Starting a new business is always an exciting decision, so congratulations! Finding the right structure for your new business can be a challenge, so I’m here to help.
I’ll walk you through the fundamentals of what a Pennsylvania Limited Liability Company (LLC) is and why it may be the right structure for your business.
(If you want to skip to the “How to Form an LLC” section, click here.)
What Is a Pennsylvania LLC?
A Pennsylvania LLC is a Limited Liability Company formed in the state of Pennsylvania that is governed by the laws, regulations, and statutes of the state of Pennsylvania.
Why Choose an LLC?
Numerous large and small business owners in Pennsylvania elect to create an LLC rather than another business structure, such as a sole proprietorship or a corporation, for the following reasons:
1. Limited Liability and Asset Protection
The primary reason why many company owners opt to form a Pennsylvania Limited Liability Company over another kind of business structure is to protect their personal assets.
In Pennsylvania, forming an LLC provides the business owner with limited personal liability protection and personal asset protection. An LLC establishes a wall between you and your business's responsibilities and debts, ensuring that LLC owners' personal assets and finances are not identified as potential sources of financial reparation in the case of bankruptcy or lawsuits against their organization.
The last few years have shown us how even the most well-prepared and successful firm may be devastated by unforeseen events. When you take those unforeseen circumstances into account, it's easy to understand why so many small business owners appreciate the personal asset protection that comes with forming an LLC in Pennsylvania.
2. Privacy
The ability to safeguard your privacy and keep sensitive information private is the second main advantage of forming an LLC.
Over time, hackers, scammers, and other fraudsters have developed more advanced techniques to commit their crimes. Cybercriminals may use even the most basic details about you to steal your identity in today's technology-dependent culture. Oftentimes, victims are unaware they have been defrauded until crooks leave them with thousands of dollars in debt in their names.
When you establish a business using a structure other than an LLC, such as a sole proprietorship, your personal information becomes public, making information such as your name, address, and phone number easily accessible online without any kind of protection.
However, if you form an LLC, you have additional options.
You may hire the services of an LLC formation service to assist you with organizing and filing your LLC documents. The Pennsylvania Department of State will register the LLC formation service's information with the state, rather than yours, ensuring that your personal information remains private and protected from exploitation.
This additional layer of protection is one of the biggest advantages to forming an LLC, and the peace of mind it grants to many business owners is a strong incentive to choose an LLC over an alternative business structure.
Northwest Registered Agent and ZenBusiness are my top two recommendations for an LLC formation service.
3. Taxation
Finally, many Pennsylvania small business owners choose to form LLCs for the flexible tax treatments.
By default, LLCs are classified as “pass-through entities,” which exempts them from the majority of federal taxes. Other business structures, such as a sole proprietorship, may or may not provide the same benefits. LLC owners can also opt for their LLC to be treated as a corporation for tax purposes if that would be preferable.
If you structure your business as a corporation, you will face what is known as “double taxation.”
Double taxation refers to the practice of corporations paying corporate income tax on their profits prior to distributing them to shareholders as dividends. Shareholders must pay personal income tax on their previously taxed profit shares after receiving such dividends.
LLCs are immune from this double taxation since they are pass-through entities. Federal income tax and corporate tax rates do not apply to LLCs and LLC members are only obliged to pay personal income tax on their profit shares.
To supplement the benefit of avoiding double taxation, the 2017 Tax Cuts and Jobs Act included a new tax benefit for Limited Liability Companies known as the Qualified Business Income Deduction (QBID).
The Qualified Business Income Deduction (QBID) was included in the 2017 Tax Cuts and Jobs Act as part of the legislation. QBID is a tax credit that entitles Limited Liability Companies to a tax saving of up to 20%. Because this discount is available only to Limited Liability Companies (LLCs), it is a strong incentive to create an LLC in Pennsylvania.
How to Start an LLC in Pennsylvania
With a strong grasp of what a Pennsylvania LLC is and why so many business owners choose this structure, you can make an informed decision about whether an LLC is the best business structure for you. If you are still exploring whether to create an LLC, the following processes are required:
*IMPORTANT* If you need help navigating the complex bureaucracy involved with forming a Pennsylvania LLC, dealing with all the formation paperwork, and maintaining your privacy, some types of businesses will finish the Pennsylvania LLC formation process on your behalf.
They're called LLC formation services, and they can help you create a Pennsylvania LLC for as low as $0 plus state filing fees (though my top-rated LLC formation service charges $39).
If you're looking for personalized support navigating bureaucracy and protecting your personal information, check out my guide to the top LLC services.
1. Obtain Certificate of Organization Form
The first step in forming an LLC in Pennsylvania is to get a copy of the Pennsylvania Department of State's Certificate of Organization form.
