What is a limited liability company (LLC) in Pennsylvania (PA)?
To understand what an LLC in Pennsylvania is, we first have to look into the business structures which are present in Pennsylvania relating to forming an LLC in Penn.
Among the types of business structures available in Pennsylvania would include sole proprietorship, partnerships, and corporations. Below is a brief overview of what each of these business structures is like.
Sole proprietorships are the simplest type of all the business structures. Most of the time, an entrepreneur with a small business will utilize this business structure before expanding or growing into other business structures, most commonly LLCs or partnerships.
Sole proprietorships are simple in a sense where they have less legal restrictions, while still retaining profit.
However, sole proprietorships also have unlimited personal liability when it comes to the debs and liabilities of the business, and termination of the business occurs upon the death of the sole proprietor.
General partnerships are formed after the agreement of each partner involved. The agreement should include contribution of each partner, the distributions of profits and losses as well as the terms of termination.
If a written agreement is not drafted, all partners are presumed to have equal shares in the losses and profits of the business.
A general partnership has unlimited personal liabilities for the businesses debts and liabilities. A limited partnership is formed when there exist one or more limited partners in combination with one or more general partners.
Limited partners have limited personal liability. On the other hand, there are alternative forms of a general partnership known as the Limited Liability Partnership (LLP) and the Limited Liability Limited Partnerships (LLLP) which involves filing with the Bureau of Corporations and Charitable Organizations of the PA Department of State.
LLP and LLLP statuses impart general partners with limitations and additional protection for personal liabilities from the businesses debts and liabilities.
Corporations are the most complex business structure. It is highly advised that the paperwork for incorporation be viewed by a legal advisor. This is to ensure that all legal consequences are considered before starting a business.
Corporations limit the liability of the owners based on the shares held by individual owners.
Death or transfer of shares does not affect the corporation, unlike other business structures. Corporations require detailed record-keeping and regulation as they have double taxation for profits. Dividends earned are tax on an individual level.
There exist two types of corporations in Pennsylvania, namely C corporations and S corporations. Both of which have different rules, with C corporations allowing federal income tax rules for determining income and S corporations following Pennsylvania income tax rules for determining income.
Limited Liability Company (LLC)
Limited liability companies are different. Limited liability companies are sometimes formed when an owner of a sole proprietorship wishes to grow and expand their business. Hence they convert their business model from sole proprietorship to a limited liability company.
There are many benefits for the owner of a sole proprietorship who wishes to expand their business to convert it to a limited liability company.
Firstly, the owner of an LLC’s personal assets (Car, Home, Bank Account) is protected from the debts and liabilities of said LLC. Secondly, it acts as a combination of benefits of pass-through taxation of a sole proprietorship or a general partnership and the liability protection of a corporation.
The owners of an LLC are referred to as members. Said members can be individuals, corporations or partnerships. There is no maximum or a minimum number of members needed to form an LLC.
Below are the steps needed to form an LLC in PA
Step 1: Selecting a viable name for an LLC in Pennsylvania
The first step to forming an LLC in Penn is to select a viable name for the LLC. The name selected for the LLC must be unique and distinguishable from existing registered businesses in Pennsylvania.
Selected LLC names may be checked for availability at the Pennsylvania Department of State business name database.
In compliance with Pennsylvania law, the selected LLC name must contain the phrase or words “Limited Liability Company,” “Limited,” or “Company”. There are some acceptable abbreviations of the phrases or words (Ltd., Co.).
In contrast, the selected LLC name must not contain words or phrases that would confuse said LLC name with the name of a government agency (Department of State, Treasury of State, FBI, Department of State etc.).
If the company name is available and a future LLC in Pennsylvania wishes to reserve a name after checking the availability of said name from the PA Department of State business name database, they may reserve the desired name with the PA Department of State for a maximum of 120 days.
Reserving a name can be done by filling a Name Reservation Form with the PA Department of State.
It is also advised to check if the selected LLC name has an available web URL in the event the LLC owner wishes to make a business website, which enables the LLC members to reserve the domain name to prevent it from being used by other entities.
Step 2: Appoint a registered agent in Pennsylvania
To start an LLC in Penn, a registered agent, also referred to as a registered agent in Pennsylvania must be appointed. The registered agent can be a Pennsylvania resident above the age of 18 or a business entity that has agreed to accept legal documents on behalf of the LLC in Pennsylvania.
The appointed registered agent must have a physical street address within the state of Pennsylvania (PO Boxes are not valid). LLCs have the option to use their personal home addresses, the address of a relative, the address of a friend or the address of a Commercial Registered Office Provider (CROP), given that they all have physical street addresses in PA.
It is advised to use the address of a CROP as the appointed registered office/ registered agent to keep the personal address of the owner off public records.
