Pennsylvania Law Monitor : Pennsylvania Lawyer & Attorney : Stark & Stark Law Firm : Yardley, Philadelphia, New York, New Jersey

A corporation is a legal entity that is separate from its shareholders, officers, directors and employees. Every corporation is required to maintain certain corporate formalities that will preserve the corporation’s status as a separate legal entity, and therefore, insulate its shareholders from personal liability.  Generally, a creditor of the corporation will be unable to recover from the corporation’s shareholders, directors and officers for a corporate debt or other corporate obligation without “piercing the corporate veil.”  Creditors may, however, “pierce the corporate veil” if the corporation does not maintain proper corporate formalities.

Every state has certain laws that provide corporate formality guidelines that shareholders, directors and officers must follow. Some of the most basic corporate formalities include having annual meetings of the shareholders and directors of the corporation. Corporations must have at least one shareholders meeting each year (or a written consent in lieu of such meeting), where the shareholders elect the board of directors for the following year. Corporations must also have a directors’ meeting each year (or written consent in lieu of a meeting) where the directors elect officers of the corporation for the following year.

Significant corporate actions should be documented and confirmed by the shareholders and directors during annual meetings, including, but not limited to, loans to or from the corporation, purchases of real estate, leases of property, purchases of a significant amount of personal property or equipment, and any other significant matter regarding the operations of the corporation.
 

• The following are corporate formalities that should be maintained to protect your corporation’s status as its own legal entity and protect you from potential personal liability:
• Maintain adequate capital in the corporation to meet all current and foreseeable debts.
• Maintain adequate liability insurance necessary for your type of business.
• Do not guarantee the debts of the corporation unless it is required to obtain loans, financing, etc.
• Do not offer to personally pay corporate debts.
• Do not commingle corporate and personal funds by placing any corporate funds in personal accounts.
• Obtain appropriate authorizations from the board of directors for any and all corporate loans to the shareholders, officers or directors of the corporation.
• Do not use corporate assets for personal use unless the board of directors of the corporation authorizes such use.
• Do hold regular meetings of the shareholders and board of directors of the corporation, and keep written documentation of the proceedings of these meetings.
• Do display the name of the corporation on all correspondence and sign your name as a corporate officer, and not individually.
   

The above is not an exhaustive list of all corporate formalities that should be maintained to protect your corporation’s status as its own legal entity and protect you from potential personal liability, however the above actions should become habit for the shareholders, directors and officers of your corporation.

Maintaining corporate formalities is not difficult, however, daily issues do arise. A trusted attorney familiar with corporations and corporate formalities can advise you on maintaining proper corporate formalities and protecting you from personal liability.

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In today's uncertain economic climate, it has never been more vital to protect your company and your customer base. With that said, it is critical to the success of your company to have properly drafted and appropriate restrictive covenant agreements with your employees which will adequately protect your company's customer relationships.  Without having appropriate restrictive covenant agreements, your business risks the unfortunate consequence of losing customer relationships to departing employees. What follows is a brief explanation of the common types of restrictive covenants.

1. Non-Competition —This is an agreement whereby the company generally seeks to prohibit the employee from accepting employment in the company's industry for a certain period of time. It is common to have a non-competition agreement that is limited by geography (e.g., the employee cannot accept employment at a competing company for a period of two years in a particular state or geographic region, such as within a hundred-mile radius of the company's offices, etc.). Non-competition agreements are disfavored in Pennsylvania. Therefore, non-competition agreements must be narrowly drafted to only protect legitimate business interests of the company.  Pennsylvania Courts are unlikely to enforce a non-competition agreement that the Court deems purpose is to eliminate or repress competition or to keep the employee from competing against the company so that the company can gain an economic advantage. Hess v. Gebhard & Co., 570 Pa. 148, 808 A.2d 912 (2002).
2. Non-solicitation —This is an agreement whereby the company does not seek to prohibit the employee from accepting employment in the same or similar industry, but rather generally seeks to prohibit the employee for a certain period of time from soliciting to render or rendering services to company customers, wherever located. The non-solicitation covenant can be modified to limit or expand the customer prohibition to past and current customers, and prospective customers reasonably identified by the company prior to the employee's termination.  Like non-competition agreements, non-solicitation agreements must also be reasonable. Pennsylvania Courts will look to limit or will not enforce non-solicitation agreements it deems unreasonable. Pennsylvania Courts have held that a covenant that an ex-employee may not "solicit, divert or take away" customers of a company allows the employee to accept business from the customers of the company, as long as the customers seek out the ex-employee. Merrill, Lynch, Pierce, Fenner and Smith, Inc. v. Moose, 365 Pa.Super.40, 528 A.2d 135 (1987).  Both non-competition and non-solicitation agreements are intended to protect the company's legitimate business interests, most important among them being its customer relationships. The primary difference is whether the employee will be prohibited from seeking or accepting gainful employment in the same industry as that of the company (i.e., non-competition), or the employee will be permitted to become employed in the same industry, but not with the benefit of the company's customers or employees (i.e., non-solicitation).
3. Non-disclosure—This is an agreement that protects information that the company finds important to its business. Non-disclosure agreements prohibit the employee from disclosing or using information of the company, other than for purposes that benefit the company. Often non-disclosure agreements require that the employee return all property of the company upon termination of employment. While often used to define the scope of "confidential information", all states have laws that prohibit an employee or former employee from disclosing confidential information of the company, regardless of whether or not there is an agreement between the company and employee covering the confidential information. 

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In Pennsylvania, there are generally three (3) forms of real estate taxation: (1) County; (2) Municipality (i.e., Township, Borough or City); and (3) School District.  Each of these taxing authorities sets their own taxing rate, referred to a millage.  A mill is equal to $1.00 for every $1,000.00 of assessed property values.  The total real estate tax that someone pays is equal to the total millage of all the taxing authorities times the assessed value of the real estate.

The calculation of the assessed value is not a simple matter.  The assessed value is equal to the ratio between fair market value and assessed values within a county referred to as the common level ratio.  The counties use a base year when all properties were last assessed to arrive at their assessed values.  In Bucks County the last countywide reassessment was done in 1972.  The common level ratio is a statistical calculation performed on a yearly basis by the State Tax Equalization Board based on data of sales in the prior year. 

A taxpayer has the right to challenge the assessment of his/her real property on an annual basis.  If you are successful in reducing the assessment of your real property you will have effectively reduced all of your real estate taxes.  Each county has a cut off date to file a challenge for the taxing authorities next fiscal year.  In many counties the deadline is August 1st, however it is important to know the cut off for the county in which your property is located.   The appeal it initially heard before the county’s Tax Assessment Appeals Board.  At the hearing before the board, the taxpayer has the burden of proving that the property is over assessed.  Normally, a taxpayer must prove that the property is over assessed in comparison to comparable properties within its taxing area (If you recently purchased your property you may be able to introduce your HUD-1 Settlement sheet as evidence that the property is over assessed). A taxpayer may also be able to challenge the assessment based on other theories (e.g. illegal spot assessments or constitutionality of the county’s base year), but are beyond the scope of this posting.  A taxpayer also has a right to appeal a reassessment done to the property due to a substantial change within forty (40) days of receipt of the notice of reassessment from the county.  The taxpayer or any taxing authority has the right to appeal the Tax Assessment Appeals Board’s decision to the Court of Common Pleas of that county, within a certain period usually thirty (30) days.  The Court of Common Pleas does not consider the board’s decision so long as independent credible evidence is introduced at the hearing before the court.  During the pendency of the appeal the taxpayer is still required to pay all taxes when they are levied. 

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