How to Start an S-Corporation in Pennsylvania (2024 Guide)

Start an S-Corporation in Pennsylvania

If you want to start an LLC in Pennsylvania, there are things that you should consider. Pennsylvania is the home to a thriving business community, making it an attractive location for entrepreneurs. One popular business structure is the S-Corporation, which offers several tax and operational advantages. This comprehensive guide will explore the process of starting an S-Corporation in Pennsylvania, including the costs, steps, advantages, and disadvantages associated with this business structure.

Webinarcare Editorial Team will help you gain knowledge through thorough research and market study. Before starting your S-corp, all the steps in this article must guide you.

What is an S-Corporation?

An S-Corporation is a type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. This tax treatment allows S-Corporations to enjoy pass-through taxation, meaning the corporation’s income, deductions, and credits flow through to the shareholders, who report this information on their individual tax returns. This structure helps to avoid the double taxation experienced by C-Corporations.

An S corporation (S corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other companies. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

Limitations and Requirements of S-Corp

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

  • Be a domestic corporation.
  • Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
  • Have just one type of stock.
  • Have a maximum of 100 shareholders or members.
  • Have only permitted individuals, certain trusts, and estates as stockholders or members.

You can apply for an S-Corp in Pennsylvania if qualified for the limitations and requirements.

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How to Form an S-Corporation in Pennsylvania?

To create S-Corp in Pennsylvania, you must follow the below guidelines that include forming a business name, hiring a Registered Agent, filing your Certificate of Organization, creating an operating agreement, requesting an EIN, and filing a form 2553.

Step 1: Register a Business Name in Pennsylvania

After you have decided on the idea to start an S-Corp in Pennsylvania, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an S-Corp, there is a complete guide on Pennsylvania Business Name Search for a proper business name. Here are some guidelines you must follow while naming your S-corp.

  • Avoid profanities
  • The name should be available, and no other entity should have the same name in Pennsylvania.
  • Limit of restricted words that need a license in Pennsylvania
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hire a Registered Agent

The next step in starting an S-corp in Pennsylvania is hiring a Registered Agent, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence. Forming an LLC with an S-corp will be easier if you have Registered Agent in Pennsylvania.

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Step 3: File For Certificate of Organization

The Certificate of Organization is an important document to start your limited liability company (LLC). Pennsylvania Certificate of Organization is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. For the Certificate of Organization to be filed in RI Secretary of State, you need to pay a filing fee of $125. In Pennsylvania, the filing fee of forming an LLC is $125 (by mail and online).

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Step 4: Creating an Operating Agreement

After you have filed your Certificate of Organization, the next step is to create an operating agreement in Pennsylvania. The operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following:

  • Article I: Organization
  • Article II: Management and Voting
  • Article III: Capital Contributions
  • Article IV: Distributions
  • Article V: Membership Changes
  • Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure.

Step 5: Request for an EIN

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

The application of an EIN in Pennsylvania can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

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Step 6: File Form 2553 for your S-Corp Business

Once you have obtained your EIN and Certificate of Organization to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or at most 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS.

In Pennsylvania, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734.

Costs of Forming an S-Corporation

There are several costs associated with forming an S-Corporation in Pennsylvania, including:

  1. Filing Fees: When forming a corporation in Pennsylvania, you must file Articles of Incorporation with the Pennsylvania Secretary of State and pay a filing fee of $125 for online and by mail filing.
  2. Statement of Information: After forming the corporation, you must file a Statement of Information (Form SI-550) within 90 days and pay a filing fee (currently $25). This statement must be filed annually after that.
  3. Franchise Tax: S-Corporations in Pennsylvania are subject to the annual franchise tax, which is the greater of a minimum tax (currently $800) or a calculated tax based on the corporation’s net income.
  4. Other Costs: Depending on the nature of your business, additional costs may include obtaining licenses and permits, registered agent services, and professional fees for legal and accounting services.

Advantages of Forming an S-Corporation

There are numerous advantages to incorporating an S-Corp, but you should be aware of certain problems. Consider the following benefits of an S corporation:

Pass-through Taxation

S-Corporations enjoy pass-through taxation, which helps to avoid the double taxation faced by C-Corporations. This can result in potential tax savings for shareholders. Pass-through taxation is a tax system where the income, deductions, and credits generated by a business entity, such as Pennsylvania General Partnership, limited liability company (LLC), or S-Corporation, are passed through to individual owners or shareholders instead of being taxed at the corporate level.

