Legal Aspects of Starting a Business in Pennsylvania
This blog post is the first in a series about the legal aspects of starting a business in Pennsylvania.
Starting your own business can be exciting but also difficult and demanding as you navigate the complex legal and regulatory environment. If you’ve never done this before in Pennsylvania or another location, we recommend that you consult with an experienced business lawyer. In this blog post, we will identify the first items that you will need to address to properly organize a business under Pennsylvania law.
Select Your Company’s Name
You will need to choose a name for your business that is both available and unclaimed in Pennsylvania. The simplest way to do this is to search the Department of State website's Pennsylvania database of registered firms. https://www.corporations.pa.gov/search/corpsearch
2. Select Your Company’s Business Entity
When deciding to create a new business or if you already own one, it is critical to select the appropriate business entity. There are various types, each with its own set of legal and tax implications. A wise decision can have an impact not only on your current and future business operations but also on your tax liability.
To help you make the best option, let's look through the basic characteristics of each of the entities and learn more about them.
Sole Proprietorship
A sole proprietorship is an unincorporated business in which only one person owns and operates it. The individual owner is liable for income taxes as well as self-employment taxes at a rate of 15.3%.
Characteristics:
There are no state or federal filing requirements to operate
There is no asset protection – the individual’s personal assets are at risk for liabilities of the business
The owner is responsible for directly taxing all business profits.
The owner has unlimited personal liability
General Partnership
A general partnership is an unincorporated entity that is organized and has the duty of conducting trade or business and has at least two owners. Ownership comes in the form of partnership units, shares, or percentages. It is vital to remember that a general partnership is not registered in any particular country, and formal registration is not required for its formation.
Characteristics:
There is no asset protection as each partner is personally liable for the debts of the partnership business
Owners are required to report income on individual returns based on ownership of the business
Both or more partners are responsible for all debts and obligations
Limited Partnership
A limited partnership has a general partner who manages the business and limited partners who may participate in the profits of the business. The general partner is liable for the debts of the limited partnership but limited partners are not; nonetheless, participation in partnership management must be limited or they risk losing their limited responsibility. At least one general partner is necessary for this sort of company.
Characteristics:
The general partner is responsible for all debts and obligations
The limited partner is not responsible for the amount invested in the partnership
Certain property protection is provided to the limited partner, while it is not provided to the general partner
Corporation
Corporations are the oldest and most familiar type of business entity. By law, a corporation is an artificial, intangible being which may acquire and own property, incur liabilities, be sued, hire employees and enter into contracts (to name a few permitted actions). A detailed statutory framework is provided for the creation and operation of corporations.
Characteristics:
Ownership of the corporation is in the form of shares
There is no limit to the number of shareholders who can own one C corporation
Corporations are obligated to pay taxes on its income
With limited exception, shareholders are not liable for the debts and obligations of the Corporation
Multiple classes of share may be issued
Limited Liability Company (LLC)
A limited liability company (LLC) is a hybrid form of business entity to limit liability, where taxation can be done as a corporation, partnership, or neglected organization. Unlike in a limited partnership, where the principal partner is personally liable for any partnership debts, LLC members have limited responsibility.
Characteristics:
LLC is established according to the state law by registration according to the statute of the state LLC Company
Members of the LLC are not personally responsible for the obligations of the LLC
The liability of LLC members is limited to financial investments in companies
S-Corporation
As noted above, corporations are obligated to pay tax on its income. Each shareholder must also pay taxes on any dividends issued which means that every dollar generated by a corporation may be subject to income tax twice – once at the corporate level and once at the shareholder level.
To avoid double taxation, corporations may elect special status under the tax code by filing to be treated as an “Subchapter S” corporation. Subchapter S corporations are not subject to income tax at the corporate level but there are limitations on its organization. Two key limitations: (1) It cannot have more than 100 shareholders and (2) there can be only one class of stock.
Characteristics:
Ownership of the corporation is in the form of shares
An S corporation cannot have more than 100 shareholders
An S corporation is created when its organizers make a S election
Register for Your County’s / City’s / Municipality's Proper License and Permit
You will need to locate specific business licenses in the cities, municipalities, and counties of Pennsylvania where the business will be located. Required licenses vary by jurisdiction. The offices for business licenses should be contacted in this phase to obtain all the relevant information.
3. Register for an EIN and Complete State and Local Tax Forms
You must obtain an Employer Identification Number (EIN) for your business from the Internal Revenue Service. This serves as your company's equivalent of a Social Security number for all federal tax reasons.
Then, open accounts with the Pennsylvania Department of Revenue to pay income and employee-related taxes and inquire about local taxes with the tax offices in the Pennsylvania cities, municipalities, and counties where your company will be located.
4. Open a Business Bank Account and Keep a Good Record
The final step to starting a business in Pennsylvania is to open a bank account that is solely for your business and has nothing to do with your personal finances.
You should also keep accurate records and related documentation for tax purposes. This will help with annual tax filing requirements as well as potential funding options.
‘’As someone who has started his own business, I know it can feel intimidating and daunting. However, by following some basic processes as described in this blog post and conferring with an experienced business lawyer about each step, in particular entity selection, you will be able to organize and finalize everything in a few weeks.” - John Pauciulo
Disclaimer: This article is intended to provide general information and should not be considered as legal advice. Reading this article does not establish an attorney-client relationship with Pauciulo Law Firm, LLC.