This is the principal document that must be filed with the Pennsylvania Department of State in order to form an LLC. Additionally, a New Entity Docketing Statement must accompany the Certificate of Organization. You may file online via the Pennsylvania Department of State's website or via postal mail. The filing fee is $125 for either option.
The steps below correspond to the fields on the Certificate of Organization form for Pennsylvania.
2. Choose Your Business Name
Following the acquisition of your Pennsylvania LLC's Certificate of Organization, the next step is to pick a company name.
Sadly, you can't just register the first business name that comes to mind.
According to Pennsylvania law, the name of your LLC must include the terms “Limited Liability Company” or “Limited Company,” or the abbreviations “LLC,” “LC,” L.L.C.,” or L.C.” The phrases “Limited” and “Company” may be shortened respectively as “Ltd.” and “Co.” Additionally, your firm may utilize the abbreviation “Ltd Liability Co.”
Additionally, the business name of your LLC must be different from any existing business organizations registered with the Pennsylvania Department of State. If you are unsure whether a given name is accessible, you may examine the business name database maintained by the Pennsylvania Department of State.
By filing a Name Reservation with the Pennsylvania Department of State, you may reserve a business name for 120 days. Reservations may be made via the mail or online. Both choices need a $70 filing fee.
If you are unhappy with the business name you were required to register for your Pennsylvania LLC, you may use a trade name, DBA (Doing Business As) name, or fictitious name on signs, advertising, and websites. You may register a trade name with the Pennsylvania Department of State online or by mail. The filing fee for either option is $70.
3. Choose a Pennsylvania Registered Agent
The next step to establishing your Pennsylvania LLC is to appoint a registered agent.
In accordance with Pennsylvania state law, all foreign and domestic LLCs are required to have an agent for service of process. In most states these are referred to as registered agents. In Pennsylvania, however, they are known as a registered office.
A registered office is an individual or business entity that will serve as your LLC's point of contact, receive mail and legal documents, accept service of process during business hours, and safeguard your information by registering their name and address with the Pennsylvania Department of State rather than yours.
When it comes to choosing a registered office in Pennsylvania for your LLC, you have two alternatives. You may function as your company's registered office independently or via a commercial registered office provider.
If you choose to act as the registered office for your LLC, it is critical to note that you will be legally obligated to accept mail, legal documents, and service of process during normal business hours on business days. This may complicate your business operations, since the majority of Pennsylvania LLCs operate during conventional business hours on business days, and stretching yourself too thin as a registered office is not a good idea.
If your Pennsylvania LLC fails to comply with a service of process, you may face a default judgment. Additionally, failing to respond to a service of process on time may result in your LLC losing its “good standing” status with the Pennsylvania Department of State, thereby preventing you from doing business in the state.
Using a commercial registered office provider in Pennsylvania rather than acting as your own registered agent significantly minimizes your personal energy investment and protects your information. Appointing a business registered office provider guarantees that you receive and are notified of any mail and service of process that the registered office provider accepts on your behalf. The only downside of using a registered agent service is that their business services cost between $99 and $299 each year.
Given the risks of acting as your own registered agent in Pennsylvania, the cost of employing a registered office service is justified. I recommend that newly created LLCs use the services of a registered agent service rather than trying to do the registered agent job on their own.
If you're interested in learning more about registered office services, please click here to read my article on the best registered agent in Pennsylvania.
4. Choose Your LLC Address
The business address of your Pennsylvania LLC is critical and must be included in your Pennsylvania LLC Certificate of Organization. All LLCs and enterprises must register a principal business address with the Pennsylvania Department of State, which is then made public.
If you do not employ a registered agent or an LLC creation service, your LLC's street address must be registered. If your firm does not have a physical location or an office, you must register your home street address as the business address for your LLC.
You do not need to provide an address on the Pennsylvania Department of State's website if you have employed the services of a registered agent. When you hire a registered agent, they will provide their own address on the form, ensuring that your personal information is not shared with anyone else.
5. Sign and File Your Certificate of Organization
After assembling your LLC formation documents and completing your Pennsylvania Certificate of Organization, it's time to file them with the Pennsylvania Department of State to form your Pennsylvania LLC. The Certificate of Organization for your LLC must include the following information:
- LLC name
- Name and address of the LLC’s registered office
- Name of each LLC Organizer
- LLC effective date
- Whether the LLC is a public benefit company (organized to benefit general public)
- Whether the LLC will provide professional services
- Signatures of LLC Organizers
The Certificate of Organization must also be accompanied by a New Entity Docketing Statement, which must include the following:
- LLC name
- Name and address of person responsible for initial tax reports
- Description of LLC business activity
- Federal Employer Identification Number (EIN)
- Fiscal year end
Once these documents have been filled out and double-checked for accuracy, you can file both forms online or by mail. The fee for either method is $125. If you choose to file by mail, send your completed Certificate and Docketing Statement to the following address:
Pennsylvania Department of State
Bureau of Corporations and Charitable Organizations
PO Box 8722
Harrisburg, PA
17105-8722
Regardless of whether you file online or by mail, expect a processing time of 7–10 business days.
