How to Incorporate in Pennsylvania vs.
How to Start a Pennsylvania LLC
A Guide to Choosing the Best Business Entity in Pennsylvania
Have you always wanted to start a business in Pennsylvania but you have no idea what the difference between an LLC and a corporation is? Let Active Filings be your guide through the jungle of business startup. We’ve put together a Pennsylvania-centric easy to use guide that will help you decide whether an LLC or corporation is right for you.
Once you’ve decided which business structure best meets your needs, you can hire Active Filings and have our professionals streamline your incorporation process. Sure you can sign up with a more expensive company managed by hedge fund billionaires where you’ll just be a number, or you can choose Active Filings, a small company like yours. Our professional staff will ease you through the business formation process, and pretty soon you’ll see why Active Filings is America’s most reliable business incorporation service.
LLCs vs. Corporations
People looking to start a business often ask whether they should set up an LLC or incorporate for their new venture. Like everything else in life, the answer depends. Below you’ll find the three factors we think will help you make an informed decision.
Ease of maintenance
Rules and regulations governing LLCs are far less restrictive than those governing corporations. In general, LLCs are not held to the same standards when it comes to record keeping, nor are they restricted in size, but generally, a corporate structure is better for larger businesses. Of course with size comes more responsibility. Corporations have to file more paperwork, organize more meetings, keep minutes, issue stock, and in some cases elect a board. If a slimmed down business structure is what you’re looking for the LLC is the best bet.
Desired tax structure
By default, an LLC is considered a pass-through entity, similar to a sole proprietorship or partnership. This means that the business itself doesn’t pay income taxes on its profits; rather any profits or loss are passed through to the owners (called members) and reported on their personal tax returns. By contrast, a corporation is considered a separate legal entity and must submit a tax return and pay income taxes on its profits. In some cases, this can lead to “double taxation,” where the corporation is taxed on its profits, then when the owners take those profits out, they will need to report the dividend on their personal tax returns. For some small-business owners who are accustomed to taking profits out of the business, double taxation can be costly.
When it comes to investing in a company, most investors feel most comfortable investing their hard earned money into corporations. The biggest reason investors prefer corporations is their favorable taxation rules. Unlike LLCs, a corporation’s shareholders are not taxed on company profits unless profits are distributed, which means the dividends paid from the corporation can be structured to take advantage of the best tax scenario for the shareholders. If you plan to grow your small business into a larger entity and attract investors, forming a corporation is your best bet.
A final thought on LLCs and corporations. LLCs are a relatively new business entity (1977), compared to corporations, which are the oldest recognized entity in the US. This affords the corporate structure a certain prestige.
PA LLCs vs. PA Corporations
While we’ve already broken down the differences between an LLC and a corporation, we’re going to dig a bit deeper into the pros and cons of forming an Pennsylvania LLC or corporation. Take a look below to see what makes Pennsylvania LLCs and corporations unique:
With a 3.07% flat income tax rate, Pennsylvania looks like it might be a low-tax state. However, most cities and towns in Pennsylvania tack on their own local income tax (school districts, too). Philadelphia hits taxpayers the hardest with a 3.87102% tax on residents and a 3.4481% tax on nonresidents. Property taxes are above average in Pennsylvania, too. And let’s not forget 9.99% corporate taxation.
Most states require LLCs and corporations to file annual or biennial reports. Pennsylvania asks that all businesses, including non-profits, check in with the state every ten years on years that end in “1.” For example, if you form your business in 2020, the state will want you to file the decennial report in 2021. If you form your business in 2022, you will next file your report in 2031. Total cost to file is $70, even for non-profits.
Pennsylvania Code requires that corporations publish their intention to file, or advertise that they have already formed a corporation with the the state. This notification needs to be published once in two separate newspapers of general circulation. One must be a legal newspaper. There is no time requirement, and corporations simply have to keep the publication notifications on file with their records. Just an added wrinkle and cost to an already complicated process. LLCs don’t have to worry about this.
Expedited Process Fees
While Pennsylvania only charges $125 to form either an LLC or a corporation, the process can take 10 days or longer. Want to speed the process up? You’ll have to submit the expedited service documents in person. $100 for same day service, $300 for 3-hour processing, and $1,000 for 1-hour processing. Sounds crazy to us.
Pennsylvania LLC or Pennsylvania Corporation? Final Answer.
Both LLCs and corporations cost $125 to file with the state, but corporations have the added wrinkle of extra paperwork, even beyond the state’s publication requirements. Corporations are also taxed at almost 10%, whereas an LLC will be subject to the flat income tax of 3.07%. For these reasons the Pennsylvania LLC is top dog!
How to Incorporate in Pennsylvania
To start a corporation in Pennsylvania, you must file Articles of Incorporation with the Bureau of Corporations and Charitable Organizations. You can file the document online, by mail or in person. The Articles of Incorporation cost $125 to file. Once filed with the state, this document formally creates your Pennsylvania corporation. Pennsylvania also has publishing requirements for corporations. While there is no timeline for publication, the state wants you to pay to advertise in two separate newspapers, with one being a legal newspaper or publication.
The state uses one form for 8 different kinds of corporations: stock, nonstock, statutory, management, professional, insurance, benefit and cooperative. Each type is subject to different sections of the Pennsylvania Consolidated Statutes. Note that cooperative and benefit corporations have additional sections to complete on the Articles of Incorporation form. Tip: Most corporations are stock corporations.
