When you are starting a business, investing in real estate ventures, or engaging in other commercial activity in Pennsylvania, it is a good idea to consider forming a limited liability company (“LLC”).
“LLC is the way to go, and the most common business [structure] that’s currently formed,” says Jacob Cohen, owner of Jacob Cohen & Company, CPAs, a Philadelphia-based certified public accountant firm serving individuals and business owners. “It’s flexible, and you can elect for it to be taxed as a partnership.”
An LLC is a hybrid between a corporation and a partnership. As such, an LLC provides the liability protection of a corporation, with the advantage of being taxed as a partnership. Generally, this means that a Pennsylvania LLC shields you from personal liability arising from your business activities. At the same time, it provides you with “pass-through” tax treatment on the profits and losses from your business. Basically, you’ll avoid being taxed twice, as a business and as an individual. You can incorporate your LLC yourself, hire a lawyer to guide you through the process, or use an online service like LegalZoom to register your business quickly.
We interviewed Pennsylvania-based experts on their experience with registering for an LLC in the Keystone State. These are the steps involved in setting up your LLC in Pennsylvania, as outlined below.
Step 1: Choose a Company Name
Pennsylvania requires that every LLC operating in the state have a unique name. You can conduct a search at the Pennsylvania Department of State website to see if your proposed name is available. The name of your LLC must contain the words “Company,” “Limited,” or “Limited Liability Company”, or either the abbreviation “L.L.C.” or “LLC”.
There are certain restrictions to choosing a company name. It cannot reference a governmental agency , such as the FBI, the State Department, or the United States Treasury. It also cannot indicate a fiduciary relationship if one doesn’t exist (trust, trustee, fiduciary). It also cannot include a non-associated financial institution or professional services firm, such as a bank, law firm, or medical practice.
Licensed professionals in Pennsylvania, such as doctors, lawyers and therapists, have different company formation requirements. They must form what is called a “restricted professional company.” You can check to see if your industry is considered to provide restricted professional services by reviewing the Pennsylvania Statement of Policy.
If your proposed name is available, you may reserve it for up to 120 days for a fee of $70 by filing a Name Reservation request form online or mailing in the form.
In choosing your LLC name, you will want to consider the following:
- Are you planning to trademark the business name tied to your product or service offering? If so, you should check first to see whether the trademark is available. Trademarks can be searched at the United States Patent and Trademark Office website.
- Do you need the website name to be the same as the company name? If so, is this domain available?
- Are you planning to market or sell on social media platforms? If so, do you need the social media handle to match the company name?
The legal name of your LLC does not have to be the same as the name you use to operate your business, as you can use a “doing business as” (DBA) name or trade name. For this reason, it is important to conduct a trademark search for your DBA or trade name to ensure that no one else has already obtained a trademark for your proposed trade name. If you choose to operate under a DBA or trade name, you still need to follow the same LLC naming conventions for your Pennsylvania LLC and also register your fictitious name (DBA) with the Pennsylvania Department of State. A DBA is a commercial name and is not a “legal entity.” Therefore, if you use a DBA, you still need to form an LLC to provide liability protection for your personal assets.
Step 2: Select a Registered Agent
When you are completing the Pennsylvania LLC form, you will be asked to list a registered agent for your company. A registered agent will be your business’s main point of contact with the state. This person will accept all state paperwork, including all legal documents, tax statements, lawsuit notices, court orders, and government correspondence.
Related: What Is a Registered Agent?
The registered agent’s name and address must be made visible to the public for anyone who needs to contact your business. This address must be a physical location and not a post office box. The registered agent must be accessible during normal business hours. You can designate yourself or someone else or a Pennsylvania-based company (e.g. registered agent service) to be the registered agent.
If you are always busy and difficult to reach, and you don’t have anyone that you feel comfortable with for this role, you can use a registered agent service. There are commercial providers who can serve as your registered agent for a fee (generally about $100-$200 per year). One benefit of using a commercial service is the greater likelihood that your business is in receipt of all legal documents, thus avoiding noncompliance with state regulation deadlines.
Step 3: Prepare and File Your Certificate of Organization and Docketing Statement
The next step in forming an LLC in Pennsylvania is to complete and file a Certificate of Organization for Limited Liability Company with the Pennsylvania Department of State. The Certificate of Organization is a document that lays out basic information about your business and officially establishes your authority to operate as an LLC in Pennsylvania.
To complete the Certificate of Organization, you will need to provide the following information:
- The LLC’s name and principal place of business.
- The registered office address.
- The name of each LLC member.
- The signature of the organizer who completes and files the form.
- The effective date for the LLC’s formation (usually the date of filing).
One important item you will need to determine when completing the Certificate of Organization is whether your LLC will be “member-managed” or “manager-managed.” In LLCs, the LLC owners are called members. Many LLCs are member-managed, as they are usually owned by one or just a few members. If you don’t have the time or inclination to manage your business on a daily basis, you can appoint another member to serve as manager, or you can hire an outside manager.
“You want to always select manager-managed [on the form],” says Sekou Campbell, partner and transactional attorney at the Philadelphia office of Culhane Meadows PLLC, a corporate and commercial law firm. “[Then] you have the option of either having a member manage it, or [having] a manager or someone who is not a member manage the LLC,” Campbell explains. You can have a manager who is a non-owner of your LLC manage it.
