How To Start An LLC In Pennsylvania
A Limited Liability Company, or LLC, is a form of business entity where business owners receive liability protection, tax deductions, and easy management. The benefits LLC provides to businesses allure many small businesses towards it. Regulations to follow for starting an LLC vary greatly from state to state. LLC has pros and cons, and many risks are involved, as they can be in any form of business structure. Learning about their conditions, advantages, disadvantages, where, and how to start an LLC is essential for any business to succeed in today’s competitive world.
What is an LLC?
An LLC is a hybrid between a corporation and a traditional partnership business structure.
The owners of limited liability companies, or members, are not responsible for the liabilities and debts, and creating it is simple. They can be other LLCs, corporations, or individuals. Many features of an LLC resemble that of a corporation and a partnership. The tax is levied on the owners of an LLC, who pay it separately on their share of the revenue. This feature is like that of a partnership.
The basic purpose of an LLC is to receive profits. Other purposes are mentioned in the certificate of organization. A Certificate of Organization is filed with the Pennsylvania Department of State for a fee to form a Pennsylvania limited liability company. This document legalizes the formation of the Pennsylvania Limited Liability Company.
Businesses in Pennsylvania can choose the form of LLC which suits their business the most. There are different kinds of LLCs that suit anyone, whether a solo business owner, an existing LLC, or a corporation seeking expansion of its business.
Advantages Of an LLC In Pennsylvania
Pennsylvania comes under the top ten states ideal for businesses to form their LLCs. Creating an LLC is the simplest and quickest way to start a Pennsylvania business. The benefits of an LLC there are mentioned below:
Limited liability protection
Let’s look at the most important advantage of an LLC in Pennsylvania, which is safeguarding the owners’ personal assets due to limited liability. In case of legal proceedings, the creditors cannot hold the members responsible for paybacks. This only applies when nothing is done illegally, or no illicit acts are performed.
Deduction of pass-through taxes
The members of PA LLC do not have to pay federal income taxes. This huge concession increases the revenue of the owners. The owners are later taxed according to their earnings share in the business. This feature is unavailable in corporations, where the owners are supposed to pay their taxes twice.
Simple and flexible formation
Sustaining and creating an LLC in Pennsylvania is a quick and simple process. The business can apply for it online or by mail. Single-member LLCs do not have to file taxes or other extensive documents. The LLCs over there can also opt to be managed by a manager and own multiple owners with a combination of individuals, corporations, or other LLCs as owners.
A credible business entity
People perceive an LLC as a credible and trustworthy form of business in comparison to a sole proprietorship or partnership. Workers and customers associated with it are considered more trustworthy than other businesses. The addition of “LLC,” “LLC,” or “Limited Liability Company” to the name of your business will let others know instantly that it is a formal business.
Register your business name
All LLCs in Pennsylvania have unique names not possessed by any other LLC or business in the state. No name close to your business name can be used as long as the business is running. The name can be registered in advance too.
A sole proprietorship or partnership will be required to name its business after the names of its owners, unlike an LLC which can opt for a unique name without any restrictions.
If the business decides to alter the location of the LLC, then Pennsylvania state allows them to do so. LLC domestication can be carried out, after which the LLC will become a domestic LLC in another state and will be governed by the laws of that state. In the initial location where the LLC was formed, the LLC will be considered a foreign entity. The process will cost $70 and require filing the Statement of Domestication form. The rules and conditions differ from state to state, and entities must make sure they have done their research before taking any steps.
What Are The Disadvantages Of Forming An LLC In Pennsylvania?
A business must thoroughly investigate before forming an LLC anywhere for a successful venture. Where Pennsylvania is an ideal place for a new business to startup, there are downsides to forming it. The disadvantages of forming an LLC in Pennsylvania are discussed below:
Cost of forming an LLC
The cost of forming an LLC in PA is higher than the cost of forming a Sole Proprietorship or Partnership. There are also charges for maintaining it, like an annual report fee. The business should consider higher maintenance and formation charges than some proprietors before forming.
Self-employment taxes are levied on the income received through LLC that is passed to the members. Taxes a corporation pays are on salaries and not on corporate profits. However, there are added state business taxes and unemployment taxes. An LLC might not be an ideal choice for you, depending on the nature of your business due to taxation.
Transfer of ownership
It is easier to transfer corporation ownership than an LLC in Pennsylvania. The shares of stock can be sold for spreading ownership, or the shareholders can sell their shares to anyone else. At the same time, an LLC member will need the approval of every member to add new members or to change the ownership proportion of the present members.
