Start a Pennsylvania S Corp

1. Choose a name

The first step in starting a Pennsylvania LLC is to name your business. Your business name provides the public with a first impression of your company, so it’s important to choose one that conveys what you’re selling and your desired brand image.

Pennsylvania LLC Naming Rules

You also need to adhere to Pennsylvania LLC and business naming rules. For example, Pennsylvania requires all LLC names to include the designator “limited liability company,” “company,” “limited,” or an abbreviation thereof.

LLCs are also prohibited from using names that contain any variations of the word “corporation” or make it seem as if the business is a government agency. Finally, a Pennsylvania LLC can’t use a name that’s too similar to a name already being used by another business in the commonwealth.

While not a law per se, it’s wise to check to make sure that your desired name isn’t already trademarked by someone else, either on the federal or state level. If you want to check its availability at the national level, conduct a search on the United States Patent and Trademark Office (USPTO) website. For Pennsylvania trademarks, check with the Pennsylvania Department of State.

Registering and Reserving Business Names

Before you can register a business name for your Pennsylvania LLC, you need to make sure it isn’t already taken. Our Pennsylvania business search page can help you with that part.

Once you’ve decided on your business name, registering it is as simple as filing your business formation documents (which we’ll cover in a later step).

2. Designate a Pennsylvania registered office

The next step is to designate a Pennsylvania registered office. In most states, this is known as a registered agent. Your registered office/agent is an individual or business entity that receives legal notices (such as notifications of a lawsuit against the company) on behalf of your business. In Pennsylvania, you only need to name the registered office instead of the registered agent.

Registered Agent Requirements

Every Pennsylvania LLC is required to appoint a registered agent/office. Your Pennsylvania registered agent/office must:

• Be a resident of Pennsylvania
• Have a physical mailing address in the Commonwealth of Pennsylvania (P.O. boxes will not suffice)

Registered Agent Responsibilities

A registered agent’s responsibilities include:

• Being available during regular business hours to receive notices (such as service of process)
• Accepting legal notices and important government mail and relaying them to the business owner(s)

Can I serve as my own registered agent?

Legally, you are allowed to serve as your own registered agent and registered office. However, this might not be the best idea.

For starters, you’re busy running your business. Having to be available during all regular hours to receive legal notices would be quite inconvenient for a business owner.

Secondly, you could be embarrassed in front of clients, investors, or colleagues when being served with subpoenas or notifications of a lawsuit in front of them. For these reasons and others, many LLC owners opt to hire professional services instead.

Using a registered agent service can help you avoid these issues. Our registered agent service can provide you with a reliable agent/office for your business, whether it’s an LLC or a corporation.

3. File Pennsylvania Certificate of Organization

File a Certificate of Organization with the Pennsylvania Department of State. This document (also referred to as Articles of Organization in other states) registers your business with the Commonwealth of Pennsylvania.

Filing such important documentation for your business can be intimidating. Our business formation plans exist to handle the filing for you and make sure everything is done accurately and efficiently. However, we’ll also walk you through the process below.

Process for Filing a Certificate of Organization

You’ll file your Certificate of Organization via the Pennsylvania Department of State. After filling in all of the required info, you can submit the form via mail or online along with your $125 filing fee. You’ll also need to include your New Entity Docketing Statement, which we will cover in a moment.

Information to Include in Your Pennsylvania Certificate of Organization

When filling out your Certificate of Organization, you’ll need to include:

• The name of your Pennsylvania LLC, including the designator (“limited liability company,” or one of the abbreviations listed in Step 1)
• The mailing address of your business (a P.O. box is not acceptable)
• Your registered agent/office’s information and county
• The name of each organizer/member
• An election for the effective date of the organization (either as soon as the document is approved by the Department of State, or a future effective date)
• A designation if your LLC is a restricted professional company (for instance, a legal firm, medical office, chiropractor, veterinarian clinic, or accounting office)
• A designation if your business is a benefit company (has the additional purpose of creating general benefit to the public)
  • If the business is a benefit company, you’ll also need to check a box if the benefits can be specified, and then list them in detail
• Organizer signatures

New Entity Docketing Statement

Along with your Pennsylvania Certificate of Organization, you’re also required to submit a New Entity Docking Statement (Form DSCB: 15-134A). This form should include:

• Your LLC’s name, including the designator
• The name and mailing address of the individual who is responsible for your LLC’s initial tax reports
• A description of your business activities
• Your LLC’s FEIN (Federal Employer Identification Number)
  • We explain how to obtain an FEIN in Step 5
• The month and year of the tax or fiscal year’s end 

4. Create an operating agreement

Draft an operating agreement for your Pennsylvania LLC. An operating agreement (OA) allows you to establish the rules for how your LLC will operate and other important factors. Pennsylvania doesn’t legally require you to put an OA together, but having one is extremely important for making your LLC run smoothly. 

