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A sole proprietorship is the simplest structure for a business with a single owner. Sole proprietorships are attractive to many small business owners because of their lack of formalities and because there are no business tax returns to file. You are deemed a sole proprietorship in Pennsylvania once you engage in business activities without registering as any other business entity (e.g., corporation or limited liability company). The biggest disadvantage to doing business as a sole proprietorship is that it is not a business entity; thus, the owner can personally be held liable for the debts and obligations of the business. Sole proprietorships in Pennsylvania operated under the owner’s legal name require no filings with the Department of State; however, if the owner wants to do business under a name other than their legal name (i.e., a trade name), they must register a fictitious name with the Pennsylvania Department of State.

A general partnership is a business formed by two or more individuals agreeing to go into business together. Pennsylvania general partnerships are not required to register with the state. However, many general partnerships will need to register a fictitious name unless the partnership uses the last name of all general partners (e.g., LaMonica, Morrison, & Smith). General partnerships are also pass-through entities for income tax purposes, meaning they pass their income (and losses) directly to the individual partners.

Pennsylvania does not require partnerships to have a partnership agreement, yet one is highly recommended. Partnership agreements lay out the rights and responsibilities of the partners and reduce the potential for conflicts and complications in the future. Additionally, many banks will require a partnership agreement before opening a business bank account for a partnership. Without a partnership agreement, your partnership will be governed by the default rules in the Pennsylvania Uniform Partnership Act of 2016.

Structuring your business as a corporation or an LLC will offer many benefits to your business. These two business structures, however, are very different regarding taxation, liability protection, management structure, ownership, and compliance. First, a limited liability company’s owners are called “Members,” whereas corporations are owned by “Shareholders.” LLCs also offer an extremely flexible management structure. LLCs can be managed by its Members or by one or more managers. Conversely, corporations have a much stricter management structure, typically with a board of directors handling management responsibilities and officers handling the day-to-day operations. Therefore, in a corporation, the owners, or Shareholders, are separate from the corporation's business decisions and daily operations, except for approval of major decisions. One of the biggest differences between an LLC and a corporation is how they are taxed. An LLC is taxed as a pass-through entity. This means the LLC’s profits and losses pass through to the individual owners and are reported on their personal tax returns. Therefore, there are no corporate tax returns. By contrast, corporations are taxed as separate taxable entities and are responsible for filing corporate tax returns. Taxation is complicated and it is highly recommended that you get advice from an experienced accountant before choosing which business structure will be the most advantageous to your business.

While they sound like very similar business structures, a limited liability company (LLC) and a limited liability partnership (LLP) have a number of differences. In Pennsylvania, LLCs can be formed by individuals, corporations, or other LLCs; whereas, LLPs are created from existing general or limited partnerships that file an election with the Department of State claiming limited liability status. Additionally, while multi-member LLCs can choose to be taxed as a general partnership, S-Corp, or C-Corp, LLPs can only be taxed like a general partnership. Liability protection is another area where these two types of entities diverge a little. Both business structures offer legal protections that prevent individual owners from being personally responsible for their business’s liabilities, debts, and financial losses. However, your business structure will greatly impact whether an innocent member or partner will be jointly responsible for another owner’s negligence or misconduct.

Yes and No. The law requires three offices for every corporation, but the same person may hold all three offices. Pennsylvania requires corporations to have a president, a secretary, and a treasurer. The offices of president and secretary must be natural persons at least 18 years old; however, the office of treasurer may be held by another corporation or a natural person at least 18 years old. Pennsylvania law explicitly allows the same person to hold any number of offices of a corporation.

While not technically required by the IRS, it is advisable to have an Employer Identification Number (EIN) for any business you form, including a single-member LLC. For starters, most banks require you to obtain an EIN to establish a business bank account in the name of the company. Also, having an EIN for your LLC helps separate your business credit profile from your personal credit profile, which is useful for things such as obtaining business lines of credit or business loans. Ultimately, the whole point of an LLC is to have a separate legal entity, so it makes sense for your business to have its own tax identification number as well.

While corporations and LLCs are both types of legal entities, an S-Corp is a tax designation. Both corporations and LLCs can elect to be taxed as an S-Corp after their entity is formed and have obtained an Employer Identification Number (EIN). One of the main advantages of electing for S-Corp tax treatment is reducing the self-employment tax burden on shareholders or members of your business. Another reason some businesses find S-Corp tax status to be advantageous is it allows corporations to avoid double taxation. However, S-Corp tax status may not be right for every business. While there are potential tax savings for electing S-Corp treatment, those tax savings may not always offset the administrative costs of maintaining S-Corp status, especially for smaller businesses.