Should You Form an LLC in Pennsylvania?

Do you plan to establish a limited liability company (LLC) in Pennsylvania? It’s simpler than you might think. Case in point, here is a guide for forming an LLC in Pennsylvania. However, the question is, should you?

Before going into why Pennsylvania, let’s see why you should form an LLC in the first place.  

Benefits of an LLC

An LLC is a business structure combining the pros of a corporation and sole proprietorship without many of the cons. The most important pro of an LLC is liability protection without the meetings. You are not liable for business debts or legal issues as an LLC member.

Another key advantage of an LLC is the pass-through taxation. Corporations typically pay taxes twice: corporate and personal income. An LLC does not typically pay taxes as a business. That’s true for single-person LLCs in Pennsylvania. Let’s dive deeper into the benefits.

Limited personal liability

Sole proprietorships are easy to set up, but you, as a business owner, are inseparable from it. Whenever the business runs into trouble, you are personally liable. LLCs are not like that. They are separate entities from their owners, so the company is responsible for its own debts and obligations. In other words, the owners’ assets are generally protected and cannot be collected as compensation.

Suppose an LLC gets involved in a lawsuit. The members can only lose the company funds if the LLC receives an unfavorable ruling. It won’t affect their house, private bank accounts, and other personal assets.

Tax advantages

LLC members can elect to be classified as sole proprietors, partnerships, C-corporations, or S-corporations and taxed accordingly. The tax flexibility lets you choose the best business structure for your business needs.

Typically, LLCs benefit from pass-through taxation. The government does not apply corporate taxes because the obligation passes onto the members. However, members must report all profits and expenses on their tax returns and only pay personal income tax, avoiding double taxation.

The exception is when you elect to form an LLC as a C-corporation. That makes double taxation unavoidable. The government taxes C-corporations at the individual and corporate levels. 

Flexibility

LLCs offer similar protections and advantages as S-corporations but with more management and profit distribution flexibility. A corporation has a fixed management structure with a board of directors, officers, and shareholders. On the other hand, it is not uncommon for formal structures to be absent in an LLC, leaving management to the discretion of its members.

Finally, you don’t have to distribute profits based on shareholder percentages in an LLC as corporations must. Suppose two members have equal stakes in the company. They may set it up so one member gets the lion’s share because of higher initial contributions or investments. Many of these considerations are not dictated by the law, ultimately leaving it to the owners to decide.

Privacy protection

When forming an LLC or a corporation, you must disclose members’ personal information, which can be accessed in public records. The only exceptions are Delaware, Nevada, New Mexico, and Wyoming. These states allow you to register an anonymous LLC to keep private details private.

You can establish an anonymous LLC in these states even if you don’t live there. However, you should find out if that is a good idea by exploring the pros and cons for each state before deciding.

Perpetual existence

An LLC is construed as a separate legal entity from its owner, allowing it to continue operating despite management changes. That means that if an owner retires, passes away, or leaves the company for any reason, the LLC will not dissolve unless the articles of organization state otherwise. If there is no dissolution clause, you can only dissolve an LLC by having all members agree to it or some administrative or judicial action requires it.

Minimal paperwork

Establishing an LLC is much less complex than setting up a corporation. Typically, you only need minimal paperwork, including a formation document, operating agreement, and articles of organization. Instead of creating these documents yourself, you can find templates online or seek advice from a lawyer specializing in LLC formation.

Only sole proprietorships require less paperwork during formation than LLCs. Given the personal liability issue with that structure, most people form an LLC instead.

Drawbacks of an LLC

Although LLCs offer flexibility, protection, tax advantages, and more, they also have drawbacks. To fully understand your business structure, it’s advisable to be aware of the downsides.

Self-employment taxes

In most cases, LLCs are taxed as sole proprietorships or multi-member partnerships. As a result, their owners are subject to self-employment tax, which must be included in the personal income tax return along with the company’s revenue.

The self-employment tax includes 2.9 percent for Medicare and 12.4 percent for Social Security. That amounts to 15.3 percent of all LLC managers’ earnings, which can add to a considerable total for small business owners.

Renewal fees

To keep an LLC active in most states, the owners must pay renewal fees every one or two years, depending on the state they’re based in. Renewal fees vary across states, ranging from $50 to $750 annually. Therefore, inquire about fees for each state and find the ones that suit your business.

Why set up an LLC in Pennsylvania?

Image by Nick Youngson from Pix4free

Single-member LLCs in Pennsylvania enjoy pass-through taxation. However, state tax authorities classify LLCs in Pennsylvania as S-Corp if they have two or more members. Thus, they pay a state corporate net income tax of 9.99 percent. So why form one in the state?

Tax programs

Pennsylvania is attractive to business owners in general because of the tax incentives. LLCs in Pennsylvania in any of the 300 opportunity zones may be eligible for tax deferrals under the Job Creation Tax Credit (JCTC) program. Additionally, a newly registered LLC in Pennsylvania can qualify for a tax credit of up to $1,000.

The benefits of an LLC in Pennsylvania extend beyond the general advantages. The state currently offers various tax credits and programs to support economic development. You may qualify for these incentives depending on your business’s nature and location.

• The Research and Development Tax Credit Program compensates LLCs conducting specific research with tax credits.

• The mixed-use Development Tax Credit Program grants LLCs tax credits for specific construction or rehabilitation projects.