In this system, business profits and losses are reported on the owners’ or shareholders’ individual tax returns, and taxes are paid at their individual income tax rates. This avoids the issue of double taxation, which occurs in C-Corporations where income is taxed at both the corporate level and again when distributed to shareholders as dividends. Pass-through taxation is generally advantageous for small businesses and their owners, as it simplifies tax filings and often results in lower overall taxes.

Limited Liability Protection

Shareholders of an S-Corporation have limited liability protection, meaning their personal assets are protected from the corporation’s debts and obligations. Limited liability protection in an S-Corporation refers to the legal separation between the personal assets of the shareholders (owners) and the business assets, which protects shareholders from being personally responsible for the company’s debts and legal obligations.

In an S-Corporation, shareholders’ personal assets, such as their homes, cars, and personal savings, are not at risk if the business faces financial difficulties or lawsuits. The shareholders’ liability is limited to the amount they have invested in the company. This limited liability is a significant advantage of incorporating a business as an S-Corporation, as it provides a safeguard for the personal financial well-being of the business owners.

It is important to note that limited liability protection can only be supported if the shareholders maintain proper corporate formalities, such as keeping separate business and personal finances, holding regular shareholder meetings, and maintaining accurate business records. In such cases, courts may “pierce the corporate veil” and hold shareholders personally liable for the company’s debts and obligations.

Transferability of Shares

Shares in an S-Corporation are more easily transferable than those in an LLC, allowing for greater flexibility in ownership changes. Transferability of shares in an S-Corporation refers to the ability of shareholders to sell, gift, or otherwise transfer their ownership interest in the company to another person or entity. This is an important aspect of an S-Corporation’s structure, as it allows for flexibility in ownership and the potential for raising capital through the sale of shares.

However, there are certain restrictions on the transferability of shares in an S-Corporation, which are imposed by the Internal Revenue Service (IRS) to maintain the company’s eligibility for S-Corp status:

  • Shareholders: The number of shareholders in an S-Corporation is limited to a maximum of 100. Only individuals, certain trusts, and estates can be shareholders; other corporations and partnerships are generally not allowed.
  • Eligible Shareholders: Only U.S. citizens and resident aliens can be shareholders in an S-Corporation. Non-resident aliens are not allowed to hold shares.
  • One Class of Stock: S-Corporations can only have one class of stock. All shares must have the same rights and privileges, such as voting rights and distribution preferences. However, differences in voting rights are allowed if they are not tied to economic rights (e.g., distribution preferences).
  • Perpetual Existence: Perpetual existence refers to the concept that a business entity, such as an S-Corporation, can continue to exist indefinitely, regardless of changes in ownership or management. This means the corporation can outlive its original founders and shareholders and continue to operate even if individual shareholders pass away or decide to sell their shares.

This characteristic of an S-Corporation provides stability and continuity for the business, as it ensures that the corporation’s operations, contracts, and legal obligations remain unaffected by changes in ownership. It also makes it easier for the company to attract investors and raise capital. Potential investors can be confident that the business will continue to exist even if the original owners are no longer involved.

Disadvantages of Forming an S-Corporation

Despite these advantages, moving to an S corporation only sometimes makes sense – or at the very least, necessitates a thorough review of certain situations. The following issues may arise in particular:

Restrictions on Shareholders

S-Corporations are subject to specific restrictions, such as a maximum of 100 shareholders and limitations on the types of eligible shareholders (e.g., only individuals, certain trusts, and estates).

Single Class of Stock

S-Corporations are limited to issuing only one class of stock, which can limit flexibility in raising capital or creating different ownership structures. A single class of stock in an S-Corporation refers to the requirement that the corporation only issues one type of stock with equal rights and characteristics for all shareholders. This means that all shares of stock must have the same economic rights, such as dividend distribution preferences and liquidation rights, as well as voting rights. The single class of stock requirement is one of the key criteria the Internal Revenue Service (IRS) sets for a corporation to qualify for S-Corp status.

Increased Complexity

Forming and maintaining an S-Corporation requires more paperwork, record-keeping, and compliance with state and federal regulations than simpler structures like LLCs.

