Forms of Common Business Entities in Pennsylvania

This Article contains a summary of some of the more common forms of entities that may be used to operate a business in Pennsylvania today and a brief review of their characteristics.

TOPICS COVERED:

  • Explanations of Terminology
  • Business Corporation - "C" Corporation
  • Business Corporation - "S" Corporation
  • Partnership
  • General Partnership ("GP")
  • Limited Partnership ("LP")
  • Limited Liability Company ("LLC")

Explanations of Terminology

Explanation of "Limited Liability" Entity - when an entity is classified as a "limited liability" entity, this means that the owners of the entity are provided with some degree of protection against their personal liability. This liability protection is not absolute. There are still ways in which owners can be held personally liable for claims that arise out of a business operating as a limited liability entity. For a more detailed explanation, see the "Corporations" article at this website.

Explanation of "Pass Through" Entity - when an entity is classified as a "pass through" entity, this means that the entity does not pay income tax at the entity level but rather that the income tax consequences are passed through to the owners of the entity - the shareholders, partners or members. The tax consequences are not the same in all pass through entities but they do have a common characteristic - no income tax at the entity level.

Descriptions of Entities

Business Corporation - "C" Corporation - a business entity formed by filing Articles of Incorporation with the Pennsylvania Corporation Bureau. The entity is owned by one or more shareholders. Shareholders may be individuals or other entities. A "C" Corporation is a limited liability entity but is not a pass through entity for tax purposes. This means that the "C" Corporation pays tax on its income before its "profits" are distributed to the shareholders in the form of dividends. The shareholders pay income tax on the dividends.  Today, Federal Income Tax on many dividends is imposed at the lower capital gains tax rate. Formerly, all dividends had been taxed at the higher ordinary income rate.

Business Corporation - "S" Corporation - a business entity formed by filing Articles of Incorporation with the Pennsylvania Corporation Bureau. The entity "elects" to be taxed as an "S" corporation by filing election forms with the Internal Revenue Service and the Pennsylvania Department of Revenue. The entity is owned by one or more shareholders. Individuals and certain entities may be shareholders of an "S" Corporation but there are limitations on the number of shareholders and the type of entities qualified to be shareholders. An "S" Corporation is a limited liability entity just like a "C" Corporation but unlike a "C" Corporation, it is a pass through entity for income tax purposes.

Partnership - see "General Partnership" and "Limited Partnership" below.

General Partnership ("GP") - a business entity formed by the agreement of two or more partners to operate as a partnership. No formal filing is required to form a General Partnership, although the partnership is required to register its name if it uses one. Partners may be individuals or other entities. A General Partnership is not a limited liability entity - the partners do have personal liability for claims against the partnership. A General Partnership is a pass through entity for income tax purposes.

Limited Partnership ("LP") - a business entity formed by the agreement of two or more partners and the filing of a Certificate of Limited Partnership with the Pennsylvania Corporation Bureau. Partners may be individuals or other entities. There must be at least one limited partner and at least one general partner. The general partner is often a corporation or an LLC. A Limited Partnership is a limited liability entity - the limited partners do not have personal liability for claims against the partnership. However, the general partner does have personal liability for claims against the partnership. A Limited Partnership is a pass through entity for income tax purposes. The entity of choice in Pennsylvania for holding title to real estate is usually a Limited Partnership rather than an LLC or a corporation.

Limited Liability Company ("LLC") - a business entity formed by filing a Certificate of Organization with the Pennsylvania Corporation Bureau. The entity is owned by one or more members. Members may be individuals or other entities. An LLC is a limited liability entity like a corporation but is usually a pass through entity for income tax purposes, like a partnership. Unlike a Limited Partnership, there does not need to be any member who has personal liability. In many situations, in which both limited liability and pass through tax treatment are desired, the LLC is the entity of choice. However, unlike other states, Pennsylvania imposes a capital stock tax on LLCs just as it does on corporations. Therefore, until this tax is completely phased out, a Pennsylvania LLC may not be the entity of choice for holding title to real estate.  The particular facts must be examined.

Note: The decision to form an entity to operate a business in Pennsylvania rather than operate as a sole proprietorship and the choice of the form of entity for the operation of a business should be made after consultation with a lawyer and an accountant. These decisions should not be made based on the limited information set forth here. Significant legal and tax consequences can result from the choices that are made. This web page does not contain all the factors relevant to the decisions nor does it explain how the various factors should be weighted in making those decisions. This web page is intended to provide only limited general information and is not intended as legal advice.

 

Copyright 2013 - 2014  Marc H. Jaffe