An overview of Pennsylvania business structures

When setting up a new business, owners must choose whether to structure their companies as sole proprietorships, partnerships, LLCs or corporations.

There is more to starting up a business in Pennsylvania than simply coming up with a product or service and drawing in customers. One of the most important steps for owners of fledgling companies is choosing how to set up their business structures. Depending on their situations, people may choose from one of four primary structure types - sole proprietorships, partnerships, limited liability companies or corporations. Understanding the different entity formation types may help business owners determine which is best suited for their companies based on their needs, goals and circumstances.

Sole proprietorships

Some businesses are owned by individual people. The owners of such companies may choose to operate as sole proprietorships. To this end, they must obtain any required permits and licenses, however, they do not have to take any formal action to form their businesses. Rather, the status results automatically from their business activities. Sole proprietors are entitled retain all their business' profits, but they are also responsible for any liabilities, debts or losses.

Partnerships

Companies owned by two or more people may be structured as partnerships. To set up such an entity, the owners must establish a company name and register with the state. Additionally, they may also choose to also draw up partnership agreements, which may specify the terms of their relationship and the business' operation. With this entity formation type, the partners may all receive a portion of the company's profits. Businesses established as partnerships do not pay income taxes. Instead, the partners each include their share of the company's losses and income on their personal returns.

Limited liability companies

A limited liability company, or LLC, is a hybrid business structure, designed to offer the flexibility of a partnership with the protections of a corporation. These types of business entities are formed by taking steps, including choosing a unique name and filing articles of organization with the state. The owners of LLCs, knowns as members, may share their company's profits as they deem appropriate. As is the case with partnerships, LLC members each record their share of the business' losses and income on their personal taxes. In the event of some types of legal action against the company, however, the members may be protected from personal liability.

Corporations

The most formal of the formation types, corporations are usually formed by larger businesses with multiple employees. The process of establishing this type of entity is more involved than the other forms and is generally costlier than the other types. To form a corporation, people must take steps, including choosing and registering their companies' legal names, filing the necessary documents with the state, and getting the required licenses and permits. Those who own corporations are provided limited liability protection, shielding their personal assets from some legal action. Corporation owners are taxed on their personal earnings, and the businesses themselves must also pay state and federal taxes.

Working with an attorney

How people in Pennsylvania choose to set up their companies when they are starting out may affect many aspects of their business, from how they operate, to how they retain profits and pay taxes. With several options available, each having their own benefits and disadvantages, it may be difficult for some to determine which entity formation type is best suited for their business. A lawyer may help them choose the right structure for their circumstances, as well as guide them through the related legal processes.