This article provides an overview of the benefits and drawbacks of forming a limited liability company (LLC) in Pennsylvania, highlighting advantages such as limited personal liability, tax flexibility, management flexibility, privacy protection, perpetual existence, and minimal paperwork, as well as disadvantages such as self-employment taxes and potential renewal and annual fees.
When conducting business activities in Pennsylvania, entrepreneurs are faced with a choice between several business structures for their company. Among the available options, many select a limited liability company (LLC) because of the range of advantages it offers to the owners.
Prior to forming an LLC, it’s essential to become familiar with its advantages and drawbacks. For that reason, we will explore both sides and help you decide whether a limited liability company is a suitable structure for your business.
What Are the Advantages of an LLC?
Generally speaking, LLCs offer numerous advantages, making them a particularly popular business structure among smaller companies. Here are a few benefits of an LLC in Pennsylvania and beyond.
Limited Personal Liability
Unlike sole proprietorships, LLCs are legally considered separate entities from their owners, meaning the business is responsible for its own debts and obligations. In other words, the owners’ assets are generally protected and cannot be collected as compensation.
Therefore, if an LLC engages in a lawsuit, the owner can only lose the funds invested in the company. On the other hand, their house, bank accounts, and other personal assets won’t be affected by the lawsuit, as they don’t belong to the business.
LLC owners have a unique opportunity to choose whether they want to be taxed as sole proprietors, partnerships, C-corporations, or S-corporations. This level of tax flexibility allows you to select the approach that best suits your business and its needs.
Typically, LLCs are taxed as sole proprietorships or partnerships, meaning they can benefit from pass-through taxation. In this case, no corporate taxes are applied, and the responsibility passes onto the owner instead. The owner then needs to report all LLC’s profits and expenses on their tax returns and only pay personal income tax, avoiding double taxation.
On the other hand, if an LLC is treated as a C-corporation, double taxation is unavoidable. C-corporations are taxed both at the individual and corporate levels. Hence, most LLC owners choose S-corporation taxation, which is also classified as pass-through.
LLCs offer similar protections and advantages as S-corporations but with greater flexibility in management and profit distribution. While a corporation has a fixed management structure with officers, a board of directors, and shareholders, an LLC has more freedom in this regard. In fact, it’s not uncommon for many formal structures to be absent, leaving management in the hands of LLC members.
Moreover, LLCs aren’t required to distribute profits according to shareholder percentages as corporations do. Even if two members have equal stakes in the company, they may decide that one receives a greater share due to higher initial contributions or investments. Ultimately, such considerations are left to the owners rather than determined by the law.
In most cases, when forming an LLC or a corporation, the owner is required to disclose their personal information, which can then be accessed in public records. However, certain states allow you to start an “anonymous” or “confidential” LLC and keep your private details out of the public eye.
Currently, only four states permit the formation of anonymous LLCs, including:
- New Mexico
That said, you can start an anonymous LLC in one of these states even if you don’t reside there. However, it’s important to research the potential advantages and disadvantages of opening an LLC in each state before reaching a decision.
Considering that an LLC is legally a separate entity from its owner, it can remain operational regardless of any changes in its management. In other words, even if an owner retires, passes away, or leaves the company for a different reason, the LLC will not dissolve unless the articles of organization specify otherwise.
In fact, an LLC dissolves only if:
- The members agree to dissolve it;
- An administrative or judicial action dissolves it;
- A dissolution-causing event specified in the articles of organization occurs.
In all other cases, an LLC continues its operation despite any changes in management.
Starting an LLC is less complicated than forming a corporation. Usually, only minimal paperwork is required, including a formation document, operating agreement, and articles of organization. Instead of drawing these documents up on your own, you can access templates online or consult a lawyer specializing in LLC formation.
Only sole proprietorships require less paperwork in their formation stages than LLCs. However, since they offer similar benefits as LLCs most small businesses, especially those with more than one member, opt for LLCs instead.
