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Business Formation & Planning Archives

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.

How can you start a successful business?

Pennsylvania entrepreneurs like you are always looking for opportunities to grow your business. Kisner Law Firm, LLC, works with you to get established in your chosen field, allowing you to reach your full potential and net the widest audience you can.

What's crucial to setting up a good business is asking the right questions before you get started. It's the same as it is when building houses: a strong foundation will last you a long time. First, you'll need to look at how you intend to manage your business. Questions to ask include:

  • How you plan on distributing your profits
  • How many owners the business has
  • Who plays active and passive roles in the business
  • The financial positions of all involved

Deciding all of this ahead of time will allow you to avoid potentially messy arguments later down the line when it comes to the profits that your company makes.

You'll also want to look at your business structure itself. For example, what kind of transactions do you expect to make? Will you need any special licenses to run your business? What sort of services do you intend to provide, or what items do you plan on selling? What is your intended audience? Are there any state regulations that you need to be mindful of?

Once you've figured out the above, getting started with your business will be a much easier task. Our linked web page has plenty of information for you to look at if you're starting your business.  Our knowledgeable attorneys are available to provide a variety of services to assist with starting or growing your business.

What is incorporation?

If you are starting a business or involved in business ownership in Pennsylvania, you may be curious about incorporation. Entrepreneur explains incorporation is the process of creating a corporation, which is a standalone entity with its own legal rights. Incorporation is done at the state level, but you can incorporate in different states, usually through filing forms and paying a fee.

Creating a corporation requires a board of directors who, along with the officers appointed by the directors, are responsible for running the business. The corporation will issue stock to shareholders, some of whom may be investors. the shareholders will enjoy limited liability because the business is an independent entity.

Incorporating a business requires following specific rules. You must file articles of incorporation. The corporation myst hold at least an annual meeting and keep records, called minutes, of the meetings of the shareholders and directors.  Taxes must be filed on behalf of the business and the finances of the business must be kept separate from personal finances. A corporation works for its shareholders and may need to provide dividends if the business is profitable.  You will need to register with the Securities and Exchange Commission if you do not otherwise qualify for an excemption.  

Corporations and shareholders sometimes face 'double taxation' where the company has to pay taxes on the profits it makes and then the owners have to pay taxes on those same profits when they receive them individually.  There are certain corporate and tax structures that can be used to minimize the impact of taxation.  Corporations must comply with rules and regulations, especially of special elections or exceptions, or they risk losing their corporate status and protections.

Corporate formation and governance can be daunting but Kisner Law Firm can provide advice and formation services to help you develop best business practices.

What's your 'pie in the sky' business idea?

Business meetings - those two words can draw excitement or ire depending on your perspective. As you meet with your partners to discuss a new business idea, you can quickly tap into the creativity in the room, but as ideas become a reality, questions arise that can bog down progress in both business formation and product creation. How can you work past these roadblocks on the way to success?

Choosing a business structure

In the early stages of planning, you will discuss what kind of business structure you and your partners will utilize. You probably know what the company will do, but how it will run takes a little more discussion. The advantages of entity types will be the subject of much discussion between you and your colleagues, and understanding the differences can help drive the conversation.  Two of the most popular entities are a limited liability company (LLC) and a Corporation. 

An LLC or a Corporation can also make tax elections to better fit the needs of your partners and your business.  Both an LLC or a Corporation can be taxed as an 'S-Corp' or a 'C-Corp', an LLC can also be taxed as a partnership.

LLC

  • Limited liability for members
  • Flexible 
  • Tax election options

S corporation

  • Avoids taxes on profits outside of compensation
  • Limited shareholder and stock options

Corporation

  • Limited liabiiity for shareholders
  • Favored by investors
  • Statutory requirements for governance structure
  • More restrictions on tax elections

Your business will likely change as the business grows, the prospects of which can be written into the business plan.

A business law attorney can assist in including the legal needs for growth in your business formation. Your legal professional can also act as a third-party voice to your business structure outside of the egos and emotions of the daily workflow.

Focus on the formation

As a soon-to-be business owner, you want to be efficient, and keeping discussions focused is often the key to early meetings. Even if you intend to develop a large business, the close company you keep is critical.

Amazon CEO Jeff Bezos was recently named as one of the richest people in the world. To help him reach his business goals, he relies on a "two pizza rule" to keep meetings productive. That is to say; he never invites more people to a meeting than two pizzas could feed. Could you use this same rule during the formation of your business?

Understanding the advantages of particular business structures can help drive formation discussion toward the 'pie in the sky' that is your business goal.

Kisner Law Firm can provide advice and planning on the formation of your business and assist new or soon to be owners on focusing on the pertinent discussions and important choices that will need to be made.  Our attorneys can also provide formation services and advice regarding best business practices one your new entity is formed.

Preparing for a consultation with a business law attorney

One of the best pieces of advice for new business owners in Pennsylvania is to seek help from those more experienced. This can mean surrounding yourself with successful owners that you respect, but should also include consulting legal experts who have helped others create and guide their companies. We at Kisner Law Firm have been strategically consulting business owners and are prepared to help you overcome obstacles that you may encounter.

If you have an appointment already made, there are certain pieces of information that are important to bring to the consultation. You will need to provide information about your operations, including what products or services you will offer and what licenses will be required for those, as well as any state or federal regulations that may apply to your business. You should also be prepared to discuss employees, equipment needs, contracts, financing and large purchases that are expected.

You will also need to explain structure of your company. This includes the number of owners that will be involved and what their contributions and level of activity will be, how profits and responsibilities will be divided, and what the financial positions of the owners will be. This information will be crucial in determining the type of entity that you need to create.

Once these facts are presented, you can make decisions such as the type of insurance that will be best, your employee situation and the most optimal way to minimize tax liability. You can focus your decisions on the goals that you have for your company now as well as in the future. For more information on preparing for your consultation, please visit our web page.

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