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Business formation considerations for startups

Pennsylvania entrepreneurs usually are filled with the excitement of a new idea, a new product, a new service and find it hard to switch gears and focus on the business per se. Nevertheless, such gear switching is vital, particularly in regard to deciding what type of business they wish to form.

As Founders Workbench points out, which business structure works best for which startup depends on the following three factors:

  1. The desires of the owner(s) regarding limited liability of personal assets
  2. The desired business ownership and management structure
  3. Federal and state taxes

Business entity types

The Small Business Administration can be helpful in cutting through the legalese associated with the various types of business organizations and explaining them in a relatively straightforward manner. Assuming that the startup will have more than one owner, the most common types of business are the following:

  • Partnership
  • Corporation
  • Limited liability company

There are several different types of partnerships. One popular type is a limited partnership wherein there is one general partner with unlimited liability and additional partners with limited liability and limited control. All of this is set forth in a written partnership agreement. The partnership itself pays no income taxes; rather, its profits are passed through to the partners who pay personal taxes on their shares of the partnership profits. Another popular type is a limited liability partnership. Similar to an LP, an LLP gives limited liability to every partner, protecting each from the actions of the others.

A corporation provides the strongest personal liability protection to the startup owners, but also is more expensive to form and requires more record-keeping. Corporations are legal entities separate and apart from their owners and pay their own income taxes. Shareholders pay personal income taxes on the dividends they receive.

Somewhat akin to a corporation, a limited liability company, a/k/a LLC, offers both corporate adn partnership advantages.  The personal assets of the owners generally are not at risk if the business is sued or goes bankrupt.  The LLC entity is filed with the state, the internal workings of the organization are mostly determined by the operating agreement amongst the members and/or managers of the company.

S corporations are a special tax election which can be taken by a corporation or an LLC.  By taking the special S election the business avoids the double taxation of a regular corporation and can receive other tax benefits.  One downside of an S corporation, however, is that all shareholders must be U.S. citizens and they are limited in the number and types of shareholders and shares that they can issue.

Kisner Law Firm works with a variety of startups to provide advice regarding the best entity for your needs, formation and drafting the necessary documents for good corporate (or company or partnership) governance.  Our attorneys are also available to assist entities who may have formed on their own using a service and now have concerns or are dissatisfied with the fit of that entity structure for their needs.

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Pittsburgh, PA 15219
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