How To Form an LLC In Pennsylvania
An LLC formation in Pennsylvania is a quick and straightforward process. The cost to file for an LLC is $125, and several legal and business documents with the Pennsylvania Department of State. The application can be filed online or by mail. The whole process can be broken down into three simple processes, which are explained below:
- Come up with a unique name for your Pennsylvania LLC
- Allocate a CROP or Registered Office
- Submission of paperwork for LLC
- Receive approval from the state
- Operating agreement
Come up with a unique name for your Pennsylvania LLC
The name for an LLC must be unique and must not be taken already. Explore the names of businesses on the Pennsylvania business entity search engine to make sure any other business does not use the name chosen.
Deciding on a name in advance will save you time and cost. The good part is that you can reserve your name 120 days in advance for a fee of $70.
Requirements for selecting the name
There are a few rules you must follow when selecting a name for registering your LLC. The name must have “company,” “limited liability company,” “limited,” “ltd.” or an abbreviation of it at the end of the name.
The name of the LLC in Pennsylvania must not contain any word which may show its association with the business corporation, like “corporation” or “incorporated.” The name must also not use any word that is used in government agencies.
Allocate a CROP or Registered Office
The law in Pennsylvania makes it compulsory for the business to provide an official mailing address or registered office in Pennsylvania where legal documents or lawsuits can be received for the LLC. The address must be a physical address and avoid a PO box. If no address in Pennsylvania is available, then the business can form a contract with a Commercial Registered Office Provider, or CROP, who can do the job on behalf of the LLC.
Make sure to form an agreement with a CROP before naming them during the process of filing for the LLC, or else the business will have to face criminal and civil penalties. There is s list of CROPs to choose from that are offered by the state.
Submission of paperwork for an LLC
Finally, submit the Certificate of Organization form and the docketing statement to the Charitable Organizations and the Pennsylvania Department of State’s Bureau of Corporation. The form can be submitted by mail for a fee of $125 or filled out online on the website.
The business must file for a foreign LLC if an LLC is already established outside PA but wants to expand there. Businesses outside must complete a Foreign Registration Statement for a filing fee of $250.
The LLC of Pennsylvania can be transferred to another state for a fee of $250 and submission of a Statement of Domestication, after which the LLC will become a Foreign LLC in PA.
Receive approval from the state
A certificate is issued from the state after the documents of formation for the LLC are approved, and the LLC exists formally. This certificate will help the limited liability company obtain a business bank account and business license.
This agreement will contain all the details about the structure of the business. This document is created as a formality to write down all that the members have agreed, so in case of a lawsuit or legal proceedings, a legal agreement is there to revise the terms on which the business was started.
Experts highly recommend the formation of a Pennsylvania operating agreement which can include the following:
- LLC name and principal address.
- Name and address of the CROP or registered agent.
- Purpose and extent of the business
- Members and their shares in losses or profits.
- Procedures to follow on how to add new members or what to do if any member leaves.
Types of LLC
Which type of LLC is ideal for me?
In Pennsylvania, there are several types of LLCs available for business owners. These include:
- Domestic LLC: This type of LLC is formed within Pennsylvania and operates under state laws.
- Foreign LLC: A foreign LLC is an LLC that was initially formed in another state but wants to operate in Pennsylvania. It must register with the Pennsylvania Department of State to do business.
- Single-member LLC: This is an LLC with only one owner or member. It provides limited liability protection and simplified tax reporting.
- Multi-member LLC: A multi-member LLC has more than one owner or member. Like single-member LLCs, they offer limited liability protection and can choose how they want to be taxed.
- Series LLC: A series LLC is a more complex business structure that allows for separate, individual series or divisions within the LLC. Each series can have its own assets, liabilities, and operations, providing extra protection and flexibility.
- Professional LLC (PLLC): This type of LLC is formed by licensed professionals such as doctors, lawyers, or accountants. The PLLC structure is similar to a regular LLC, but it’s designed to comply with specific professional licensing requirements.
Remember to research and consult with a professional to choose the most appropriate LLC type for your business needs.
Applicable LLC Taxes In Pennsylvania
All LLCs are charged according to their types in Pennsylvania. The state of Pennsylvania declined the LLCs to pay franchise taxes or Capital Stock in 2017. The details of state taxes are available online on their web page.
The single-member LLCs are “disregarded entities,” and the multi-member LLCs are taken as partnerships for taxation. Anyhow the LLC’s expenses and income are not taxed at the business level but are passed down to the members’ tax returns, who pay their income tax on revenue. The members also have to pay self-employment taxes on their share of profits as they are considered self-employed by the state.
Some LLCs are elected and taxed as S-corporations, which is another kind of pass-through tax method. The members don’t have to pay self-employment taxes and get to save more for their retirement plan.
- State Employer Tax: LLCs that have employees must pay State Employee Tax. First, get an Employee Identification Number or federal tax ID number. This number will also be required when opening a bank account in the business’s name. The Employee withholding tax must be paid every month or every four months. The form for payment is available on the Department of Revenue Website through their E-tides online filing system.