Along with the Certificate of Organization, you will also need to include a Docketing Statement. The Docketing Statement requires your LLC’s employer identification number (EIN), fiscal year, and other details. You can mail in the Certificate of Organization and Docketing Statement, or you can file them online for faster processing. The filing fee for the Certificate of Organization is $125, and there is no fee for the docketing statement. Since most LLCs do not have an EIN until after filing, this does not need to be provided on the docketing statement at the time of filing. It can be provided when you receive your EIN.
If your certificate is approved, you’ll receive a copy of the filed certificate in the mail. If the state rejects your certificate for some reason, the Department of State will identify the issue, and you will have an opportunity to make corrections and refile.
Step 4: Create Your LLC Operating Agreement
An operating agreement is an agreement among the members of the LLC that details how the LLC will be managed and operated. Even if you are a single-member LLC, it is important to have an operating agreement, as the management structure may change over time, especially if your business grows quickly.
Some of the key benefits of an operating agreement are:
- It allows members to develop the business’s rules, policies and procedures for running and managing the LLC.
- It outlines a plan and process in case a member dies or leaves the company.
- It can include a procedure to resolve disputes among members.
- It may define a process for removal of an LLC member.
- It clarifies the business’s management structure (member-managed or manager-managed).
- It helps to establish the LLC as a bona fide legal entity. This is especially important for single-member LLCs.
- It provides clear evidence that you are separating your personal and business assets.
It is recommended that you incorporate the above structural details into your LLC operating agreement. Drafting an LLC operating agreement can be a daunting task. If you plan to do this yourself, you would be well-advised to consult with an attorney familiar with Pennsylvania LLC laws.
“Not having an operating agreement, or having a very poorly written operating agreement, and then not having strong buy-sell provisions [if partners split] are probably the two things that I see hurt the business,” says Campbell. “Completely out of the blue, if someone gets injured or, God forbid, passes away, buy-sell provisions also cover those things as well.”
Step 5: Obtain an Employer Identification Number (EIN)
Once you have received your file-stamped Certificate of Organization and your LLC is officially formed, you will then need to apply for a federal Employer Identification Number (“EIN”) with the Internal Revenue Service. You need an EIN in order to pay Pennsylvania business taxes for your LLC, as well as to open an LLC bank account and conduct other types of business. You can obtain your EIN on the IRS website, and the Internal Revenue Service lets you register an EIN for free.
Step 6: Open a Bank Account
After you have obtained your EIN, you can open a business bank account for your LLC. It is very important to create and maintain a separate business bank account and make sure you do not commingle any of your LLC finances with your personal finances. The same is true regarding credit cards: you should have a separate credit card in the name of the LLC that is used exclusively for LLC business.
To establish a business bank account, you will need to show the bank your filed Certificate of Organization and your EIN. The bank may also require a signed operating agreement and background information for each LLC manager and member.
Step 7: Complete Business Registration and Obtain Permits
Depending on your specific business activities, your LLC may need to report sales and use tax and/or employer withholding. In order to register your LLC for state tax and employer accounts, you’ll need to complete the Pennsylvania Enterprise Registration Form.
You may also need to obtain any necessary business licenses or permits. To determine if you need a PA business license, you can check with the Pennsylvania Department of State Licensing Services.
If you are operating an online business, there are additional issues that will need to be considered, including complex privacy and data protection laws in certain states (California, Colorado, Connecticut, Utah, Virginia) and the UK / European Union.
Lastly, you may want to consult with a business attorney or accountant before you form your Pennsylvania LLC, particularly if it is your first time. It may save you the time and expense of having to fix any mistakes you may make during your LLC formation process.
“I would definitely recommend having a business attorney,” says Catherine Janisko, founder and owner of Catsy Lu Beauty, Pennsylvania-based cosmetic and personal care company. “You just don’t know what can happen in the future, especially if you’re online.”
Frequently Asked Questions
How much does it cost to start a Pennsylvania LLC?
Filing your Certificate of Organization in Pennsylvania will cost $125. If you choose to reserve a name beforehand, you can hold a business name for up to 120 days for an additional fee of $70. Additional services like LegalZoom come with an additional cost.
What are the annual fees for a Pennsylvania LLC?
Each year, you will need to file an annual report to maintain annual registration, which includes a $70 fee.
How long does it take to set up a Pennsylvania LLC, and is it easy?
Filings completed online will take about four weeks, and filings sent in by mail will take five to six weeks to process.
Do I need a lawyer to start an LLC?
You don’t have to engage a lawyer in order to start an LLC, but the added advantage of working with a professional is that you can ensure you’re taking the right steps in the right order. Weigh the pros and cons of retaining professional help versus incorporating your LLC yourself.
What is an LLC formation service, and is it worth it?
An LLC formation service like LegalZoom or Northwest Registered Agent will walk you through a checklist of the steps you need to take to file your LLC. The service then sends in the application on your behalf, and communicates the Secretary of State’s decision back to you one it has been received.
What is a DBA, and do I need one for my Pennsylvania LLC?
A DBA, which stands for “Doing Business As”, is a vanity name for your LLC that you can use when conducting business. Some organizations may want their business name to be different from their actual LLC name, for marketing purposes. Your DBA cannot be a name that has already been filed in the state of Pennsylvania.