Business Incentives in Pennsylvania
LLCs in Pennsylvania are eligible for certain business incentives introduced in weaker communities to encourage job creation and economic growth. There are two major incentives to keep in mind — Qualified Opportunity Zones and Job Creation Tax Credit (JCTC).
If you register your LLC in one of the 300 Opportunity Zones in Pennsylvania, you can benefit from tax deferrals on prior gains invested in the Qualified Opportunity Fund (QOF). Investors involved with QOF for over five years receive further advantages, including a 10% exclusion of the deferred gain.
Furthermore, thanks to the JCTC program, a new LLC can claim a tax credit of up to $1,000 once it registers in Pennsylvania. Similarly, an already existing business can benefit from the same initiative if it creates 25 new jobs within three years or increases employment by 20%. This incentive distinguishes Pennsylvania as one of the most attractive states for starting an LLC.
What Are the Disadvantages of an LLC?
Although LLCs offer flexibility, protection, tax advantages, and more, they come with certain drawbacks as well. To fully understand the business structure you’re choosing, it’s advisable to be aware of the downsides too.
Subject to Self-Employment Taxes
In most cases, LLCs are taxed either as sole proprietorships or multi-member partnerships. As a result, their owners are subject to self-employment tax, which needs to be included on the personal income tax return along with the company’s revenue.
The self-employment tax includes 2.9% for Medicare and 12.4% for Social Security. In total, that amounts to 15.3% of all LLC manager’s earnings, which can be a significant sum for owners of smaller businesses.
Potentially High Renewal Fees
To keep an LLC active, the owners have to pay renewal fees every one or two years, depending on the state they’re based in. Renewal fees also vary across states — they can range from $50 to $750 per year. Therefore, you should inquire about fees for each state and find the ones that suit your business.
High Annual Fees for Professional LLCs in Pennsylvania
Pennsylvania doesn’t require regular LLCs to pay fees annually. However, PLLCs and foreign LLCs that offer professional services are held to a different standard. In fact, they must file a Certificate of Annual Registration and pay an annual fee of $610 for each member of the LLC to the Department of State.
Who Should Start an LLC?
Forming an LLC is an excellent choice for small business owners with significant personal assets they need to protect, as well as those who want a certain degree of flexibility in business management and tax payment.
Nearly all companies can operate as LLCs, regardless of the number of members. However, some states reserve the right to restrict certain professions from operating as LLCs. For instance, most licensed professionals, such as doctors, accountants, engineers, and lawyers, cannot form an LLC in California. In most other states, they aren’t allowed to operate as regular LLCs. Instead, they can start Professional LLCs.
Additionally, financial trust companies, insurance agencies, and banks are restricted from forming LLCs in all states. Ultimately, it is important to check the laws in each state before deciding which one is suitable for your LLC.
How a Business Lawyer Can Help
Consulting a legal advisor isn’t required when opening an LLC, but it is highly beneficial to do so. In fact, a good business lawyer with extensive experience in forming LLCs significantly reduces your research time. Moreover, a lawyer can:
- Help you file the necessary documents;
- Assist you in drafting an operating agreement;
- Keep records and documentation of the formation process;
- Help you choose an available business name;
- Provide continuous business advice and support.
Hiring a lawyer to manage the legal side of forming an LLC allows you to focus on other aspects of your business. The only downside might be finding a good business lawyer that fits your budget.
Taking the Next Step: Pennsylvania LLC Benefits
Fortunately, Wyoming LLC Attorney offers expert legal advice at an affordable price, ensuring each client's complete satisfaction. Our clients frequently choose to start an LLC, because this structure offers the most privacy, protection, and tax and management flexibility. Although there may be downsides to this business structure, a qualified Wyoming LLC attorney will introduce you to the best options for your company and simultaneously ensure you receive expert guidance and high-quality legal advice.
Schedule attorney time with Wyoming LLC to discuss your options and form an LLC today!