LLC vs S-Corp | What Entrepreneurs Need to Know in Pennsylvania

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LLC vs S-Corp in Pennsylvania

When starting a small business in the Pennsylvania, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in Pennsylvania. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in Pennsylvania. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in Pennsylvania

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in Pennsylvania?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in Pennsylvania?

Unlike a limited liability company (LLC) or other business structures, Pennsylvania S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in Pennsylvania

Creating a business in Pennsylvania requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming Pennsylvania Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in Pennsylvania does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in Pennsylvania.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in Pennsylvania

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in Pennsylvania is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in Pennsylvania. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in Pennsylvania are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in Pennsylvania are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in Pennsylvania to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in Pennsylvania with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

Pennsylvania State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in Pennsylvania, it costs $70, which can be paid to the RI Secretary of State. Of course, before forming the whole LLC, you must pay the initial fee of $125 (by mail and online) to the Pennsylvania Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in Pennsylvania have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

Pennsylvania LLC: An LLC can have any number of owners, called members, from starting Pennsylvania Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

Pennsylvania S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

Pennsylvania LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in Pennsylvania.

Pennsylvania S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

Pennsylvania LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

Pennsylvania S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

Pennsylvania LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the Pennsylvania Operating Agreement.

Pennsylvania S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

Pennsylvania LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in Pennsylvania: LLC or S-Corp?

Filing an LLC or S-Corporation in Pennsylvania requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Registered Agent. To establish an LLC in Pennsylvania, you must submit the Certificate of Organization to the Pennsylvania Department of State. Your Certificate of Organization must include information about your Pennsylvania LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the Pennsylvania S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in Pennsylvania: LLC or S-Corp?

Taxes for LLCs and S-Corporations in Pennsylvania depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the Pennsylvania LLC Cost for detailed information.

Pennsylvania S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate Pennsylvania LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in Pennsylvania?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in Pennsylvania. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734​ in Pennsylvania.

