PA ABC's for new agencies
3. Creating your business and licensing your agency
Choosing your business structure
Your next consideration will be the type of business organization to use. You must examine all of the characteristics and consult a knowledgeable legal professional when considering the formation of your business. Legal and tax considerations will help to determine your final choice, as well as personal needs and the needs of the business. Here are your choices:
A sole proprietorship, by definition, means one natural person owner. Most small businesses operate as sole proprietorships. A sole proprietorship does not have a separate legal existence apart from its owner under state law. The sole proprietor does not file a separate Pennsylvania income tax return for the business because the business activity is reported on the owner’s Pennsylvania individual income tax returns.
A sole proprietor is not an employee, therefore he must make quarterly estimated payments to provide for these tax liabilities. The sole proprietor is solely liable for all the debts of the business. A small business owner may select the sole proprietorship in the beginning of the business and later, may decide to form another type of business organization.
A sole proprietorship is not required to file organization papers with the Pennsylvania Department of State. However, if the sole proprietor intends to do business under a different name, that name must be registered with the Pa. Department of State. This can be done by submitting an "Application for Registration of Fictitious Name," or doing the same online through the Online Business Registration Interview (OBRI). See more information on Fictitious Names below.
A partnership is similar to a sole proprietorship, except that two or more parties are involved. The parties carry on as co-owners of the business for profit. In a business partnership, the parties that join forces can be individuals, corporations, trusts, other partnerships, or a combination of all of the above. Each partner is responsible for all the debts of the business. Any act by any partner binds the business, unless that person had no authority and the third party knew that person had no authority.
A general partnership is formed by an agreement entered into by each partner. A general partnership is not required to file organization papers with the Pennsylvania Department of State, however if it operates using a fictitious name, the general partnership may be required to register the fictitious name. A Fictitious Name Application can be completed online through the Online Business Registration Interview (OBRI).
A corporation is a legal entity with all rights, privileges and responsibilities of a person. The corporation, and not the owners, is solely liable for all the debts of the business. There are two types of corporation structures: a C-Corporation and a S-Corporation (further explained below).
To form a corporation in Pennsylvania, you must file Articles of Incorporation (form DSCB: 15-1306) with the Corporation Bureau, Department of State accompanied by a Docketing Statement (DSCB: 15-134A).
Publication of either the intent to file or the actual filing of Articles of Incorporation must be made in two newspapers of general circulation, one a legal journal, if possible. Proofs of the advertising are not required to be sent to the Corporation Bureau but should be filed with the minutes of the corporation. The advertisements must contain the name of the proposed corporation and a statement that the corporation is to be or has been organized under the provisions of the BCL of 1988.
The Articles of Incorporation and the Docketing Statement can be completed online through the Online Business Registration Interview (OBRI).
C-Corporations are the most commonly used type of corporations and are suitable for businesses of any size. A C-Corporation is a separate legal entity with assets and liabilities that are entirely distinct from yours. C-Corporations can have any number of shareholders. Shareholder's assets are protected from the creditors of the corporation since the liability of the shareholders is limited to the amount contributed by them to the capital of the corporation.
A disadvantage of C-Corporations is double taxation as profits are taxed first as income to the corporation, then as income to the shareholder when distributed as dividends. In some cases, small corporations having not more than 75 shareholders can obtain S-Corporation status.
S-Corporations are not separately taxable entities, so the income is "passed-through" to the shareholders for federal tax purposes. Shareholders of S-Corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S-Corporations to avoid double taxation on the corporate income. S-Corporations are responsible for tax on certain built-in gains and passive income.
Limited Liability Partnership
A Limited Liability Partnership is a partnership that provides liability protection for all limited partners. There must be at least one limited partner and at least one general partner. A PA Limited Liability Partnership is formed by filing a Statement of Registration on form DSCB: 15-8201A with the Corporation Bureau, Department of State. The Statement of Registration and Application for Registration can be completed online through the Online Business Registration Interview (OBRI).
A limited partnership is a partnership formed by at least two persons. The partnership must have at least one general partner and at least one limited partner. The general partner assumes the personal liability for the debts and obligations of the partnership. The limited partners do not have any personal liability beyond the capital contributions they make to the partnership. A Pennsylvania limited partnership is formed by filing a Certificate of Limited Partnership on form DSCB:15-8511 with the Corporation Bureau, Department of State. The Certificate of Limited Partnership or Application for Registration can be completed online through the Online Business Registration Interview (OBRI).
Limited Liability Company
The limited liability company (LLC) is an association of one or more persons which provides the liability protection of a corporation, with many of the tax advantages of a partnership or a sole proprietorship. A person forming an LLC is referred to as an organizer and a person admitted to an LLC is called a member. A Limited Liability Company is formed by filing a Certificate of Organization with the Corporation Bureau, Department of State, on form DSCB: 15-8913, accompanied by a Docketing Statement, form DSCB:15-134A. The Certificate of Organization and Application for Registration can be completed online through the Online Business Registration Interview (OBRI).
Sources for additional information
Licensing your agency
Once your business is registered with the government, you can turn your attention to getting your agency licensed.