- Sales Tax: Sales Taxation on LLC depends on the product it sells. The LLC must collect the taxes and payments to the state. For the calculation of taxes correctly to avoid errors, the business must file with the Department of Revenue. The tax can be reimbursed quarterly or monthly through the Department of Revenue or the E-tides online filing system.
- Mixed-Use Development Tax Credit Program: LLCs in Pennsylvania receive tax credits for legalized construction of rehabilitation projects.
- Educational Tax Credits: The LLCs in Pennsylvania that provide organizations scholarships to institutes where needful students attend receive tax credits.
Cost of forming an LLC in Pennsylvania
Businesses are largely turning up to Pennsylvania for starting LLCs due to flexibility and easy formation. The taxation policy is also favorable for many entities. The setup of an LLC in PA can require an initial investment. The cost can vary according to the kind of LLC in question and the kind of business structure.
Upon filing for the Domestic LLC and submission of important legal documents and a list of members, the fee of $125 as a Certificate of Organization has to be paid to the Secretary of State of Pennsylvania. If the company wishes to reserve its name, an additional $70 would be charged. The state levies charges of $150 for the Certificate of Merger, Division, or Consolidation. There is an additional fee of $125 for every new association created due to the division of LLC. Certain companies are eligible to pay an annual registration fee of at least $500.
For Foreign LLCs, the charges differ. Registration charges are $250 and $250 for any amendments made for registration. Each ancillary transaction costs $250.
There are additional costs of hiring CROPs as the state demands to submit a legit address for receiving important legal documents. This can range from $49 to $300 per year. This cost can be deducted if a valid address in PA is submitted to serve the purpose. Upon submission of the wrong address, Civil and Criminal penalty charges can be applied.
Certificate of Organization
Name reservation (optional)
Registered agent fee
Pennsylvania decennial report
Business licenses and permits
Starting A Business
Business Opportunities to Explore in Georgia
If you plan to start your new venture in Pennsylvania, then it’s just the right place to be. The town of Pennsylvania has over one million small-scale businesses, which make up most of the businesses the state gets. Keystone State attracts most small businesses to settle there due to the low cost of living, talented and educated workforce, convenient location, and supportive laws for small businesses. Innovative ideas are most likely to be successful in the state, and nothing should stop you from reaching your goals.
The most profitable business to do anywhere is the one with your passion in it. Use your talent and knowledge and research thoroughly before you launch your startup.
Why Start A Small Business In Pennsylvania?
Starting a business in Pennsylvania is ideal for businesses as the state strongly supports small businesses. Due to the low cost of living, home-based businesses can be started without too much investment and a huge scope for success. The tourism industry loves to explore new trends and ideas, and small businesses are most likely to thrive there.
Philadelphia, Pittsburgh, and Allentown are ideal cities in Pennsylvania where small businesses can do very well. The incentives and advantages for such ventures in these cities sound promising to new startups. The business should investigate and test the market to see if any location is ideal for its business.
Is LLC The Best Entity For Me?
Maybe, LLC isn’t the right entity for you. Maybe it is a C-Corp. Only way to find out is to directly compare them all.
LLC vs Corporation (C-Corp)
Sole proprietorships and Limited Liability Companies (LLCs) are two of the most common business entities for individuals and small businesses. Learn what differentiates the two today.
LLC vs S-Corp
Not sure what business structure to choose? Learn about the key differences between LLC and S-Corp today.
LLC vs Sole Proprietorship
The primary difference is that an LLC provides limited liability protection for its owners, while a sole proprietorship does not.
Frequently Asked Questions About Starting An LLC In Pennsylvania
Here are the most commonly asked questions about forming an LLC business in the state of Pennsylvania:
If the documents are submitted by mail, it takes six weeks, and online submission takes four weeks to complete.
A certificate of subsistence verifies that the LLC in Pennsylvania exists under the laws of the Commonwealth of Pennsylvania and that it abides by the tax and registration requirements. Many states refer to the certificate of subsistence as a certificate of good standing. Although it is not required in the state, you may need it to get government funding, get financing, or register your foreign LLC in a different state. After applying for the certificate, you can get it within 2 working days for a fee of $40.
Pennsylvania has no reporting requirement or annual fee except for professional LLCs, which must submit an annual registration certificate to remain in good standing. However, there is a report that the company’s owner has to file every 10 years, which is submitted with a filing fee of $70.
There is no need for general businesses; however, permits or licenses may be required for specific professions and industries. If you are unsure about the specific industries, you can check with the Department of State for further information.
If you want to operate your business under a trading name different from your company’s legal name, you must file a “doing business as” or DBA in Pennsylvania. First, select a DBA name and then make sure it is not being used by anybody else in the state. After that, you can file a registration of a fictitious name with a fee of $70.