FAQs

What are the benefits of forming an LLC in Pennsylvania?
One of the benefits of forming an LLC in Pennsylvania is that the owners (members) have limited personal liability for the debts and obligations of the LLC.
What are the benefits of forming an S-Corp in Pennsylvania?
One of the benefits of forming an S-Corp in Pennsylvania is that the owners (shareholders) are not personally liable for the company’s debt, and taxes are typically lower than with a traditional corporation.
Which one is the right choice for my business, LLC or S-Corp?
The choice between an LLC and S-Corp largely depends on the specific needs and goals of the business owner. A consultation with a business attorney or accountant would be beneficial in making this decision.
What is the process of forming an LLC in Pennsylvania?
The process of forming an LLC in Pennsylvania involves filing Articles of Organization with the Pennsylvania Department of State and paying a fee. The LLC should also have an operating agreement and obtain any necessary licenses and permits.
What is the process of forming an S-Corp in Pennsylvania?
The process of forming an S-Corp in Pennsylvania involves incorporating with the Pennsylvania Department of State, filing Form 2553 with the IRS to elect S-corp tax status, and obtaining any necessary licenses and permits.
Can a non-resident of Pennsylvania form a Pennsylvania LLC?
Yes, a non-resident of Pennsylvania can form a Pennsylvania LLC.
Can a non-US citizen form a Pennsylvania LLC?
Yes, a non-US citizen can form a Pennsylvania LLC.
Is a Pennsylvania LLC taxed as a corporation?
No, a Pennsylvania LLC can be taxed either as a corporation or a pass-through entity (like a partnership or sole proprietorship).
Is filing a Pennsylvania LLC tax return difficult?
Filing a Pennsylvania LLC tax return requires attention to detail, knowledge of tax laws, and careful record keeping. Consulting with an accountant or business attorney may be advisable.
Does Pennsylvania recognize the Series LLC structure?
Pennsylvania currently does not acknowledge the Series LLC structure.
Can an S-Corp in Pennsylvania have more than 100 shareholders?
No, an S-Corp in Pennsylvania can have no more than 100 shareholders.
Can an LLC in Pennsylvania have close to infinite number of partners?
Yes, an LLC can have an almost infinite amount of partners, referred to as members.
What is the role and legal status of managers in an LLC operating agreement?
Managers in an LLC are responsible for the day-to-day operations of the company. The specifics of the manager’s role and legal status are determined by the LLC’s operating agreement.
Can the owners of an LLC or S-Corp be held personally responsible for the company’s debt?
Generally, the owners of an LLC or S-Corp cannot be held personally responsible for the company’s debt and obligations except when corporate formalities are ignored and personal actions cause wrongful harm.
Must an LLC operating agreement be filed with any government agency in Pennsylvania?
No, an LLC operating agreement in Pennsylvania does not need to be filed with any government agency.
Must the personal identities of LLC members be disclosed to the public in Pennsylvania?
The personal identities of LLC members do not need to be disclosed to the public in Pennsylvania as they may be protected under confidentiality provisions.
What are the profits and losses of an LLC or S-Corp subject to?
In Pennsylvania, profits and losses of an LLC or S-Corp are subject to tax.
Is a Pennsylvania LLC isolated from the assets of the members, employees, and managers?
At a minimum, a properly maintained LLC offers limited liability to members, employees, and managers by isolating them from the LLC’s obligations and liability. However, there may be circumstances when the corporate personhood veil is pierced.
Can an S-Corp in Pennsylvania have both preferred and common stock?
No, an S-Corp in Pennsylvania can only have one class of stock.
Can an LLC in Pennsylvania be converted to an S-Corp?
Yes, an LLC in Pennsylvania can be converted to an S-Corp provided that certain conditions are met. An election must be filed with the IRS to make this happen.
Can an S-Corp in Pennsylvania change its tax status to a C-Corp?
Yes, an S-Corp in Pennsylvania can change its tax status to a C-Corp following the process laid out by the IRS.
Can a Pennsylvania business merge into an LLC?
Yes, a Pennsylvania business can merge into an LLC and maintain the existing corporation’s non-tax attributes.
Are the liability protections for LLC and S-Corp owners the same?
Generally, the liability protections for both LLC and S-Corp owners are similar in respect to liability protection, as long as the LLC or S-Corp is properly structured and its members fulfill the corporate formalities.
Do I have to file an annual report in Pennsylvania for my LLC or S-Corp?
Yes, an LLC or S-Corp in Pennsylvania must file an annual report.
How are Pennsylvania LLCs and S-Corps taxed?
Pennsylvania taxes both LLCs and S-Corps depending on the entity’s type of tax treatment as either a corporation (C), pass-through (partnership or sole proprietorship), or disregarded entity for a single-member LLC.
What happens if my LLC or S-Corp doesn’t pay its annual state fee?
If an LLC or S-Corp in Pennsylvania does not pay its annual state fee, the entity will be considered delinquent and may be dissolved or have its authority to do business in Pennsylvania revoked.
Can an S-Corp in Pennsylvania issue incentive stock options?
No, S-Corps in Pennsylvania cannot issue incentive stock options.
Is it required to obtain workers’ compensation coverage in Pennsylvania?
Pennsylvania requires that LLCs or S-Corps with employees have workers’ compensation coverage.
Can the liability protections afforded to LLC and S-Corp owners extend to any personal conduct cases?
No matter whether an entity is an LLC or S-Corp, breaches of privacy, expressed or implied warranties or personal conduct of its individual shareholders are beyond its operating purposes and can result in breaking down corporate personhood veil in court cases to attach personal liability or assets to reimburse the harmed third-party.
What is an LLC in Pennsylvania?