Benefits of a Pennsylvania LLC Operating Agreement

If drafting more business documents while creating an LLC in Pennsylvania sounds like a dull chore, then you might reconsider after finding out the benefits of having an OA.

A few common ones include:

• Setting rules for how the LLC will run 
• Spelling out the roles of the individuals involved in the LLC
• Deciding ownership percentages 
• Highlighting how voting will be conducted for business-related decisions 
• Further legitimizing the business by making it look more professional and planned out 
• Helping you get loans since some financial institutions may require an OA

What to Include in an Operating Agreement

Here are some common elements you may want to include in your OA:

• The names of the owners and their ownership percentages
• The duties of each member/manager
• How voting on business matters will be conducted
• How profits will be distributed
• Directives on how new members will join the LLC
• Reasons and procedures for removing a member/manager
• How ownership interests will be handled if a member leaves the LLC or retires, dies, etc.
• How to handle dissolving the business

If you want to create an operating agreement but aren’t sure how to get started, we offer a customizable template to help.

5. Apply for an EIN

Get an Employer Identification Number (EIN) from the IRS. Many LLCs, including those with employees or more than one owner, are legally required to obtain an EIN, also known as a Federal Tax Identification Number or Federal Employer ID Number. Most banks require an LLC to have an EIN to open a business bank account. This nine-digit number is used for tax purposes and other financial paperwork.

We can obtain this number for you with our EIN service.

Register for Pennsylvania business taxes

Depending on your specific business activities, your LLC may need to report things like sales and use tax or employer withholding. In order to register your LLC for state tax and employer accounts, you’ll need to complete the Pennsylvania Enterprise Registration Form (PA-100).

This form enables Pennsylvania LLCs to establish multiple accounts, including:

• Employer Withholding Tax (1099)
• Promoter License
• Public Transportation Assistance Tax License
• Sales, Use, Hotel Occupancy Tax License
• Tobacco Product’s License
• Transient Vendor Certificate
• Unemployment Compensation
• Use, Tax, Wholesaler Certificate
• Vehicle Rental Tax

6. File the form for S corporation election

Complete and submit the form to apply for S corporation tax status. Once your LLC or C corporation formation is approved by the commonwealth, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corporation status. 

The Internal Revenue Service requires that you complete and file your Form 2553: 

• Within 75 days of forming your LLC or C corporation, or no more than 75 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year preceding the tax year the election is to take effect.

There is a caveat for limited liability companies wanting to file as an S corporation: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you file both Form 8832 and Form 2553 together via USPS-certified mail. 

Every one of the members or shareholders must sign the consent statement portion of the form. For more information on how to file Form 2553, visit the IRS website.

PA S Corp: Pros and Cons

While S corporation classification does come with a number of benefits for some businesses, making this election might not be right for every company. Sit down with an experienced tax professional and carefully weigh the various pros and cons before deciding how you want to move forward. 

S Corporation Pennsylvania: Advantages for LLCs

The advantages of filing as an S corporation for an LLC aren’t the same as they are for C corporations. First, let’s look at the advantages for LLCs.

A traditional LLC already has pass-through taxation by default, so the benefits of federal S corporation election for an LLC have to do with the taxes for self-employment. This does take some explanation, but it could save certain LLCs a lot in those taxes.

Explaining Self-Employment Taxes

The members of a standard LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC, meaning that they’re self-employed.

Being self-employed means you pay self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on all the profits you receive from the LLC. This is more than the taxes you’d pay when working for someone else because your employer would pay part of them.

Dividing Profits and Salary

But when the members make an S corporation election, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay Social Security and Medicare taxes on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members will still pay income and all other applicable taxes on their share of the profits.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation

One important stipulation to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. If they didn’t, you could pay yourself an annual salary of $8 and avoid contributing anything to Social Security or Medicare. 

So, how is “reasonable compensation” defined by the IRS? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” While the terms aren’t clearly defined, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning.

If the Internal Revenue Service determines that whatever salary you’re paying yourself isn’t reasonable, it has the authority to reclassify your non-wage distributions (which aren’t subject to employment taxes) to wages (which are subject to employment taxes). Various court cases have supported the IRS’s right to do this.