How to Start an LLC in Pennsylvania
To form your LLC, you must first file your Certificate of Organization with the Bureau of Corporations and Charitable Organizations. You can file the document online, by mail or in person at a cost of $125.
Your name must include “Limited Liability Company,” “Limited,” “Company” or an abbreviation. Most businesses keep it short and sweet with “LLC.” Example: Lori’s Baked Goods, LLC.
PA Decennial Report Requirements
What is the Pennsylvania Decennial report?
Most states require LLCs and corporations to file annual or biennial reports. Pennsylvania asks that all businesses, including non-profits, check in with the state every ten years on years that end in “1.” For example, if you form your business in 2020, the state will want you to file the decennial report in 2021. If you form your business in 2022, you will next file your report in 2031.
What information do I need when I’m filling out the annual report?
Your business’s name and address.
Names and addresses of officers and directors (if a corporation).
Names and addresses of managers or members (if an LLC).
Name and address of your registered agent.
Type of business your company is involved in.
How do I file my biennial report?
You can file online or by mail. In both instances you’ll need to go online to the state’s business portal: PENN FILE
If filing online:
You probably already have an account with PENN FILE, the state’s online business portal, but if you don’t, now is your time to create an account.
Follow the prompts and enter all pertinent information.
Finish up by paying with your credit card.
If filing by mail:
Click “Forms” at the top of the page.
Select “Decennial Report of Association Continued Existence” under “Miscellaneous Forms.”
Download, print, and populate the form with the necessary information.
Mail your report with a check for $70 made out to Pennsylvania Dept. of State.
Mail your decennial report to:
Pennsylvania Department of State
c/o Decennial Reports
401 North St
Harrisburg, PA 17120
How much does the report cost?
All business entities pay $70, even non-profits.
When is the report due?
Every 10 years on years ending in “1.” For example, if you formed your business in 2015, you’ll need to file a report in 2021. Pennsylvania doesn’t charge late fees for failing to file a report, but the state will allow you business’ name to become available for use if you are delinquent for more than 1 year.
Pennsylvania Business Taxes
Paying taxes is like going to the dentist. No one wants to do it. Taxes are, however, an integral part of successfully doing business in America. While we’re not tax professionals, we definitely will do our best to try and explain what kind of taxes your business will be expected to pay.
How will my corporation be taxed?
Corporations face “double taxation.” First they pay taxes on net profits from the business, and then get hit a second time when taxed on the dividends they receive from those earnings. Dividends are taxed at the shareholder’s personal tax rate. An LLC doesn’t have this problem, which means anyone looking to form a corporation should take note of a state’s corporate income tax and personal income tax. By filing IRS Form 2553 (Election by a Small Business Corporation), a corporation with 100 or fewer shareholders can elect to be taxed as an S Corp. Of course, if a corporation chooses S Corp status, they’ll have to jump through a few extra hoops and meet certain requirements required by the IRS.
How will my LLC be taxed?
Single member LLCs, meaning it’s just you running your business, are treated like sole proprietorships by the IRS. This means that any profits or losses your LLC experiences, will pass-through to you as the single owner. All you have to do is file a Schedule C, which reports profits or loss from your business, with your personal tax return (IRS Form 1040). It should be noted that an LLC can elect to be taxed as a corporation under Subchapter C, by filing IRS Form 8832 (Entity Classification Election), or as a corporation under Subchapter S by filing IRS Form 2553 (Election by a Small Business Corporation).
What if my LLC has more than one member?
As with a single member LLC, the IRS will view your multi-member LLC as a partnership. The LLC will retain it’s pass-through tax status, with a few wrinkles with regards to paperwork. Instead of one member filing a 1040, instead each member will have to file a Return of Partnership Income form (IRS Form 1065). This document lets the IRS check and make sure each owner is reporting their income properly. Beyond that, each LLC owner will attach a Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc.) to their Form 1040. This form shows the IRS each member’s share of the LLC’s profits and losses.
Here’s a tip: If your LLC is going to have more than one member, it would be a good idea to draw up a simple operating agreement. Most states don’t require an LLC to have one, but with so many cooks in the kitchen, you’ll want clear documentation with regards to ownership percentage, voting rights, distribution of profits and losses, as well as rules for buying out a member. You won’t be require to file the agreement, but it should be signed by each member and kept with the LLC’s important documents.
Beyond the basic information you’ll also need:
• payroll documents
• bank and credit card statements
• accounting documents
• partnership agreements
• depreciation schedules
• gross receipts
• checking and savings account interest
What tax forms do I need to file?
Corporations: Form PA RCT-101
Partnerships: Form PA-65
LLCs: Form PA-40
What’s the PA corporate tax rate?
9.99%, making Pennsylvania corporations the highest taxed in the US.
What does PA’s income tax look like?
It should be noted, that although the state levies a relatively low income tax, some local municipalities levy income tax rates ranging from 1% to almost 4%.
When are my tax returns due?
Personal and corporate tax returns are due by April 15th.
What if I need an extension?
To request a Pennsylvania-only extension, file Form REV-853 by the original deadline of your return. You will receive notification from the Pennsylvania Department of Revenue indicating that your extension has been approved or denied. You can submit a Pennsylvania extension request by paper mail (with Form REV-853) or file your request electronically using PA Business Tax e-Services. If you have an approved Federal tax extension (IRS Form 7004), you do not have to use Form REV-853 unless you owe Pennsylvania tax. Remember to enclose a copy of your Federal extension with your Pennsylvania tax report when you file.