Franchise Tax

S-Corporations in Pennsylvania are subject to the annual franchise tax, which can financially burden some businesses.

In an Pennsylvania S-Corporation context, the franchise tax is usually based on the company’s income, net worth, or a combination of both. Since S-Corporations are pass-through entities for federal income tax purposes, meaning that their income is not taxed at the corporate level but rather passed through to individual shareholders, they may be exempt from or subject to lower franchise tax rates in some states than traditional C-Corporations.

However, S-Corporations must still comply with Pennsylvania franchise tax requirements, which may include annual filings and tax payments. It is crucial for S-Corporation owners to understand the specific rules and regulations in their state of operation and to consult with a tax professional to ensure compliance and minimize their tax.

FAQs

What is an S-Corporation in Pennsylvania?
An S-Corporation in Pennsylvania is a corporation that has elected to be taxed as a pass-through entity for federal income tax purposes.
What are the requirements to start an S-Corporation in Pennsylvania?
To start an S-Corporation in Pennsylvania, you must file Articles of Incorporation with the Pennsylvania Department of State and obtain a Federal Tax Identification Number (EIN).
Is there a minimum amount of money needed to start an S-Corporation in Pennsylvania?
There is no minimum capitalization required to start an S-Corporation in Pennsylvania.
Can a non-US citizen start an S-Corporation in Pennsylvania?
Yes, a non-US citizen can start an S-Corporation in Pennsylvania if they have a valid US Tax Identification Number (TIN).
What tax benefits does an S-Corporation in Pennsylvania offer?
An S-Corporation in Pennsylvania offers pass-through taxation which allows profits and losses to be passed through to shareholders.
What is the filing fee for Articles of Incorporation for an S-Corporation in Pennsylvania?
The filing fee for Articles of Incorporation for an S-Corporation in Pennsylvania is $125.
Do I need to file a Pennsylvania Franchise Tax return if I have an S-Corporation?
Yes, even S-Corporations doing business in Pennsylvania must file a Pennsylvania Franchise Tax return.
Do S-Corporations in Pennsylvania require annual meetings?
Yes, S-Corporations in Pennsylvania are required to hold annual meetings.
Are S-Corporations in Pennsylvania required to have bylaws?
Yes, S-Corporations in Pennsylvania are required to have bylaws.
Is there a limit to the number of shareholders an S-Corporation in Pennsylvania can have?
An S-Corporation in Pennsylvania can have no more than 100 shareholders.
Can an S-Corporation in Pennsylvania have multiple classes of stock?
No, an S-Corporation in Pennsylvania can only have one class of stock.
How do I elect S-Corporation status in Pennsylvania?
To elect S-Corporation status in Pennsylvania, you must file Form 2553 with the IRS.
Are S-Corporations in Pennsylvania subject to the state’s corporate net income tax?
Yes, S-Corporations in Pennsylvania are subject to the state’s corporate net income tax.
Do S-Corporations in Pennsylvania pay any other taxes besides the corporate net income tax?
Yes, S-Corporations in Pennsylvania may be subject to other taxes such as sales tax and capital stock tax.
Are there any special requirements for S-Corporations doing business in multiple states, including Pennsylvania?
S-Corporations doing business in multiple states, including Pennsylvania, must comply with the tax laws in each state they do business in.
Can an S-Corporation in Pennsylvania operate with only one employee/shareholder?
Yes, an S-Corporation in Pennsylvania can operate with only one employee/shareholder.
Can an S-Corporation in Pennsylvania have foreign shareholders?
Yes, an S-Corporation in Pennsylvania can have foreign shareholders.
Are S-Corporations in Pennsylvania required to pay minimum tax?
No, S-Corporations in Pennsylvania are not required to pay minimum tax.
Do S-Corporations in Pennsylvania need to comply with state and federal record-keeping requirements?
Yes, S-Corporations in Pennsylvania must comply with state and federal record-keeping requirements.
Can S-Corporations in Pennsylvania give stock options to employees?
Yes, S-Corporations in Pennsylvania can give stock options to employees.
Can an S-Corporation in Pennsylvania issue bonds?
No, an S-Corporation in Pennsylvania cannot issue bonds.
Are S-Corporations in Pennsylvania required to have a registered agent?
Yes, S-Corporations in Pennsylvania are required to have a registered agent.
Can I file for S-Corporation status retrospectively for last year?
No, you cannot file for S-Corporation status retrospectively for last year.
When do I need to file S-Corporation taxes for Pennsylvania?
S-Corporation taxes in Pennsylvania are due on or before the fifteenth day of the third month following the close of the corporation’s taxable year.
What happens if an S-Corporation in Pennsylvania has a negative net income for a taxable year?
If an S-Corporation in Pennsylvania has a negative net income for a taxable year, the loss can be passed through to shareholders and used to offset other income.
Can an S-Corporation in Pennsylvania convert to a C-Corporation?
Yes, an S-Corporation in Pennsylvania can convert to a C-Corporation.
Can an S-Corporation in Pennsylvania convert to an LLC or Partnership?
Yes, an S-Corporation in Pennsylvania can convert to an LLC or Partnership.
Are S-Corporations in Pennsylvania subject to double taxation?
No, S-Corporations in Pennsylvania are not subject to double taxation.
Can an S-Corporation in Pennsylvania have more than one business entity as a shareholder?
Yes, an S-Corporation in Pennsylvania can have more than one business entity as a shareholder.
What are the advantages of forming an S-corporation in Pennsylvania?
S-corporations in Pennsylvania offer the benefits of limited liability protection without the double taxation of a traditional corporation.
