Following is a brief overview of a few different types of business entities. All individuals and business entities wishing to operate under a different name or fictitious name need to register the fictitious name with the Pennsylvania Department of State.
A sole proprietorship is one of the simplest forms of business ownership. As the name implies, it has a single owner who controls and runs the business. As a single owner, when the owner dies the business terminates. A sole proprietorship has advantages in that it is simpler than some other forms of businesses. A sole proprietorship typically has less recordkeeping required, less of a need for concentration of separation of business funds from personal funds, and in general less paperwork. A sole proprietorship does not require a state business entity filing, but must file a fictitious name with the Pennsylvania Department of State if it desires to operate under a fictitious name. Similar to other business entities, a federal Employer Identification Number (EIN number) can be obtained online from the federal government. An advantage of obtaining an EIN number is that the sole proprietor can then provide the EIN number to other entities for W9 and 1099 paperwork, instead of providing the sole proprietor’s social security number (SSN). A large disadvantage of a sole proprietorship is that the sole proprietor owner can basically be considered one in the same as the sole proprietorship business. Thus, the owner is typically liable for all business liabilities and debts. The sole proprietorship does not offer liability protection for the owner.
A Pennsylvania general partnership is a simple form of a partnership. It is similar in many ways to a sole proprietorship, except that there are two or more owners called general partners. Owners can be individual people or business entities. The general partnership is formed by a contract between the partners, and like a sole proprietorship, does not require state registration and does not provide liability protection to the owners. A fictitious name filing must be made with the Pennsylvania Department of State for a general partnership fictitious name.
A Pennsylvania limited partnership differs from a general partnership in that it has at least one general partner, and at least one limited partner. The limited partner(s) are not involved in the daily management of the partnership and have limited liability. Unlike a general partnership, a limited partnership must file a Certificate of Limited Partnership with the Pennsylvania Department of State.
Limited Liability Partnership (LLP):
A Pennsylvania LLP comes about via a general partnership registering as an LLP with the Pennsylvania Department of State. An LLP can offer additional liability protection for general partners compared to a general partnership.
Limited Liability Limited Partnership (LLLP):
A Pennsylvania LLLP comes about via a limited partnership registering as an LLLP with the Pennsylvania Department of State. An LLLP can offer additional liability protection for general partners compared to a limited partnership.
For Profit C Corporation:
A for profit C corporation (for profit C Corp.) may be considered a separate entity, in many ways similar to a separate person. A person can own property and be involved in business transactions etc. A corporation can also own property and be involved in business transactions. C Corporations are required to register with the Pennsylvania Department of State, including the filing of articles of incorporation and a docketing statement. For profit C corporations should have corporate bylaws kept in a corporate record book, along with stock certificates to be offered / sold to shareholders, shareholder meeting minutes, a stock ledger, and other corporate records. Shareholders can be individuals, trusts, and estates. As a minimum there should also be yearly annual meetings of the shareholders. Shareholders should vote on corporate officers including but not limited to a President, Secretary, and Treasurer, as well as a board of directors to manage the day to day activities of the company. With proper registration, bylaws, annual meetings, records, and following statutory requirements, the company should exist as a separate entity and provide liability protection for the owner shareholders. This separation from, or protection of, the shareholders is often referred to as the corporate veil. Improper maintenance of the corporation and records, or illegal or fraudulent activity of the owner shareholders may create a situation in which the owner shareholders can be held liable for the corporation. This is sometimes referred to as piercing the corporate veil, or breaking the corporate veil. For example, if another person such as a neighbor borrows money and you don’t cosign for the loan, then typically you’re not liable for your neighbor’s debt. Similarly, with a properly maintained corporate veil, owner shareholders that have not cosigned for corporate debt typically are not responsible for corporate debts. If another person such as a neighbor is involved in an automobile accident and you are not responsible for the accident, then typically you do not have any liability for the accident. Similarly, with a properly maintained corporate veil, owner shareholders that have not done anything intentionally wrong or fraudulent are typically not responsible for corporate liability. Similar to two different people paying separate income taxes, a for profit C corporation files / pays income tax, and the shareholders file / pay separate taxes. C corporations can be privately held companies or publically held companies such as those traded on the New York Stock Exchange (NYSE).
For Profit S Corporation:
A for profit personal corporation (for profit S Corp.) is similar to a for profit C corporation in many ways. Proper actions and record keeping are required to maintain the corporate veil. However, there are a few differences. S corporations are limited to not more than 100 shareholders. S corporations and C corporations may both be closely held corporations. However, S corporations can only be privately held corporations, and cannot be publically held corporations such as publically traded C corporations on Wall Street. Unlike C corporations, S corporations are only taxed once for federal income tax purposes, with ‘flow-through taxation’ or ‘pass-through taxation’ to the shareholders.
Limited Liability Company (LLC):
An LLC can consist of a single member (single member LLC) or multiple members. Members can be individuals or business entities such as other LLC’s or corporations. Instead of corporate bylaws, LLC’s have LLC operating agreements. LLC’s can offer liability protection to members similar to corporate liability protection to shareholders in many situations. It should be noted however, that Pennsylvania courts may likely treat a single owner LLC as a sole proprietorship without liability protection. LLC’s may have an advantage over a corporation of less recordkeeping and paperwork, but records should still be kept. A certified public accountant (CPA) should be consulted for taxation registration. An LLC may be able to register to be taxed as a sole proprietorship / partnership or S Corporation.
Many other business entities exist that are not discussed here, including but not limited to, statutory close corporations, non-stock corporations, professional corporations (P corporation, PC, or P Corp.), nonprofit corporations, benefit corporations, and business cooperatives. It is recommended that a lawyer for business law and CPA be consulted before deciding on the legal structure of a business. It is hoped that you will consider Mentch Law for your business entity law needs.
Attorney Kirk E. Mentch, Esquire
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