When starting a new business, you’ll need to make several important decisions, including what type of legal entity your business should be. Pennsylvania recognizes multiple business legal structures, including sole proprietorships, limited liability companies (LLCs), partnerships, and corporations. Whether you should create an LLC for your small business depends on your income, your tax strategy, and how much personal liability protection you would like to have.
The Benefits of Forming an LLC
Forming a limited liability corporation (LLC) is a popular choice for business owners in Pennsylvania. Business owners enjoy a lot of flexibility with LLCs. Owners don’t have to maintain the strict record-keeping requirements that corporations must maintain and file. For example, under Pennsylvania law, an LLC isn’t required to keep formal records of meetings and votes. Some of the most appealing benefits of forming an LLC include the following:
- Management flexibility
- Members have limited personal liability for debts and contracts of the business
- Another LLC can own an LLC
- LLCs can elect to be taxed as S corporations
- Forming an LLC is a relatively simple and affordable process
One downside of filing an LLC involves the need to file annual reports and take steps to form an LLC legally. Becoming a sole proprietor can be easier regarding paperwork and filing requirements. However, sole proprietors do not have personal liability protection from debts and judgments against their business. Forming a corporation is more advantageous if you want even greater personal liability protection.
Paying Taxes with an LLC in Pennsylvania
Consider your tax strategy when deciding whether you need an LLC for your small business. For tax purposes, LLCs are considered pass-through entities. The income from the LLC passes through the business down to the owners or members. The members will pay taxes on the portion of income they receive each year. Some states impose an additional franchise tax on companies that operate in their state, but Pennsylvania does not impose this type of tax on LLCs.
Instead, LLCs are taxed by default as partnerships. However, they can be taxed as corporations. Pennsylvania’s corporate net income tax is levied according to the federal taxable income. As of 2023, the state will start reducing the tax rate by .5 percent yearly.
The business law attorneys at Jones, Gregg, Creehan & Gerace LLP can help you understand the tax implications of forming an LLC. We can help you determine whether your LLC should be taxed as a partnership or whether filing taxes as a corporation is advantageous. The implications for which type of filing you use could be significant, so it’s important to speak to an experienced attorney about the pros and cons of forming an LLC.
Maintaining an LLC
In 2022, the Pennsylvania legislature passed a new law requiring various types of businesses, including LLCs, to submit annual reports. Before this law’s passing, LLCs were only required to submit a report every ten years. The new law becomes effective in 2025. The annual report must contain specific information, but the filing fee is inexpensive at only $7.
Contact a Skilled Small Business Attorney in Pittsburgh
If you are deciding whether to form an LLC for your small business, the attorneys at Jones, Gregg, Creehan & Gerace LLP are here to help. We can answer your questions and help you understand the pros and cons of creating different types of legal business structures in Pennsylvania. Contact Jones, Gregg, Creehan & Gerace LLP to schedule a complimentary case evaluation.