• The Malt Beverage Tax Credit Program benefits businesses that manufacture malt or brewed beverages when they form an LLC and apply for this program.

• Educational tax credits apply to LLCs that contribute to scholarship organizations that provide scholarships for underachieving students.

• The Keystone Innovation Zone Tax Credit offers tax credits to companies within the Keystone Innovation Zones.

• LLCs in the Keystone Special Development Zone can apply for a tax credit when redeveloping abandoned or deteriorated commercial and industrial sites.

• Historic Preservation Tax Credit compensates an LLC in Pennsylvania if it rehabilitates eligible landmark structures.

• The Neighborhood Assistance Program (NAP) motivates engagement in activities that improve community economic development in poor neighborhoods.

• The Resource Enhancement and Protection Tax Credit is available to farmers and agricultural businesses that implement proper management practices in their operations.

• Film or video game production companies can benefit from the Entertainment Production Tax Credit.

• Tour operators promoting live musical events in Pennsylvania may claim tax credits under the Entertainment Economic Enhancement Program.

• Pennsylvania Resource Manufacturing Tax Credit awards a tax credit of five cents per gallon of ethane bought and utilized in producing ethylene to companies that invest at least $1 billion in capital and create a minimum of 2,500 full-time jobs while constructing the manufacturing facility.

• Certain facilities that use coal refuse to generate power, control acid gases, and use ash produced by the facilities to reclaim mining-affected sites may get compensation through the Coal Refuse Energy and Reclamation Tax Credit.

Business climate

Pennsylvania is among the top states for small businesses. One study shows that over half (54.2 percent) of small companies survive for five years. The state also logged $6.4 million in small business loans per 100,000 residents.

Registration and other costs

The Keystone State makes registering an LLC in Pennsylvania easy and affordable. The only fee to register an LLC in Pennsylvania is a non-refundable $125 at initial registration for filing the Certificate of Organization with the state. If the state rejects your filing, you must make corrections within 30 days. If you don’t, you must pay another $125 to refile.

You must also submit a decennial report every ten years and pay a registration fee of $70. Pennsylvania offers a name reservation option if you are not ready to file your LLC. For $70, you can hold a business name for up to 120 days.

These are the main costs of starting an LLC in Pennsylvania. However, remember that there may be other costs, including legal fees for preparing your certificate of organization and operating agreement. You must also hire a registered agent to represent your business if you are not a resident or prefer someone else to take the role.

Annual fees

Pennsylvania doesn’t require regular LLCs to pay fees annually. However, professional and foreign LLCs are held to a different standard. These LLCs must pay an annual fee of $610 per member and file a Certificate of Annual Registration to the state.

DIY setup

You can file your LLC online through the Secretary of State’s website. You must prepare the necessary paperwork, fill out the Certificate of Organization, and pay a filing fee.

Additionally, you must select a unique LLC name and appoint a registered agent. You can elect yourself as the registered agent if you live in the state. After completing the required steps and paying the fees, you can submit your LLC application for state review and approval.

The Secretary of State advertises the turnaround time for LLC formation in Pennsylvania as seven (7) to ten (10) business days, as indicated on the state website. However, it usually takes three to four weeks due to the state workload causing the delays. When filing, this turnaround can take longer based on the state examiner’s workload.

Types of LLCs

Pennsylvania offers various LLC types to suit your business. Whether you are one person or a team of founders, the Keystone State has an option for you.

• Single-member LLC: A single-member LLC is a company with just one owner, known as a member.

• Member-managed LLC: A member-managed LLC is a multi-member LLC that places authority on the LLC members. Depending on the operating agreement’s specifics, each member participates in decision-making. Most small LLCs are member managed.

• Manager-managed LLC: A multi-member LLC requires members to elect someone else to handle company operations and make business decisions. Members still have authority over the larger company, but the manager is the primary legal agent. That allows them to make decisions quickly. Most LLCs with many members are manager managed.

• Restricted LLC: Under Pennsylvania law, LLCs performing specific professional services must register as restricted professional companies. These include most healthcare services, public accounting, psychology, and legal.

• Benefit LLC: A benefit LLC may be formed if one of the limited liability company’s purposes is to create general public benefit. General public benefit positively impacts society and the environment as assessed against a third-party standard. That includes offering beneficial products and services to low-income and underserved communities. It also applies when promoting economic opportunity for individuals or communities and preserving the environment. Other eligible activities target the improvement of arts and sciences, knowledge advancement, economic development, human health, or anything that benefits society.

• Domestic LLC: Any previously listed LLCs can be domestic or foreign, depending on whether the business is formed in Pennsylvania. An LLC formed in Pennsylvania will be considered “domestic.” In contrast, a legal entity that conducts business in Pennsylvania but was formed outside of the state is a foreign LLC.

• Foreign LLC: If an LLC is formed outside of Pennsylvania but does taxable business in the state, it must register as a foreign LLC.  Check the Pennsylvania Department of Revenue website to see whether the economic nexus applies to your business, requiring a foreign LLC to file specific tax reports.

Form a Pennsylvania LLC With Confidence

Despite the self-employment taxes and other potential drawbacks, forming an LLC in Pennsylvania can provide significant benefits, including liability protection, tax flexibility, and operational freedom. It’s essential to consider both the advantages and the challenges before deciding. Consult with a professional for personalized insights, helping ensure that forming an LLC aligns with your business goals and financial strategy.