A Pennsylvania LLC is a type of business structure that combines the liability protection of a corporation with the tax benefits of a partnership.
What is an S-Corp in Pennsylvania?
A Pennsylvania S Corporation is a type of corporation that allows the profits and losses to flow through to the shareholders’ personal tax returns.
What are the registration requirements to form an LLC in Pennsylvania?
To form an LLC in Pennsylvania, you must file Articles of Organization with the PA Department of State, appoint a registered agent, and obtain an EIN.
What are the registration requirements to form an S-Corp in Pennsylvania?
To form an S-Corp in Pennsylvania, you must file Articles of Incorporation with the PA Department of State, elect S-Corp status with the IRS, appoint a registered agent and obtain an EIN.
Which business structure is easier to set up, an LLC or an S-Corp in Pennsylvania?
Both types require filing with the Pennsylvania Department of State; however, S-Corp takes additional step to be elected. It is important to evaluate your business structure with your legal advisor.
Which business structure offers more liability protection in Pennsylvania?
Both Limited Liability corporations and S-corporations provide some protection against personal liability for shareholders; however, limitations vary and depending on various factors you should choose the best for you.
Can a foreign LLC or S-Corp do business in Pennsylvania?
Yes, a foreign LLC or S-Corp may register to do business in Pennsylvania by filing with the Pennsylvania Department of State.
What are the tax implications for LLCs in Pennsylvania?
Pennsylvania LLCs are not taxed on the state level, however they will still pay federal taxes. Members of an LLC in Pennsylvania pay tax on their share of the profits based on their personal income.
What are the tax implications for S-Corps in Pennsylvania?
In case of S-Corps, only shareholders have to pay taxes as opposed to the entire corporation. S-Corps, like LLCs in Pennsylvania, enjoy state level tax privileges.
Can new members be added to an LLC in Pennsylvania?
Yes, an amendment to the Articles of Organization can authorize the addition of new members.
Can additional shareholders be added to an S-Corp in Pennsylvania?
Yes, additional shareholders may be added to an S-Corp by issuing new shares of stock.
What is the maximum number of shareholders for an S-Corp in Pennsylvania?
The maximum number of shareholders for an S-Corp in Pennsylvania is 100.
Is it mandatory for an LLC or an S-Corp to hold annual shareholder meetings in Pennsylvania?
The annual shareholder meetings are not mandatory or prescribed. It’s `highly recommended` to have meetings, documentation and records to maintain when it comes to these structures.
What are the filing fees for LLCs in Pennsylvania?
Currently the filing fees are $125.
What are the filing fees for S-Corps in Pennsylvania?
Currently the filing fees are $125.
When are annual reports due for LLCs in Pennsylvania?
The Pennsylvania Department of Revenue requires every LLC to file annual reports to maintain its good standings. They are due April –June every year, according to a fixed date.
When are annual reports due for S-Corps in Pennsylvania?
Similar to LLC, S-Corp should also file annual reports for good standing. The report becomes due April –June every year, according to a fixed date.
Can an LLC elect S-Corp taxation status in Pennsylvania?
Yes, an LLC in Pennsylvania can elect S-Corp tax status by filing Form 2553 with the IRS, many parties shall consider their pros and cons before making such decisions.
Can an S-Corp convert into an LLC in Pennsylvania?
Yes, an S-Corp in Pennsylvania can convert to an LLC by filing Articles of Organization with the Pennsylvania Department of State.
Can an LLC convert into an S-Corp in Pennsylvania?
Yes, an LLC in Pennsylvania can elect for S-Corp status by filing Form 2553 with the IRS and revolting the Articles of organization with the Secretary of State.
What are the document storage requirements for LLC and S-Corp in Pennsylvania?
Limited disturbance of documents and reasoning in the contract is suggested by the authorities.
Can an LLC have a single member in Pennsylvania?
Yes, Pennsylvania permits LLCs to have a single member.
Can an S-Corp have a single shareholder in Pennsylvania?
No, S-Corps require to have two or more shareholders; Partnership likewise held different liability among individuals by sharing all of the risks and costs.
Can an LLC accumulate retained earnings in Pennsylvania?
Limited Liability corporations in Pennsylvania may accumulate retained earnings due to its stretched tax strategy.
Can an S-Corp accumulate retained earnings in Pennsylvania?
No, Unlike LLC it doesn’t qualify to accumulate retained earnings longer or Unnecessarily.
Is Unemployment Insurance applicable for LLC in Pennsylvania?
Yes. LLC in Pennsylvania should pay and report Pennsylvania Unemployment Compensation Insurance.
Is Unemployment Insurance applicable for S-Corps in Pennsylvania?
Yes. Owners of the S-Corp, unlike part amount of the self-employment tax in proper enumeration and must be tax accordingly to abide in good faith affair.
Due to the complexities involved in forming and maintenance, which is better suited for larger businesses – LLC or S-Corp in Pennsylvania?
Limited Liability corporations seen better seem in accommodating likewise issues. In contrast, S-Corp handles more capital and communication issues, for larger companies like themselves.
Are the rules governing LLCs and S-Corps in Pennsylvania adequate for doing business in the state?
Yes, the state of Pennsylvania provides adequate rules governing LLCs and S-Corps; upgrades are also added timely.
Can an LLC or S Corp change to a different business structure later on in Pennsylvania?
Yes, an LLC or S-Corp in Pennsylvania can convert to another business structure in following maintenance work could lead to emerging new disorders.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in Pennsylvania will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in Pennsylvania and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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