Do I need a lawyer to form an S-corporation in Pennsylvania?
While an attorney is not required, it is highly recommended to consult with an experienced business lawyer to ensure your business is properly structured and compliant with state laws.
Can a single person form an S-corporation in Pennsylvania?
Yes, a single person or entity can form an S-corporation in Pennsylvania.
How do I register my S-corporation in Pennsylvania?
You can register your S-corporation in Pennsylvania by filing the necessary paperwork with the Pennsylvania Department of State.
What is the cost to form an S-corporation in Pennsylvania?
The cost of forming an S-corporation in Pennsylvania depends on various factors, such as the type of business, number of employees, and other considerations.
Are there any annual fees or taxes for S-corporations in Pennsylvania?
Yes, Pennsylvania S-corporations are required to pay an annual registration fee and file an annual state tax return.
What type of businesses can form an S-corporation in Pennsylvania?
Almost any type of business can form an S-corporation in Pennsylvania, but there are some exceptions, such as financial institutions, insurance companies, and certain medical professionals.
Does Pennsylvania have any special rules or requirements for S-corporations?
Pennsylvania has specific regulations for S-corporations, such as the need to file an annual report and obtain certain licenses and permits.
Can an S-corporation be owned by foreign entities or non-residents of Pennsylvania?
Yes, foreign entities and non-residents of Pennsylvania can own an S-corporation in the state, but they may need to comply with additional tax and regulatory requirements.
What are the requirements for forming an S-corporation in Pennsylvania?
To form an S-corporation in Pennsylvania, you need to file articles of incorporation, obtain an EIN, create corps-bylaws, and comply with all state and federal regulations.
Is Pennsylvania a good state to form an S-corporation in?
Pennsylvania is a good state to form an S-corporation, as it offers a business-friendly environment, skilled workforce, and excellent transportation and infrastructure.
Do S-corporations pay corporate tax in Pennsylvania?
In Pennsylvania, S-corporations are not subject to state income tax, but they may still have federal and local tax obligations.
Can S-corporations have multiple classes of stock in Pennsylvania?
No, S-corporations cannot have multiple classes of stock in Pennsylvania.
What is the timeline for forming an S-corporation in Pennsylvania?
The timeline for forming an S-corporation in Pennsylvania can vary depending on factors such as state processing times, filing requirements, and documents needed.
Can S-corporations offer different types of shares in Pennsylvania?
No, S-corporations in Pennsylvania are limited to only one type of share.
Do S-corporations in Pennsylvania need to hold annual meetings or minutes documentation?
No, S-corporations in Pennsylvania are not required to hold annual meetings or maintain minutes documentation, although it is generally recommended to do so.
Can S-corporations in Pennsylvania issue non-voting shares?
Yes, Pennsylvania S-corporations may issue non-voting shares, but this may require additional legal documentation and may affect control issues.
What are the residency requirements for forming an S-corporation in Pennsylvania?
There are no residency requirements to form an S-corporation in Pennsylvania.
Is it easy to convert to an S-corporation in Pennsylvania?
Converting to an S-corporation in Pennsylvania can be a complicated process that requires careful planning and consultation with a business attorney.
Can an S-corporation be formed as a nonprofit in Pennsylvania?
No, a nonprofit organization cannot be formed as an S-corporation in Pennsylvania.
Can an S-corporation in Pennsylvania be formed as a benefit corporation?
Yes, an S-corporation in Pennsylvania can be formed as a benefit corporation, which allows the company to prioritize certain social or environmental objectives.
What is workers’ compensation insurance and is it required for Pennsylvania S-corporations?
Workers’ compensation insurance provides benefits to employees in case of job-related injuries or illnesses. In Pennsylvania, most S-corporations are required to carry this insurance, although there are some exceptions for certain types of employees.
Can S-corporations in Pennsylvania have international shareholders?
Yes, international shareholders can hold shares in S-corporations in Pennsylvania, but these shareholders may need to comply with specific US tax and regulatory laws.
Are there any residency requirements for Pennsylvania S-corporation officers or directors?
There are no residency requirements for Pennsylvania S-corporation officers or directors.
Is it mandatory for a Pennsylvania S-corporation to have a physical presence in Pennsylvania?
While a physical presence is not mandatory, S-corporations in Pennsylvania must have a registered office or agent within the state to receive official correspondence and notices.
What is the limitation on the number of shareholders for an S-corporation in Pennsylvania?
In Pennsylvania, S-corporations are limited to no more than 100 shareholders.
Can an S-corporation merge with another business in Pennsylvania?
Yes, an S-corporation in Pennsylvania can merge with another business entity, but it is highly recommended to seek guidance from a business attorney.
What legal documents must an S-corporation file with Pennsylvania’s Department of State?
Among the most important documents to file with the Pennsylvania Department of State are articles of incorporation, bylaws, and annual reports.
What are the main tax obligations for Pennsylvania S-corporations?
Main tax obligations for Pennsylvania S-corporations include filing tax returns with the Pennsylvania Department of Revenue and paying any applicable taxes or fees.

