Benefits Of Incorporating In Pennsylvania Vs Forming An Llc
As a new small business owner or investor in Pennsylvania
, you'll have to decide whether to set up your business as a corporation or a limited liability company. This decision can confound, but it usually helps to identify the major issues you'll want to keep in mind:
Issue #1 - Setup Costs
The filing fee in Pennsylvania is the same for both corporations and limited liability companies. Forming either type of entity costs $125.
Generalizing about the setup costs you might pay an attorney, paralegal or other service is more difficult. But the corporation and LLC fees should be similar for most small businesses.
Note: Foreign LLCs and corporations pay a higher filing fee of $250. (A foreign entity is an entity formed in another state.)
In summary then, setup costs probably aren't a factor you want to focus on.
Issue #2 - Processing time
The Pennsylvania Department of State requires some time to process your articles after you file the formation documents for an LLC or corporation. The processing time varies depending on the department's workload, but typically they process your documents in about a week, regardless of whether you're forming an LLC or a corporation.
However, Pennsylvania will let you expedite your filing for $70, raising your total filing fee to $195. The benefit of this is that you receive same-day processing.
Processing time, then, isn't really a key issue either. With both a Pennsylvania LLC and a corporation, you're typically only going to be a few days away from having the entity set up after you've done your part to complete the paperwork.
Issue #3 - Governing the LLC or Corporation
Entity governance does differ for corporations and limited liability companies. By design, corporations provide a structure for passive investors to invest in a business. The corporation structure itself essentially assumes that outside, passive investors buy shares of stock in a corporation. Accordingly, the shareholders typically meet annually and elect a board of directors. These directors meet regularly with management and also appoint and then oversee corporate officers who run the business on a day-to-day basis.
Finally, corporation by-laws spell out in detail how all this governance works so everybody understands and plays by the rules. In comparison, limited liability companies allow for very simplistic governance and structure. The LLC may be managed by the LLC owners (who are called members) just like a partnership is managed by its partners. Or the LLC may appoint a particular member to be the LLC manager and then this person runs the show. The LLC will have an operating agreement to spell out how the governance works. But the operating agreement can often by very simple for small one or two owner LLCs. In short, then, a limited liability company often means much simpler governance for the entity. Whether this simplicity is good, however, depends on the needs and requirements of the entity's investors.
Issue #4 - Tax Complexity
Tax complexity represents another area where corporations differ or may differ from limited liability companies. A Pennsylvania corporation will automatically require both a federal and a state corporation income tax return. In addition, a Pennsylvania corporation will be required to process employee payroll--even if the only employee is the working shareholder. An LLC's tax accounting in Pennsylvania can be just as complicated as a corporation--an LLC can make an election to be treated for tax purposes as a corporation or as an S corporation. But an LLC can often opt for simpler tax accounting.
A one-owner LLC owned by an individual who is running a business can treat the LLC (for tax purposes) as a sole proprietorship. A one-owner LLC owned by an individual investing in real estate can just report the real estate investment as if it's owned and managed by the individual.
Issue #5 - Limited Liability and Protecting Assets
Both a corporation and a limited liability company should offer small businesses the same legal liability protection. State legislatures designed the limited liability company to offer just as good of liability protection--only with less red tape. Some attorneys even argue that an LLC may provide better liability protection than a corporation does because LLC members are less likely to "break" the simpler rules of governance. That's significant because breaking the governance rules (for example, not having a real board of directors) can be a factor that courts look to when they decide to ignore the corporation's protective power.
Note: In two other states, Florida and Utah, federal or state courts have minimized or dismissed the protective power of a single member limited liability company in certain cases.
by: Stephen Nelson
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