Starting a Business in Pennsylvania: The Benefits of Legality

Limited liability companies are hybrid entities that combine the protections of a corporation with the flexibility of a partnership or sole proprietorship.A limited liability company (LLC) is a business structure where the owners are not held personally liable for the company's liabilities or debts. It does this by separating the business owner's personal assets from the company's assets. Considered more formal than a partnership, an LLC requires articles of organization to be filed with the state. Limited liability companies are hybrid entities that combine the protections of a corporation with the flexibility of a partnership or sole proprietorship.

Legally starting a business in PA is important as it creates a separation from yourself and your business. This separation, which is sometimes referred to as the "corporate veil," protects you from any lawsuits or liabilities that could be connected to your business. Additionally, it allows you to file any personal expenses you accrue while operating your business as business expenses.

A sole proprietorship is when a single individual is responsible for all of the operations and legal responsibilities of a business. Many businesses that  end up being corporations , partnerships or LLCs, begin as this type of business. If considering registering as a sole proprietorship as opposed to an LLC, consult a legal professional because, as noted, you will be independently responsible for any liability associated with your business.

As an LLC, partners or shareholders have the freedom to choose being taxed as a partnership OR a corporation. Additionally, LLCs require the least amount of formal annual requirements.

Other types of corporations act as their own taxable entity (no option for partners to be taxed). Meetings are required to maintain a corporation's status annually.

Getting a business off the ground and to the point where it is earning a consistent profit can take years. The legal filing process to start a business however is much shorter. If you choose to file as an LLC, the Certificate of Organization usually takes 2 to 3 business days to complete once it is submitted to the Pennsylvania Department of State.

The main differences between an S-Corporation and a C-Corporation are found in the taxes paid and on the number of owners allowed in the corporation. Under a C-Corporation the company pays corporate income tax and the shareholders pay federal income taxes through dividends. S-Corporations on the other hand have pass-through taxation where they record their business income and losses on their personal tax returns. As far as ownership is considered C-Corps have no restrictions on the number of owners, but S-Corps can only have up to 100 shareholders that must reside in the United States.

An operating agreement is a document used by LLCs that outlines how decisions will be made by the business. This could include both operational and financial decisions. The purpose of the operating agreement is to serve as a guide to the internal operations of the business that is catered to the specific needs of the owners. Once the document is signed by the members of the LLC, it acts as a legally binding contract. If drafted properly, this agreement also gives members protection from personal liability to the LLC and can serve as a reference guide in the event of a disagreement between owners.

When you are looking to start your business there are several factors that you may want to consider. 

• How much legal liability do you want to take on?
• What are the tax implications of each business structure?
• How flexible do you want your business to be now and in the future?
• Do you plan on bringing on partners/investors?
• Do you plan on hiring employees or giving those employees a percentage of the ownership?
• Who will be in charge of the day to day functions as opposed to the strategic decision making?

The needs of your business will be different from others that have done it before you. Take a close look at these questions when deciding which business structure makes the most sense for your situation. These are by no means the only questions that you should be answering, but they are very important in the process.