Other LLC Activities
Following the filing of your Pennsylvania LLC formation documents, you must complete a few additional tasks to ensure the success of your Pennsylvania LLC.
According to Pennsylvania law, all domestic and foreign LLCs that provide specified restricted professional services (such as a doctor or lawyer) must file an annual Certificate of Registration with the Department of State. Annual registration for your Pennsylvania LLC is due by April 15th of each year. You may register online or by mail at the Pennsylvania Department of State's website. The filing cost is $560 multiplied by the number of members in the LLC.
Your Pennsylvania LLC may need specialized business permits, depending on its location and the kind of business you want to operate. Contact the municipal or county clerk, or other appropriate government body in the location in which your LLC will operate to see if any local business licenses are required.
If your Pennsylvania LLC is going to offer professional services, such as legal or accounting, you must follow the requirements for forming a Professional Limited Liability Company (PLLC), also known as a restricted professional company. Professional companies are limited to providing a single licensed professional service, and all members must possess the requisite business licenses and permits, or be registered with the state, in order to perform the licensed professional service for which the LLC was founded. You may be required to produce a copy of each LLC member's current business license or state registration as part of the LLC formation process.
If your LLC plans to offer services that benefit the public or was organized to provide those services, then you’ll need to fill out some additional information on your Certificate of Organization. Public Benefit Companies need to include their particular public benefit purpose (i.e., what they are doing to benefit the public) and must also include language and provisions in the LLC Operating Agreement indicating the LLC’s public benefit.
If you want to sell goods, collect sales tax, or hire employees for your LLC, you must register with the Pennsylvania Department of Revenue (DOR). Even if your LLC won’t collect sales taxes or hire anybody, you must register with the Department of Revenue for tax reasons. Online registration is available through the DOR's website. Other Pennsylvania state taxes may apply, depending on your desired tax treatment.
If your LLC is based outside of Pennsylvania and you want to expand into the state, or if you are not a resident of Pennsylvania, you must complete the foreign LLC registration procedure. This is comparable to the process for establishing a domestic LLC. The crucial difference is that a foreign LLC must file a Foreign Registration Statement. Additionally, you must choose a registered office in the state of Pennsylvania with a physical street address in the state. You may file online or by mail; both options cost $250.
If this is your first time filing an annual report or applying for a business license, an expert can help you. A professional employer organization (PEO) in Pennsylvania may be able to assist you with submitting yearly reports and other documentation, and online legal services may also be accessible to assist with further paperwork.
Pennsylvania LLC Fee Summary
How much does it cost to form a Pennsylvania LLC? Whether you use an LLC formation service or not, you will be required to pay certain fees and taxes. The following is a breakdown of some of the expenses connected with forming an LLC in Pennsylvania.
Certificate of Organization: $125
Name Reservation: $70
Registered Agent Fee: $99–$299
Annual Report: $560 x number of LLC members (PLLC Only)
State Personal Income Tax: 3.07%
State Corporate Income Tax: 9.99%
After Starting Your Pennsylvania LLC
Congratulations! You've formed your Limited Liability Company in Pennsylvania by filing the Certificate of Organization! This is a significant accomplishment, so reward yourself with a bottle of champagne, a weekend getaway, or dinner with friends or family. However, don’t get complacent, since further work must be completed before your LLC may commence operations.
Before you can consider the LLC formation process complete, you must accomplish three more procedures to ensure your LLC's good standing.
Step 1. Create an Operating Agreement
While it is not required by law for Pennsylvania LLCs to draft or adopt an LLC Operating Agreement, it is in your company's best interests to do so.
Without an Operating Agreement, your Pennsylvania LLC will be regulated solely by Pennsylvania business law and LLC regulations, which may or may not be suitable for your business operations. By drafting an Operating Agreement, you may establish ownership and operating procedures that go beyond what is needed by state law, which often only covers the minimal requirements.
*IMPORTANT* Before you begin writing the Operating Agreement for your LLC, you must first determine the management structure for your LLC. By default, a multimember LLC has a member-managed voting system, while single-member LLCs often bestow the owner with complete control. If you or any of your LLC members lack management ability, the best solution is a manager-managed structure. Your LLC, via this structure, delegates power to make high-level choices to managers rather than making them yourself. If this management style is chosen, it is critical to ensure each manager's competency and trustworthiness.
Operating Agreements provide the rules and procedures that govern the interaction of members, managers, and departments inside your LLC, as well as their respective tasks and responsibilities. An LLC's capacity to function is severely limited in the absence of an Operating Agreement.
