PA LLC Formation – The Basics You Need to KnowAugust 5, 2024
What You Need to Know about LLC Formation in Pennsylvania
When starting a new business, one of the first and most important decisions a business owner must make is deciding how to structure their new business. The most common business structures include a limited liability company, a sole proprietorship, a partnership, and a corporation.
Each structure has its own advantages and disadvantages, including personal liability exposure and income tax implications. To determine which business entity is appropriate, a business owner should carefully analyze the business in question and what is important to the business owner.
This post will discuss the formation of a Pennsylvania Limited Liability Company, or PA LLC formation, in more detail.
What is a Limited Liability Company (LLC)?
LLCs are a common choice of business entity for the Pennsylvania small business owner. Under Pennsylvania law, a limited liability company is a type of business entity that can provide an owner or owners (i.e., “Member” or “Members” in LLC parlance) with protection from personal liability arising out of activities of the business operations.
The Benefits
Limited liability companies provide asset protection benefits and tax benefits for owners. In addition, an LLC can shield owners from liability, assist in estate planning, and allow for flexibility in capital structure and governance.
PA LLC Formation
To form an LLC in Pennsylvania, a business owner must file a Certificate of Organization with the Pennsylvania Department of State. While not required, adopting an Operating Agreement and obtaining an EIN or federal Employee Identification Number is usually appropriate.
Other Filing Requirements
LLCs that limit their activities to certain professional activities can be Restricted Professional Companies. The professional activities include:
- Practice of law
- Podiatric medicine
- Veterinary medicine
- Osteopathic medicine and surgery
- Medicine & surgery
- Dentistry
- Optometry
- Public Accounting
- Psychology
- Chiropractic
These kinds of limited liability companies must file a Certificate of Annual Registration, along with an annual filing fee, by April 15th of the year following each year it is in existence.
Operation
In consultation with a business attorney, the entity’s Members decide how an LLC will be operated. LLC Members have incredible flexibility in determining the rules that will govern their operations.
Taxation
LLCs are taxed as “pass-through” entities, which means that the profits and losses of the entity are reported on each Member’s individual personal income tax return. Additionally, Members must include profits or losses on their Pennsylvania state personal income tax returns.
Liability Protection
PA LLC formations can protect personal assets from debts and liabilities that arise in connection with operating your business. An LLC with more than one Member can also provide some protection against claims from a Member’s personal creditors. If a claim is made against an individual Member in his or her personal capacity, the creditor cannot be awarded assets from the Member’s LLC interest. The creditor will be limited to payments to the individual from the LLC. However, this does not mean that Members are immune to all liability. An LLC Member can become individually liable for “any negligent or wrongful acts or misconduct committed by the [Member].” (See 15 Pa.C.S. § 8204(b)(2)(i)).
Professional Services LLCs
It’s essential to highlight that forming an LLC is particularly advantageous for professional services. However, an LLC does not protect professionals in chiropractic, dentistry, law, medicine & surgery, optometry, osteopathic medicine and surgery, podiatric medicine, public accounting, psychology, or veterinary medicine from malpractice liability. Professional liability insurance is also an important consideration for professional LLCs.
Ongoing Compliance
Once formed, LLCs must comply with various ongoing requirements to maintain their good standing. This includes filing periodic reports and paying necessary fees. Pennsylvania LLCs must file a decennial report every ten (10) years, updating the state on any company information changes.
Additionally, keeping accurate and detailed records of all meetings and financial transactions is critical. Failure to comply with these requirements can result in penalties and the loss of liability protection.
Estate Planning Benefits
One often overlooked benefit of forming an LLC is its potential to assist in estate planning. LLCs can be structured to allow for the seamless transfer of ownership interests, making passing the business on to heirs easier. This can be particularly useful for family-owned businesses looking to maintain continuity across generations.
Flexibility in Management
Unlike corporations with a rigid structure of directors and officers, LLCs offer more flexibility in management. Members can manage the LLC themselves (member-managed LLC) or appoint managers to handle the day-to-day operations (manager-managed LLC). This flexibility can be a significant advantage for small business owners who want to retain control over their business without the formalities required by a corporate structure.
Raising Capital
LLCs also provide more options for raising capital compared to sole proprietorships and partnerships. They can issue different classes of membership interests, each with its own rights and preferences. This makes it easier to attract investors who may be interested in contributing capital in exchange for a share of the profits and a voice in the company’s management.
Operating Agreements
While not legally required in Pennsylvania, having an operating agreement is highly recommended for LLCs. This document outlines the rules and regulations governing the LLC’s operations and can help prevent member disputes. It covers important topics such as how profits and losses will be distributed, the process for admitting new members, and the procedures for resolving disputes.
Obtain Your LLC in Pennsylvania
Forming an LLC in Pennsylvania offers numerous benefits, from liability protection and tax advantages to flexibility in management and capital structure. However, the process involves several steps and ongoing compliance requirements. Business owners should consult with a qualified attorney to ensure they understand all the legal and financial implications of forming an LLC.
The concepts discussed here can be very complicated, and there are many issues far beyond the scope of this post. Anyone contemplating starting a new business should consult a qualified attorney to discuss these and other related issues. Please contact the Harrisburg Business Law Attorneys of Daley Zucker at 717.724.9821 for more information.