Step 3: Obtain a Pennsylvania Business License
Not all business industries require a Pennsylvania business license. In the event that the Pennsylvania LLC requires a business license, it can be obtained by filing a PA-100 Business Entity Registration Form online or by mail with the Pennsylvania Department of State.
If the members of a Pennsylvania LLC are unsure about which licenses their specific industry requires, it is advised that they reach out to a professional licensed company to ensure all required licenses are filed for.
LLCs are able to file for a fictitious business name, also referred to as a “Doing Business as” (DBA) name with the PA Department of State.
The fictitious business name can differ from the legal business name filed by the LLC to the PA department of state. Unlike the legal business name, the fictitious is not unique but can be used as a trading name.
Pennsylvania differs from most other states in this matter as fictitious business names are not unique.
Step 4: File a Certificate of Organization and Docketing Statement
An LLC in Pennsylvania is formed by filing a certificate of organization (DSCB:15-8821) with the Pennsylvania Department of State. The certificate of organization is a legal document.
The certificate of organization must include the name of the Pennsylvania LLC, appointed registered office, the names of all members, an effective date for which the Pennsylvania LLC is formed and the list of services which your LLC will be providing.
It is worth mentioning that the Pennsylvania Department of State has a filing fee for the certificate of organization. The certificate of organization filed to the Pennsylvania Department of state must be accompanied with a docketing statement (DSCB:15-134A).
The accompanying docking statement should include the name of the LLC, the name of the individual responsible for initial tax reports, a description of the LLC’s business activity, the Federal Tax Identification Number (FEIN) / Employer Identification Number (EIN) and the LLC’s Fiscal Year End (FYE).
Both the certificate of organization and docketing statement can be sent to the Pennsylvania department of state via mail or online.
Step 5: Write up an LLC operating agreement
Although it is not a requirement, it is highly advisable that the LLC members draft an LLC operating agreement. The operating agreement is solely an internal document, meaning it does not require filing with the Pennsylvania secretary of state or the Pennsylvania department of state.
The operating agreement of an LLC acts as a document to establish the power, duties, liabilities and obligations of each member of the LLC. Members of an LLC do have the option of not drafting an operating agreement.
LLCs which do not draft an operating agreement run the risk of being insufficiently equipped to reach any settlements regarding misunderstandings over management and finances.
The Pennsylvania LLC would be required to follow Pennsylvania’s default operating agreement if an operating agreement is not drafted among members. Hence it is strongly advised that the LLC organizers draft an operating agreement to ensure smooth operation.
Step 6: File for a Pennsylvania LLC Employer Identification Number (EIN)
The Employer Identification Number (EIN), sometimes referred to as a Federal Employer Identification Number (FEIN) or even Federal Tax Identification Number (FTIN) are nine-digit numbers assigned by the Internal Revenue Service (IRS).
EINs are used when opening business bank accounts, filing and managing federal and state taxes and when hiring employees.
If the owner of a sole proprietorship intends on expanding and growing their business into an LLC, they are required to obtain a new EIN in compliance with the IRS. Obtaining an EIN can be done online or via mail by the IRS.
All LLCs with employees are required to have an EIN. LLCs with more than one owner are required to have an EIN as well.
Step 7: Pennsylvania LLC Taxes and Certificate of Annual Registration
Most Pennsylvania LLCs act similarly to sole proprietorships in Pennsylvania where the income of the LLC itself is not taxed. These types of business entities are known as pass-through entities. However, the income of members of the Pennsylvania LLC are taxed based on their share of the business.
The default tax status in Pennsylvania according to the IRS is as follows. If the Pennsylvania LLC is single-member owned,it would be taxed as a sole proprietorship. In contrast, if the Pennsylvania LLC is multi-member owned, it would be taxed as a partnership.
Please note that the taxes mentioned above are state / local taxes, not federal taxes. There are options for an LLC who wishes to treat their business like a corporation for tax purposes.
LLCs who opt for this option would have to pay for the income tax of a C corporation, but they are able to save on the self-employment taxes.
The members of the Pennsylvania LLC should ensure that the net income of the Pennsylvania LLC is sufficient to cover the additional administrative cost that comes with being treated as a C corporation.
If the Pennsylvania LLC has employees, the LLC would have to pay federal taxes (IRS) and state taxes. The first step is to withhold and pay the employee income taxes to the Department of Revenue (DOR).
Pennsylvania law requires employers to withhold Pennsylvania personal income tax from employees’ compensation in the case that a service is provided by a resident or non-resident employee within or outside the state of Pennsylvania.
The employer is required to register the business with the DOR online or by mail (PA-100).
Once registered, the withholding taxes must be filed on a periodic basis semi-weekly, monthly, semi-monthly or quarterly (see more on the Pennsylvania Department of Revenue website) using the PA-501 form.
