Top Legal and Financial Considerations for Starting a Business in Pennsylvania

Are you thinking of starting a Pennsylvania business? Forming a company in the Keystone State can be a rewarding and lucrative business opportunity.

There are many legal, financial and operational considerations to factor into your decisions related to the start of your business. Here’s a closer look at some of those factors and why they’re essential for your business.

Business Structure

Your business structure is the legal organization your company will use. Choosing the right business structure is one of the biggest decisions you will make. That’s because the business entity you use will govern how you and the business are taxed, how you run your business and how personally liable you could be if something goes wrong.

There are multiple business structures to choose from. Here is a look at the top 4.

Sole Proprietorship

A sole proprietorship is the simplest structure and easiest to start. There is no formal or legal paperwork to file to become a sole proprietorship.

In a sole proprietorship, you are the lone owner and are responsible for all the decisions related to company operations. You manage the business and make the key determinations about how it is run.

Taxes are simple. In a sole proprietorship, your company is called a “pass through” entity because the profits, losses and expenses are passed along to your personal tax returns.

A sole proprietorship may be easy from a formation standpoint but carries with it considerable risk. If there is a judgment against the business, creditors can come after your personal assets, including your house, car and savings.

Partnerships

A partnership consists of two or more partners sharing in the profits and losses. Like with a sole proprietorship, in a partnership, the finances are passed through to the owners’ individual tax returns.

To run a partnership, it’s important to spell out the key rules governing the organization. The agreement details how profits are distributed, the roles of each partner, how much capital each partner contributes, how new partners can join, how disputes are resolved and how and under which circumstances the partnership will be dissolved.

There are many different types of partnerships. In a general partnership, all partners are equally liable for decisions, while profits, losses, assets and authority are distributed equally.

A limited partnership is another common type. Limited partners have no control or management responsibilities for the company. A subset of partners run the company and are responsible for day-to-day operations and any liabilities. Limited partners are protected in most cases from liability claims.

Corporations

Unlike in other business structures, in a corporation, your business is its own legal entity. That means the corporation pays taxes and is unique and separate from its owners, called shareholders.

A corporation must be chartered in the state where it is headquartered and pays taxes, can enter into legal agreements and can be sued. Corporations file their own taxes and must elect a board of directors, which is responsible for making key business decisions, issuing regular public reports on financial health and operations and holding annual meetings.

Forming a corporation can be expensive, with extensive legal and regulatory costs. That said, it can be an advantageous structure for raising funds through the sale of shares in the company.

One downside of a corporation structure is that it’s subject to double taxation. The corporation itself pays taxes while shareholders also pay taxes on any dividends the company issues.

Limited Liability Corporation (LLC)

Forming an LLC is a popular choice for Pennsylvania business owners. A Pennsylvania LLC offers flexibility and protection.

Like with other business types, an LLC is a pass-through entity when it comes to taxation. In addition, the owners, called members, can determine whether they choose to run the company themselves or hire managers to do so.

Setting up an LLC is relatively simple and can be done via a third party that will also act as a registered agent, which will collect any legal documents on the company’s behalf.

LLCs have extensive liability protection. Except in extreme cases, the owners are protected from any seizure of personal assets in the case of an adverse judgement.

Taxes

As a Pennsylvania business, you will pay various taxes on the goods and services you sell.

You will have to pay a 6 percent sales tax on any goods or services sold. In addition, local municipalities can add their own local taxes. For example, there’s a 1 percent local tax in Allegheny County and a 2 percent local tax in Philadelphia.

Depending on the type of business you own and what you sell, additional taxes may apply. In addition, domestic and foreign corporations pay a corporate net income tax of 8.49 percent.

If you have employees, you’ll also need to deduct federal withholding and unemployment insurance taxes.

Insurance

The type of insurance policies you take out will depend on the type of business you have and whether it has a physical location. There are many different types of policies to consider, including:

• General Liability. This policy covers a broad range of scenarios. It can protect you if someone is injured on your property, property damage and liability related to products you sell.
• Professional Liability. This coverage protects you against claims of negligence, misrepresentation or providing bad advice to clients. It’s often called errors and omissions insurance
• Business Interruption. This policy protects lost income and expenses to due business disruption or property losses
• Cyber Liability. Like business interruption insurance, this coverage protects you if your digital systems or data are hijacked or otherwise attacked
• Commercial Auto. If you have vehicles owned or leased by the company, insurance protects you or employees if there is an accident or property damage

Start-Up Costs and Operating Costs

Starting a business is an exciting proposition. However, before you sell one good or service, you will incur several start-up costs that are necessary to get your business operational.

Here’s a look at some of those key start-up expenses:

• Inventory. The initial supply of items you will sell or use to make items to sell is an important factor. Knowing what will sell, how quickly it will sell and how much you need to factor in for spoilage, if applicable, are informed guesses at first
• Marketing. You need to get the word out about your business. That means investing in marketing campaigns across multiple channels to let folks know about your company and value
• Research. You need to understand your potential customers, markets and competitors. Researching these elements help you set prices, develop marketing and communicate to customers about the value proposition you provide
• Office Space. If you will have a brick-and-mortar business, you need a place to call home. You will need to either buy or lease office space that fits your needs
• Equipment. Depending on the type of business you have, your equipment needs could be minimal or expensive. From office machines like computer and printers to unique tools needed for your company, equipment purchasers are a big portion of start-up budgets
• Furniture, Supplies and Website. You’ll need to sit on something in your office. That means buying office furniture and supplies and securing utilities. You’ll also need to build a website and social media presence

Advisors

As a business owner, you’re likely to have plenty of questions. That’s why it’s critical to have a cadre of trusted advisors to help you along the way.

An attorney is a wise move, helping you navigate state laws, negotiate business agreements, review contracts and advise you on legal matters that arise.

An accountant or bookkeeper is another important consideration. You’ll need help managing your finances, preparing statements and filing your taxes.

A financial advisor can also be invaluable, helping you think about a long-term strategy for your business, your personal finances and succession planning.

Starting your Pennsylvania business is an exciting time. With the right knowledge about business structures, taxes, insurance, start-up expenses, and advisors you’ll be well positioned for success.