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Once
you decide to establish a business, your first
consideration will be the type of business
organization to use. Legal and tax considerations will
help to determine your final choice, as well as
personal needs and the needs of the particular
business. There are three principal kinds of business
structures:
- the sole
proprietorship
- the partnership
- and the corporation
There
are advantages and disadvantages to each of the legal
forms of business you may choose. As an entrepreneur
you must examine all of the characteristics and
consult a knowledgeable legal professional when
considering the formation of your business.
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Most
small businesses operate as sole proprietorships. This
is the simplest form of organization and allows the
single owner to have sole control and responsibility.
Some advantages of the sole proprietorship are less
paperwork, a minimum of legal restrictions, owner
retention of all the profits, and ease in
discontinuing the business. Disadvantages include
unlimited personal liability for all debts and
liabilities of the business, limited ability to raise
capital, and termination of the business upon the
owner’s death. You should note that a small business
owner might very well select the sole proprietorship
to begin. Later, if the owner succeeds and feels the
need, he or she may decide to form a partnership or
corporation.
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A
partnership is similar to a sole proprietorship except
that two or more people are involved. Advantages are
that it is easy to establish, can draw upon the
financial and managerial strength of all the partners,
and the profits are not directly taxed. Some
disadvantages are unlimited personal liability for the
firm’s debts and liabilities, termination of the
business with the death of a partner, and the fact
that any one of the partners can commit the firm to
obligations. The partnership is formed by an agreement
entered into by each partner. This agreement may be
informal, but it is advisable to have a written
agreement drawn up between all parties. While no
filing is required to form a general partnership, it
may be required to file a fictitious name
registration. Refer to the section in this guide on
How to Register Your Business Name.
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A
limited partnership is a partnership formed by two
or more persons having one or more general
partners and one or more limited partners. The
limited partners have limited exposure to
liability and are not involved in the day to day
operations of the limited partnership. A
Pennsylvania limited partnership is formed by
filing a Certificate of Limited Partnership on
form DSCB: 15-8511 with the Corporation Bureau,
Pennsylvania Department of State.
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The
limited liability company (LLC) is a hybrid
between a partnership and a corporation, providing
the liability protection of a corporation, with
the advantage of being treated as a partnership. A
Certificate of Organization is required to be
filed with the Corporation Bureau, Pennsylvania
Department of State, on form DSCB: 15-8913,
accompanied by a docketing statement, form DSCB:
15-134A.
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A
limited liability partnership (LLP) is an existing
partnership that files an election with the
Corporation Bureau, Pennsylvania Department of
State, claiming LLP status, on form DSCB:
15-8201A. The effect of becoming a LLP is to
provide general partners with additional
protection from liability.
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corporation is the most complex form of business
organization. It is costlier and more difficult to
create because of the paperwork required. Business
activities are restricted to those listed in the
corporate charter. However, most corporations list
a general purpose clause.
Advantages of a
corporation are that liability is limited to the
amount owners have paid in to their share of
stock, and the corporation’s continuity is
unaffected by the death or transfer of shares by
any of the owners. Some disadvantages are
extensive record keeping, close regulation, and
double taxation (taxes on profits and taxes on
dividends paid to owners).
To form a corporation in Pennsylvania, you must
file Articles of Incorporation, form DSCB:
15-1306, with the Corporation Bureau, Pennsylvania
Department of State, accompanied by a docketing
statement, form DSCB: 15-134A. Foreign (out of
state) corporations must submit an application for
a Certificate of Authority, form DSCB:15-4124,
accompanied by a docketing statement, form DSCB:
15-134A, to conduct business in Pennsylvania.
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Closely held corporations may elect to be taxed as
federal or state S corporations (IRC 1361-1379),
which permit shareholders to pay taxes on
corporate net income personally, as if it were a
partnership. S corporation status is limited to
corporations that have no more than 75
shareholders. A Pennsylvania corporation can not
elect to be an S corporation unless it has also
applied for federal S status. To apply for
Pennsylvania S status, file form REV-1640 with the
Pennsylvania Department of Revenue within 75 days
of the beginning of your fiscal year. When you
receive a copy of your federal notification of
approval from the IRS, you must furnish a copy to
the Pennsylvania Department of Revenue. S
corporations are responsible for filing and paying
the Capital Stock and Foreign Franchise Tax.
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Visit the
following sites for more information on choosing a
Legal Business Structure:
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Pennsylvania Open for Business
Explains the various legal structures and has the
relevant forms for each structure available online.
Assists entrepreneurs in completing and submitting
required forms.
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Smartbiz.com
Links directly to the section of this business
assistance website containing articles, reports and
checklists related to company structure.
For direct
assistance in selecting a legal structure appropriate
for your business, contact the local SBDC or SCORE
chapter that serves your county:
Pennsylvania Corporate Bureaus
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Corporation Bureau
Pennsylvania Department of State
308 North Office Building
Harrisburg, PA 17120
(717) 787-1057
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Bureau
of Corporation Taxes
Pennsylvania Department of Specialty Taxes Division
Attn: “S” Corporation
Department 280704
Harrisburg, PA 17128-0704
(717) 783-6035
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