legal issues one will face throughout the life of the business.  In all, if you own a small business or are thinking of starting a small business in Pennsylvania or New Jersey, you should consider contacting Stuart Mickelberg.

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