If you are planning to start a business in Pennsylvania, one of the first steps is to choose the type of legal structure (or business entity) that makes the most sense in light of your business goals. This is a choice that should not be taken lightly. While you can modify your entity structure over time, putting in the effort to make an informed decision up front will not only save you unnecessary expense down the line, but also lay the foundation to protect your personal and business assets, have the ability to secure funding, and generally hit the ground running – without leaving important legal issues unresolved.
Choosing a Business Entity in Pennsylvania
For most businesses (including new medical marijuana organizations), there are six primary options when it comes to forming a new business entity in Pennsylvania. These are:
- General Partnership. Generally speaking, any time two or more individuals (or companies) start a new business together without forming another type of entity, they will form a general partnership. Unlike other types of business entities, creating a general partnership does not require a filing with the Pennsylvania Department of State (although general partnerships do have income and other reporting requirements). In a general partnership, all partners can make commitments on behalf of the business, and all partners are exposed to personal liability.
- Limited Partnership. A limited partnership requires at least one general partner and one limited partner. Any general partners will face liability exposure similar to the partners in a general partnership, while limited partners (whose role in the business’s operation must be limited) enjoy limited liability. In order to form a limited partnership, you must file a Certificate of Limited Partnership with the Department of State and complete the other necessary formalities.
- Limited Liability Partnership (LLP). In a limited liability partnership (LLP), the general partners enjoy limited liability similar to limited partners or the members or shareholders of a corporation or limited liability company (LLC). Forming an LLP starts with filing a properly-completed form DSCB: 15-8201A with the Department of State.
- C-Corporation. Unless you elect for S-corporation status, when you form a corporation in Pennsylvania, you will be forming a C-corporation by default. C-corporations are perhaps most well-known for their “double taxation,” with income taxes being owed at both the corporate and shareholder level. However, this tax treatment can be beneficial under certain circumstances, and corporate shareholders (in a properly formed and maintained C-corporation) enjoy limited liability.
- S-Corporation. The difference between a C-corporation and an S-corporation lies in the company’s tax treatment. Unlike C-corporations, S-corporations are treated like partnerships for tax purposes, which means that income is reported at the shareholder level. However, as with C-corporations, S-corporation shareholders enjoy limited liability, there are a number of corporate formalities, and forming the business starts with filing Articles of Incorporation and a Docketing Statement with the Department of State.
- Limited Liability Company (LLC). A limited liability company (LLC) blends the limited liability of the corporate structure with the limited formalities required of a general or limited partnership. As a result, the LLC has become the go-to choice for many small businesses in Pennsylvania. However, before you file your Articles of Organization with the Department of State, it is important to assess whether forming an LLC will truly meet both your short-term and long-term business goals.
As you can see, there are numerous considerations involved in choosing a business entity. In fact, the list above really just scratches the surface. To ensure that you, your co-owners, and your company will have the protections, rights, structure, and flexibility you desire, it is important to discuss your options with an experienced attorney.
Contact The Slocum Firm | Lawyers for Business Formations in Scranton, PA
At The Slocum Firm, we provide business entity counseling and formation services to entrepreneurs and established companies throughout Pennsylvania. If you are starting a new business or expanding and need to form an affiliate or subsidiary, we can help you decide on an entity structure that works for you. To get started with an initial consultation, call our Scranton, PA law offices at (877) 410-2341 or email an attorney at The Slocum Firm today.