Additionally, Operating Agreements serve as a contract between members, explicitly defining each member's position and responsibility. Poorly prepared Operating Agreements may include confusing or misleading wording, causing disagreements between LLC members and departments. A poorly prepared Operating Agreement may also omit procedures for onboarding new members and assigning shares and responsibilities in the case of a member's exit, impeding your company's growth.
To avoid these circumstances, ensure that your LLC Operating Agreement has as many thorough and unambiguous provisions as possible. A well-written LLC Operating Agreement should specify each LLC member, their profit and loss share, their tasks and authority level, and how they should interact with the different divisions of your LLC. If your LLC has managers, the Operating Agreement should contain standards and procedures describing the managers' authority and responsibilities. A well-written Operating Agreement with clear instructions and extensive operating procedures may assist in simplifying your organization's daily operations, enabling you to relax as your business grows.
If you are inexperienced with the process of drafting a Pennsylvania LLC Operating Agreement, several LLC formation services provide assistance with the procedure as part of their service. If you want assistance with the language, consider subscribing to an online legal consultation service. Additionally, Northwest Registered Agent’s website has an Operating Agreement template available for download, which may be viewed by clicking here.
Step 2. Apply For an Employer Identification Number
Your Pennsylvania LLC may be required to get a Federal Employer Identification Number (EIN) from the Internal Revenue Service (IRS) in order to conduct certain business operations. If your LLC will collect sales tax or recruit workers, you will need an EIN. To get an Employer Identification Number, you do not need to recruit workers or collect sales tax. If you want to apply for further licenses and permits for your business, you will need an EIN. Additionally, the EIN acts as the Federal Tax Identification Number for your Pennsylvania LLC.
Additionally, getting and using an EIN rather than your Social Security Number may help you prevent future identity theft. The Internal Revenue Service (IRS) may provide you an EIN, and the procedure is easier than it seems.
If you hire a service to incorporate an LLC on your behalf, they will file for an EIN on your behalf. If you are starting a business on your own, you may apply for an EIN online between the hours of 10 a.m. and 7 p.m.
Step 3. Open a Business Bank Account
To effectively form your Pennsylvania LLC, you must first open a designated LLC bank account.
Many business owners in Pennsylvania ignore this step due to inexperience, but it is highly important and you will be glad you did.
Having a single bank account for personal and company transactions simplifies and saves time for many LLC and small business owners. There are several reasons why creating a business bank account for your firm may help secure its success.
Firstly, it streamlines federal and state tax filing. A frequent misconception of small business owners who use their personal accounts for both personal and business finances is that they will be able to distinguish between personal and business transactions when paying their state and federal income taxes. Federal tax returns are sometimes filed months after these transactions take place, making it hard to differentiate business expenses from personal ones. It is far easier to create a business bank account than it is to maintain a complete log of all financial transactions.
Secondly, if you fail to keep your personal and business finances separate, you face the danger of your personal information and bank account funds being used against you in court. By using your personal bank account to manage the money of your LLC, you effectively nullify the personal liability protection afforded by an LLC by blurring the boundary between personal and business assets.
To recap, establishing a bank account for your LLC may simplify tax preparation while also safeguarding your assets and personal information.
To create a bank account in Pennsylvania for your LLC, you'll need a “bank kit.” A bank kit is a collection of documentation that should contain, but is not limited to, the Certificate of Organization, Operating Agreement, and EIN for your Pennsylvania LLC. Numerous LLC formation providers give bank kits as part of their offerings, eliminating the need for you to obtain this information independently.
Pennsylvania LLC FAQs
Pennsylvania LLC Taxes?
Unless you opt to have your LLC taxed as a corporation, there aren’t any state-specific taxes for LLCs. If your LLC has employees, then you’ll still be required to pay state employer taxes and register for an EIN, but those aren’t state-specific requirements.
Do I need to file an annual report?
Only LLCs offering certain restricted professional services, such as doctors or attorneys, are required to file an annual report in Pennsylvania. This is referred to as a Certificate of Annual Registration and is due on April 15th of each year. LLCs that do not offer professional services are under no obligation from the PA Department of State to file annual reports.
In Summary
Congratulations on taking an important step on your business journey by forming a Pennsylvania LLC today!
If you prefer to forgo the use of an LLC formation service and wish to establish your LLC on your own, then you’ll need to remember the following steps:
- Obtain the Certificate of Organization form
- Name your LLC
- Choose your registered agent
- Choose your LLC address
- Sign and file your Certificate of Organization
Establishing an LLC in Pennsylvania takes hard work and can seem overwhelming. There will be many forms to file, applications to fill out, and an intimidating list of filing fees to pay. But if you accomplish all these feats, you’ll be able to revel in the sense of pride and accomplishment that comes from starting your own business.
Once again, congratulations on beginning your business adventure by forming an LLC in Pennsylvania!
