By understanding the distinctions between different Pennsylvania business
entites, people will be better able to determine which entity is best
designed for their respective businesses. In Part One of this Two-Part
article, I answer some oft-asked general questions about selecting a business entity.
[Portions of this article are based upon an article I wrote for and which
was published by both the December, 2018 Pennsylvania Bar Association's
Solo & Small Firm
Newsletter and the January, 2019
Pennsylvania Bar News. --KPM]
What types of business entities are recognized in Pennsylvania? Thirty years ago, there were only a handful of recognized business entities
in Pennsylvania: Sole proprietorships, general partnerships, limited partnerships,
S corporations and C corporations. In the 1990s, Pennsylvania enacted
legislation which provided for limited liability companies and limited
liability partnerships. In addition, Pennsylvania now allows for the formation
of "Benefit" entities, i.e., entities which allow decision-makers
to take into consideration one or more social issues (such as environmental
or educational concerns), instead of making decisions based solely on
the effect upon the monetary value of an equity holder's ownership stake.
Will the type of business I choose have an effect upon which entity works
best for me? Sometimes. For example, Pennsylvania has special rules for entities whose
owners are limited to to being attorneys, doctors, engineers, accountants
and other "professionals." However, most decisions regarding
entity selection are based more upon tax, liability and flexibility issues
than upon the nature of the business. For example, if an accountant advises
that the owners of a company are better off taking a "salary"
as opposed to receiving periodic "distributions," an S corporation
may be preferable to a limited liability company. On the other hand, a
limited liability company will likely be the preferred entity if a company's
success depends upon obtaining investments from other companies. That
is because S corporations have restrictions upon who can be an investor
in or equity holder of the company, while limited liability companies
have no such restrictions.
What if I want to start a business with my spouse or other family member? This is a huge concern when selecting a business entity. Many people don't
realize that, unless a specific entity is properly formed and maintained,
any business owned by two or more people is going to be treated under
Pennsylvania law as a general partnership. General partnerships are a
liability
nightmare: Each partner, and all of the partners together, can be held
personally responsible for the entire amount of partnership debts and obligations. If spouses
start a business and don't properly form and maintain the business
entity, and if the business runs into financial difficulty, not only will
the assets of the business be at risk, but the family home, cars, bank
accounts and everything else owned by them, individually or jointly, will
be at risk.
[In Part Two of this article, I will answer questions regarding the changes
during the past five years which have transformed Pennsylvania into one
of the most progressive states in the nation in terms of entity transformation
and flexibility.]
---Ken Milner