20 Pennsylvania Small Business Q&As

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.

A principal place of business is the primary location where a company operates, impacting the company’s legal jurisdiction and tax obligations. A registered office is the physical address where a company receives service of process and other official documents. Pennsylvania requires all businesses to have a registered office, which must be an actual street address (not a PO Box). If your business does not have a physical location in Pennsylvania, you may need to engage the services of a Commercial Registered Office Provider (i.e. CROP), which can be used in lieu of providing a registered office address.

Both options have pros and cons. Choosing what is best for your business will depend on its size and long-term goals. With a member-managed LLC the members (i.e., owners) share in the decision-making process and take an active role in the day-to-day operations. This is ideal for small or mid-size businesses that do not require a larger, separate management system like a board of directors to operate. This is the default management structure for an LLC in Pennsylvania. A manager-managed LLC is where the member(s) (i.e., owner(s)) of the company delegate operational control to a designated person(s) (i.e., manager(s)) to run the company. This can be done by hiring an outside manager or by selecting one or more of the members of the company to be managers. With this structure, the manager(s) will handle day-to-day business decisions. This is ideal when one or more members within a business want to take on a more passive investor role in the company.

An operating agreement establishes a business’s financial and managerial responsibilities, including rules, regulations, and other administrative provisions. In Pennsylvania, the operating agreement serves the same function that bylaws serve for a corporation. These agreements will typically cover critical subjects such as ownership, management and voting, capital contributions, membership, distributions, and dissolution. At the very least, an operating agreement provides proof of ownership, which many banks require to open a business bank account. An operating agreement is an entirely private document between the owners and is not filed with the Pennsylvania Department of State nor with any other government agency.

Workers' Compensation insurance is required for most employers under Pennsylvania law. Workers' compensation insurance coverage is mandatory if your business employs one or more employees (regardless of employee status, number of hours worked per week, or whether the employee is a spouse or child). However, you may be exempt from carrying workers’ compensation coverage in some situations. Particularly, owners of sole proprietorships and limited liability companies are exempt – owners, not any of their employees – since they are owners and not employees.

Pennsylvania requires corporations and fictitious name registrations to advertise notice of their articles of incorporation or registration of their fictitious name in two newspapers of general circulation in the county where the corporation or fictitious name is located. One of the newspapers must be a legal newspaper, if any. No advertising is required when forming a limited liability company.

The premise for fictitious names in Pennsylvania is that the public has a right to know with whom it is doing business. Thus, Pennsylvania law requires any individual, sole proprietorship, partnership, corporation, limited liability company, or other form of association conducting commercial activities under a name other than his/her/its real or proper name to register that name with the Pennsylvania Department of State. It is important to point out that registering a fictitious name does not create a new busine

Absolutely. Piercing the corporate veil occurs when a court determines that a corporation or LLC has been improperly used to shield its owners from personal liability, allowing creditors and claimants to pursue the personal assets of the members or shareholders. When a creditor seeks to pierce the corporate veil, the court will look at several factors to help make its determination, including lack of separation between the company and its owners, undercapitalization, failure to observe corporate formalities, commingling of funds, and fraudulent or illegal activities. Additionally, in November 2022, Pennsylvania law was amended to add an annual reporting requirement for corporations, LLCs, and partnerships commencing in 2024. Under this new law, all business entities must file an annual report with the Pennsylvania Department of State or risk involuntary dissolution or cancellation proceedings and loss of their limited liability protection.

Pennsylvania does not have a general business license at the state level. However, businesses need to be aware of certain occupational license requirements as well as municipal licenses that may be required depending on the type of business or where it is located within the state. Certain occupations, such as barbers, engineers, pharmacists, real estate brokers, etc., do require licenses to operate in Pennsylvania. Also, certain municipalities, such as Philadelphia, require businesses to obtain a license to do business within their boundaries. As used here, the term municipality includes cities, boroughs, townships, and counties.

Beginning in 2025, Pennsylvania now requires most business entities to file an annual report to the Department of State. The new annual report will cost $7 for corporations, limited liability companies, limited partnerships, and limited liability general partnerships. There are different filing deadlines depending on the structure of the business. For example, limited liability companies must file their report by September 30th of each year, while corporations must file by June 30th of each year. Therefore, an LLC that was formed in 2024 will file its first annual report by September 30, 2025.

How to properly dissolve or terminate your business in PA depends on many factors. In all cases, you will need to satisfy all the debts of the business, obtain tax clearance certificates from the Pennsylvania Department of Revenue and the Pennsylvania Department of Labor, and file a Certificate of Termination or Articles of Dissolution, whichever the case may be. Failure to close your business properly can put you and your business at risk – both financially and legally.