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Choose a Legal Structure for Your New Business

January 30, 2010

When beginning a business, you must decide what legal form of business entity to establish. Your legal form of business determines the amount of regulatory paperwork you have to file, your personal liability regarding investments into your business, and the taxes you have to pay. The most common business structures include:

  • Sole Proprietorship – A business owned and managed by one individual who is personally liable for all business debts and obligations.
  • Partnership – Two or more people share ownership of a single business.
  • Corporation – A legal entity owned by shareholders.
  • S Corporation – A special type of corporation created through a tax election. An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corporation.
  • Limited Liability Company (LLC) – A hybrid-type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership
  • Non-Profit – An organization engaged in activities of public or private interest that are not motivated by making a profit. Some non-profits are exempt from paying federal taxes.
  • Cooperative – A business or organization owned by and operated for the benefit of those using its services. Cooperatives are not a legal structure.

Visit these resources to learn more about which business structure is right for you:

  • Guide to Choosing a Business Structure
    The U.S. Small Business Administration provides this clear and concise guide covering the most popular business structures. Outlines the advantages and disadvantages of each type of business structure as well as tax requirements.
  • Tax Information – Business Structures
    The Internal Revenue Services provides information on the tax implications of the most common business structures.

Registering Your Business

If you decided to create a corporation, a non-profit, a limited liability company or a partnership (limited, or limited liability) in Pennsylvania, you will have to register your business and file certain documents with the state government. If your business is a sole proprietorship, you do not need to register your business with the state, however a sole proprietor using their own name for the business name does not need to register unless they formally use another (“fictitious”) name as a the trade name.

Here is a link to Pennsylvania’s Guide for Business Registration:

http://www.dos.state.pa.us/corps/lib/corps/guidetobusreg/businessguide.pdf

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