Any version of the REV-1667 form would be needed to reconcile the tax withholding of the Pennsylvania LLC. Furthermore, employers will have to pay state unemployment insurance taxes (UI).
The state unemployment taxes are handled through the Department of Labour and Industry (L&I). The registration of the state unemployment taxes can be done by filing form PA-100. After registering, a report on wages and payment of unemployment insurance to the department of labour and industry (L&I) must be filed every quarter (see more on the L&I website).
If the formed LLC sells products to customers in Pennsylvania, sales tax must be collected and paid by the employer to the Pennsylvania department of revenue.
This would require the employer to register this specific cause to the Pennsylvania department of revenue.
Following registration, periodic sales tax payments must be made to the Pennsylvania department of revenue for sales made. Additional registration may be required if the LLC wishes to do business in other states outside of Pennsylvania.
In the state of Pennsylvania, only foreign or certain professional LLCs are required to file a certificate of annual registration with the PA Department of State.
The certificate of annual registration must be filed before the 15th of April. There is an annual non-refundable fee of $560/member on the 31st of December, this fee must accompany the filed certificate of annual before the 15th of April.
Step 8: Maintaining the Pennsylvania LLC
Maintaining the formed LLC in PA is the next important step after the LLC is formed. It is recommended that members of the LLC maintain good standing with the state of Pennsylvania for as long as the LLC exists.
Members of the LLC are able to apply for a certificate of subsistence when the LLC is still in existence as a matter of record in the Office of the Secretary of the Commonwealth.
Information regarding steps on how to obtain the certificate of subsistence can be found on the department of state website.
Members of an LLC are also advised to keep personal and business finances separate as to avoid confusion during sorting. By doing so they are ensuring that they will not be personally liable for any business debts and liabilities.
What are the benefits and drawbacks of starting an LLC?
The benefits of starting an LLC are as follows. LLCs generally do not need the extensive upkeep and recordkeeping of a corporation. The members of an LLC are not personally liable for business debts and liabilities.
Furthermore, the LLC itself is not taxed as it is considered a pass-through entity unless the members of the LLC request to be treated as a C corporation. The drawbacks of starting an LLC would include the initial cost of starting an LLC being costlier than sole proprietorships and partnerships.
Besides that, members of the LLC are required to pay high federal self-employment taxes. LLCs are also not able to issue stocks and hence they are not ideal for fundraising. Lastly, a high annual fee is incurred for LLCs in PA which has a high member count.
Drawbacks aside, forming an LLC in PA is a great option as it offers a balance between tax flexibility and legal protection for small business owners, not to mention how easy it is to form one in Pennsylvania.
Alternative: Using LLC Formation Services
What if someone doesn’t want to go through the hassle of doing the research and filling up the legal work needed to start an LLC. If an individual or group of individuals wish to start an LLC in Penn, but do not want to go through the hassle and the trouble of filing everything by themselves?
Well, they do have the option of getting assistance from company formation services. There is an abundant number of options when it comes to choosing a company formation service. Looking at the companies that are able to help with forming an LLC in Pennsylvania would not limit our choices but it does give us some options to work with.
Among the most popular company forming services that help with LLC formation would include but is not limited to ZenBusiness, Incfile, LegalZoom, Legal Nature, etc. Questions might arise as to how using a company formation service is beneficial and what are the associated risks.
Among the benefits of using a company formation service, time conservation is one of the important ones. When forming an LLC by ourselves, we would end up searching for forms and documents to fill out.
Even after doing extensive research, it is likely that we would miss out a form or two. This can be easily prevented by using a company formation service. Furthermore, most company formation services guide the owner on how to go about settling their first annual requirements.
By settling these annual requirements, paying the fees on time, the individual using the company formation services can rest easy knowing that they are not risking the possibility of receiving a legal penalty for late submission.
Learning from the first time will ensure future company owners are ready to handle the maintenance of their own companies for future years.
There are few if not no downsides to using a company formation service. The main drawback is the cost of hiring the company formation service. If the individual(s) are not willing to pay the cost, they can of course opt to fill out the legal work themselves.
In conclusion, it would be safe to say that opting to use a company formation service is the fastest and safest way to form an LLC in Pennsylvania.
Choosing to use a company formation service also leaves more time and manpower to focus on the business instead of the logistics of forming the LLC itself.
Hopefully this article has helped you in your pursuit of forming an LLC in Pennsylvania. Though the article has mentioned key points that will help you along the journey, it is recommended that you contact a legal advisor on how to proceed with the legal work required.
Contacting a legal advisor will ensure that you are compliant with your current states laws as well as a hasty application process.
Starting a business correctly doesn’t have to be difficult. With over 15 years of experience consulting new businesses and start ups, Matthew is probably the best person to help you set a strong foundation for your business.