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So you Want to start a business? What type of Entity do you need?

What is a business entity?

A business entity, as defined by the Pennsylvania Department of State is “any individual or any corporation, association, partnership, joint-stock company, business trust, syndicate, joint adventureship or other combination or group of persons, regardless of whether it is organized or formed under the laws of this Commonwealth or any other jurisdiction”
Therefore, anyone whether a person or another business entity who is operating under a name other than his/her/its proper name must register the name with the Pennsylvania Department of State.

Sole Proprietorship

This is how many small businesses start. This is the simplest form of a business organization and allows an owner to have control and responsibility. There is less paperwork, less restriction and the owner can start and stop running it whenever he or she chooses with little consequence or expense. The biggest issue with sole proprietorship is that there is no limit of liability protection from being sued. While this may work for someone who occasionally cuts a neighbor’s grass for $10 or $20 bucks..or who is helping a friend move one time, it’s not advisable when you start to steadily get customers. Not only can you be sued, but if the business falls apart, so do you. You remain personally liable for all of the business debts and have limited use of ability to raise capital or take out business loans. Also, when you pass, your family members cannot continue to run your sole proprietorship since it was never officially set up.

Fictitious Names

A fictitious name is any name other than a property name of the entity itself. This can often be referred to as a “DBA”. It can be ran as a sole proprietorship or partnership. Using the Joe example from above, he may make a business card that says Joe’s landscaping. It’s assumed that customers will write checks to Joe’s “company”, but since he hasn’t set up a company yet….he’ll have checks he can’t cash. However, if he files for a fictious name, he will be Joe Smith d/b/a Joe’s Landscaping and will be able to deposit these checks. The purpose of the fictious name is to assist customers in finding the owner of a certain business going on within the Commonwealth. That being said, there are many Sal’s pizza’s in this area and its very unlikely they are all owned by Sal…so this offers the least amount of protection. Registration of a fictitious name does not create any exclusive right to use the fictitious name. Note, that if an individual registers a fictitious name, it must be advertised in two newspapers in the area where the business will be operating.

Corporations

The opposite of a sole proprietorship. These are the most complex businesses to set up and should never be set up without an attorney’s assistance. A corporation is a legal entity that has its own existence separate form the individuals who run it and have many of the same rights, privileges and responsibilities that a person has, including the right to purchase or sell property, sign contracts and bring lawsuits. Individual shareholders are generally not liable (so long as they do not “pierce the corporate veil”) or responsible for the debts and obligations of the corporation. While it is not “required” to have an attorney prepare the Articles of Incorporation, so much of the benefits of a corporation hinge on whether the entity was set up and maintained correctly. There are at least 12 factors that must be looked at before submitting Articles of Incorporation. Because of the complex legal issues, including tax and contract, you should seek legal and accounting advice to make sure you’ve considered all the various complexities. Just like the fictitious name, a corporation must be advertised in two newspapers of general circulation and preferably with one being the county’s law journal. You’ll likely need an attorney’s assistance in drafting bylaws for the corporation.

Examples of Corporations are:

  • Nonstock
  • Statutory
  • Registered
  • Closely held (“S” Corp)
  • Management
  • Professional
  • Non-Profit (“Not For Profit”)
  • Insurance
  • Benefit
  • Cooperative

“S” Corporation

An “S” Corporation is not different from a “C” Corporation with regard to corporate filings with the Department of State, however, they do get treated differently with regard to taxes. An S Corp allows shareholders to pay taxes on corporate net income personally as if it were a partnership with “pass-through taxation”) Not everyone can qualify for an “S Corp”. All Corporations by default are “C Corps” unless “S” is elected. An S Corp is set up the same way as a C-Corp as far as the legal requirements. You’ll likely need the attorneys help in drafting by-laws for the entity. Both C Corps and S Corps have a decent amount of required paperwork that needs to be prepared regularly.

Nonprofit Corporation

Nonprofit Corporations are those where members do not receive any monetary profit from the corporation. It can be set up for benevolent, charitable, civic, cultural, educational or religious purposes provided that is no financial benefit to its members except as salaries or expense reimbursements. These are also extremely challenging to set up and most definitely will involve attorneys and accountants. Nonprofit status can make an organization eligible for benefits such as a relief from state sales, property, and income taxes. Organizing at the state level does not automatically grant the corporation exemption from federal income tax. To qualify as exempt from federal income tax, the nonprofit must meet additional requirements set forth in the Internal Revenue Code. There are at least 10 considerations that should be discussed with legal counsel before beginning to think about setting up a non-profit corporation. Nonprofits must also be advertised in two newspapers (generally one local newspaper and one county law journal). You’ll likely need an attorney’s help in drafting bylaws for operating the nonprofit.

General Partnership

A Pennsylvania General Partnership is “an association by two or more persons to carry on as co-owners of a for profit business”. These can be individuals or other existing businesses, but must be 2 different entities coming together. Each general partner is entitled to equal say in how the partnership operates. Each partner is an agent of the partnership and has authority to bind the partnership. However, the owners in a general partnership do not get the benefit of limiting liability unless they elect a Limited Liability Partnership (LLP) A general partnership is formed by agreement which, while not required to be in writing, should always be in writing. General partnerships often require a fictitious name to be set up with them as well. You would use an attorney to draft the operating or partnership agreement between the partners.

Limited Partnership

A Limited Partnership (LP) is one formed by two or more people with at least one being a general partner. The general partners function like a general partnership would function above. The limited partners have limited exposure to liability and are not involved in the day-t-day management of the partnership. This could be referred to as an angel investor or “a silent partner”. There are at least five different considerations before setting up a Pennsylvania limited partnership.

Limited Liability Partnership

A Limited Liability Partnership (LLP) is a partnership that files a statement of registration with the Commonwealth of Pennsylvania. This provides partners with limitations and additional protection on their personal liability. Either General Partnerships or Limited Partnerships can qualify to be Limited Liability Partnerships. Either must file Certificates of Annual Registration and submit an annual registration fee.

Limited Liability Company

A Limited Liability Company (LLC) is a mix between a sole proprietor or partnership and a corporation. Owners of a LLC are called members and may include individuals, corporations or other LLCs. This provides liability protection for owners (whether individual, general partners, or limited partners), with advantage of being treated as a sole proprietor or partnership for taxation purposes and management flexibility. A certificate of organization is required to be filed with the Department of State along with a docketing statement. There are at least 7 conditions you should speak with an attorney and accountant about before starting an LLC. LLC’s can be standard or restricted entities. Note that restricted entities require an annual registration and annual fee payment to be completed each year. An operating agreement will also need to be prepared and followed by the entity. This is where attorneys often come into play.

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