Disadvantages of S corporation Status for LLCs

Having an LLC with S corporation status can also have some drawbacks over a regular LLC:

Stricter Requirements 

S corporations have more qualifications than a standard LLC or corporation (as we listed above). Pennsylvania S corp filing requirements say that you can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A standard LLC doesn’t have these limitations.

More Scrutiny from the IRS

Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS usually monitors LLCs filing as S corps more closely. That could mean a greater chance of being audited, even if you follow the law to the letter. In fact, small business owners in an S corporation may want to observe some of the same formalities that corporations do (such as extensive record keeping), even if they’re not legally required to. It’s not necessary to appoint corporate officers or write corporate bylaws, but keeping something similar to a corporate records book could be useful if the business is audited.

More Bookkeeping and Accounting

Having an LLC with an S corporation election generally means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to do so. Your taxes will be more complex, too.

With these added complications, it’s possible that you’ll have higher administrative costs because you may need to pay for an accountant, bookkeeper, and/or a payroll service or software.

PA S Corp: Advantages for C Corporations

If you have a C corp (the default form of corporation), filing as an S corporation has these advantages:

Pass-Through Taxation

One major disadvantage for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the corporate level. But when those profits are ‌distributed to the individual shareholders as dividends, they’re taxed a second time on the shareholders’ personal tax returns.

But when a corporation qualifies to be an S corporation, those profits are only taxed at the individual shareholder level. The business itself isn’t taxed on them. This is called “pass-through taxation,” and it’s how business entities like sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation.

However, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. Thus, the disadvantages of double taxation aren’t as severe now as they were. 

Writing Off Losses

Just as business profits pass through to the owners of an S corporation, so do the losses. Unlike the shareholders of a C corp, S corporation shareholders can write off the company’s losses on their personal income statements. 

This can help offset their income from other sources and can be helpful if the corporation loses money in its early years. However, make sure you’re aware of and understand ​​the IRS’s shareholder loss limitations.

Qualified Business Income Deduction

Under the 2017 Tax Cuts and Jobs Act, some S corporation owners may be able to deduct up to 20% of their qualified business income. This deduction isn’t available to C corp shareholders.

Qualified business income (QBI) is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details).  

Disadvantages of S Corporation Status for C Corporations

S corporation election also has the following minuses:

Limited Number of Shareholders

As mentioned, an S corporation can’t have more than 100 corporation shareholders, while a C corporation doesn’t have that restriction. This limitation could be an issue later if the corporation expands and goes public.

Limited Types of Shareholders

All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could become a problem if you want to expand internationally. You also can’t have partnerships or corporations as shareholders. Standard corporations don’t have these limitations.

Only One Class of Stock

A common way corporations attract investors is to offer preferred stock. That’s okay for C corporations, but the IRS doesn’t allow it for S corporations.

More IRS Scrutiny

As with LLCs, the extra restrictions S corps have often cause the IRS to watch them more closely to see if they’re in compliance. In other words, your corporation has a higher chance of being audited.

Again, it’s important to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corporation experience should be able to make sure you stay in compliance with the IRS. They may also be able to help you find additional ways to lower your tax bill.

Pennsylvania-Specific Considerations

In an S corporation, the business itself doesn’t usually pay federal income taxes, just the individual owners. But what about Pennsylvania income taxes?

Pennsylvania treats businesses that file as an S corp for federal income tax purposes the same way when it comes to income tax from the commonwealth. That is, the same pass-through taxation that applies to federal income taxes applies to commonwealth income taxes. For S corp owners, the Pennsylvania S corp tax rate is basically the Pennsylvania personal income tax rate. An S corporation is subject to Pennsylvania corporate net income tax only to the extent of its built-in gains. 

Some states require an S corporation to make a separate S corporation election at the state level, but Pennsylvania no longer requires that. If a company has a valid federal subchapter S corporation election, it will automatically become a Pennsylvania S corporation.

Pennsylvania also gives S corps the ability to opt-out of being taxed as a Pennsylvania S corp at the commonwealth level by filing Form REV-976. This may help some S corp owners with the limit imposed by the Tax Cuts and Jobs Act of 2017 on the amount of state and local taxes individuals can deduct for federal income tax purposes. To use this election, all of the S corp owners must sign the form. Once made, the election can’t be revoked for five years.

We can help

Forming an S corporation or any business can be complicated, but we’re here to make it as simple for you as possible.

When you’re ready to make your move, we can help you form a Pennsylvania LLC with an S corporation designation and provide you with valuable support from our team of business experts.