How to Form a Limited Liability Company in Pennsylvania
This guide will walk you through the important steps to take to form a limited liability company in Pennsylvania. It is good business practice to consult with an experienced business attorney prior to forming a legal entity in order to ensure you are choosing the best entity for your business.
What is a Limited Liability CompanyLimited Liability Companies (LLCs) are becoming increasingly favored as the entity of choice for new businesses. An LLC is a hybrid between a corporation and a partnership. It is a separate legal entity, There is great flexibility in how you can set up an Limited Liability Company. In addition, an LLC does not require all the corporate formalities that a corporation must follow to avoid having a third party pierce the corporate veil (which would leave the shareholders open to personal liability).
Steps to take to form a Pennsylvania Limited Liability Company1. Choose the name for your LLC. The name must include the words "Company," "Limited," or "Limited Liability Company," or an abbreviation of one of those words.
2. File a Certificate of Organization with the Department of State. The Certificate of Organization must include the name of the LLC, its address and the name of each organizer of the LLC. If the LLC is a restricted professional company, this should be indicated on the Certificate of Organization. Professional services are chiropractic, dentistry, law, medicine and surgery, optometry, osteopathic medicine and surgery, podiatric medicine, public accounting, psychology and veterinary medicine.
3. A Docketing Statement must be filed with the Certificate of Organization. Include the name of the LLC and the name of the individual responsible for initial tax reports. You should also include their mailing address and a description of the business activity of the LLC. The Docketing Statement will also indicate the end of the tax year of the LLC.
4. The person(s) forming the LLC should also apply for an Employer Identification Number.
5. If there will be more than one member of the Limited Liability Company, an Operating Agreement should be drafted. Most banks will want to see the Operating Agreement before opening an account for the LLC.
6. Submit the filing fee (currently $125.00) with your application.
7. The paperwork to form an LLC can be done online. Be sure you know what you are doing, You may find yourself having to fix your filing, which could result in additional fees.
Tax Treatment of Limited Liability CompanyAs stated above, an LLC is a flexible entity. It is considered a pass-through entity, so that the income and losses pass-through to the members. This means they are reported on their individual income tax returns. However, a Pennsylvania LLC may elect to be treated as a corporation. If an LLC elects to be treated as a corporation, it may also elect to be treated as a S corporation.
Whether an LLC elects to be treated as a corporation may impact the amount of self-employment tax it pays. Discuss this issue with your business lawyer.
If the LLC elects to be treated as a corporation and then also elects to be treated as an S corporation, the LLC can pay each of its members a reasonable salary (and it must be reasonable if you want to avoid an audit). The salary will be subject to self-employment taxes, but the balance of the income is not subject to self-employment tax. Depending on your business, this could represent significant savings.
The payment of self-employment taxes is not the only factor to consider in choosing your legal entity structure.You should consult with your accountant and business lawyer as to what makes the most sense for your business before you form an Limited Liability Company.