Also Read

Why You Should Start Pennsylvania S Corp

An S Corp is similar to a traditional Corporation (C Corp) but with some key differences that make it a more attractive option for many small businesses. One of the main benefits of an S Corp is the pass-through tax treatment. This means that the profits and losses of the business are passed through to the individual shareholders, who report them on their personal tax returns. This can result in significant tax savings compared to a C Corp, where the business itself is taxed separately.

Another advantage of an S Corp is the ability to avoid double taxation. In a C Corp, the business is taxed on its profits, and then dividends paid to shareholders are taxed again on their personal tax returns. With an S Corp, only the shareholders are taxed, so there is no double taxation.

Furthermore, an S Corp allows for a more formal structure than a sole proprietorship or partnership, providing more liability protection for the owners. In the event of a lawsuit, personal assets are generally protected from business creditors.

Additionally, an S Corp allows for easier transfer of ownership through the sale of stock. This can be advantageous if you plan to eventually sell your business or bring on investors. It also allows for perpetual existence, meaning that the business can continue to operate even if the ownership changes.

Another important benefit of an S Corp is the potential for tax savings on self-employment taxes. As an owner of an S Corp, you can pay yourself a reasonable salary and take the rest of your income as distributions, which are not subject to self-employment taxes. This can result in significant savings compared to being a sole proprietor or partner.

Overall, starting an S Corp in Pennsylvania can offer numerous benefits that make it an attractive option for small business owners. From tax savings to liability protection to ease of transferability, an S Corp can provide the best of both worlds for business owners looking to establish a formal and structured business entity.

If you are considering starting a business in Pennsylvania, it is worth exploring the option of forming an S Corp and consulting with a legal or tax professional to determine if it is the right choice for your business. With the potential for tax savings, liability protection, and flexibility in ownership, an S Corp could be the key to taking your business to the next level.

Conclusion

Forming an S-Corporation in Pennsylvania can be a beneficial decision for small business owners seeking liability protection, pass-through taxation, and easier transfer of ownership. By meeting the requirements set by the IRS and following the necessary steps, business owners can take advantage of an S-Corp’s unique structure and benefits. However, it is essential to consider the potential drawbacks, such as increased paperwork and limitations on ownership, before making a final decision. Consulting with a legal or financial professional can help business owners determine if an S-Corporation is right for their needs and goals.

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