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Clarifying Business Legal Structures

One of the most important steps when starting a business in Pennsylvania is to decide what type of legal structure is best for the business. Pennsylvania recognizes multiple business entities, from sole proprietorships to corporations. When choosing a legal entity for a business, it’s important to consider your business’s size, structure, management style, and tax considerations. It’s also important to consider the amount of personal liability you are willing to take on when starting your business.

Sole Proprietorships

Sole proprietorships are the simplest type of business structure. A single owner has sole control and responsibility over the small business. Sole proprietorships require fewer legal forms to establish the business, and the owner retains the profits. It’s also easier to discontinue the business. However, sole proprietorships have unlimited personal liability for all of the liabilities and debts of the business.

General Partnerships (GP)

A general partnership is a formal business entity formed by two or more partners. In Pennsylvania, there isn’t a formal filing requirement to form a general partnership. However, the partnership must register its name if it uses one. The partners can be individuals or other legal entities. As with sole proprietorship owners, partners do have personal liability for any debts and other claims against the partnership. For tax purposes, a general partnership is a pass-through entity.

Limited Partnership (LP)

In a limited partnership, there must be at least one limited partner and one general partner. In most cases, the general partner is a corporation or an LLC. The partners in a limited partnership enjoy limited liability protection. The limited partners don’t have personal liability for debts and other claims against the partnership.

Limited Liability Company (LLC)

Forming a limited liability company is a popular choice for business owners, with good reason. LLCs can be owned by one or more members which can be individuals or other entities. LLCs offer the members limited liability protection from creditors and debtors, and members also have pass-through income tax. However, unlike other states, Pennsylvania imposes a separate tax on LLCs. LLCs are required to pay a capital stock tax, as are corporations. Until this tax is phased out, forming an LLC may not be your best choice in Pennsylvania. An attorney can help you decide on the most strategic type of business for you.

Business Corporation – “C” Corporation

A C corporation is a business entity formed through articles of incorporation. One or more shareholders own the entity. Shareholders can be individuals or other entities. C corporations are not pass-through entities for tax purposes but provide owners with limited liability. The C corporation will pay taxes on its income before shareholders receive the profits as dividends. Additionally, shareholders are required to pay income tax on the dividends.

Business Corporation – “S” Corporation

S corporations are also formed using articles of incorporation. An S corporation can elect to be taxed as an S corporation by filing the appropriate election forms with the Internal Revenue Service (IRS) as well as the Pennsylvania Department of Revenue. There are limitations regarding the number of shareholders allowed and the type of entities that can qualify as shareholders. S corporations are also limited liability entities. The main difference between C and S corporations is that S corporations are pass-through entities for tax purposes.

Contact an Experienced Business Attorney in Pittsburgh

If you have questions about what type of legal structure will work best for your business, don’t hesitate to contact Jones, Gregg, Creehan & Gerace LLP to schedule an initial consultation.