Setting Up a Business Entity
Summary of the process to establish a business in PA
Assuming you have the necessary information at the ready, you can create a subsidiary in as little time as a day. “Necessary information” includes information such as the company name, address, contact persons, intended capitalization, and similar items. Once the company is formed, you will likely be required to draft organizational resolutions and other “housekeeping” items may be required — such as establishing a bank account, adopting bylaws, and arranging financing.
Legal fees associated with incorporating or otherwise establishing a subsidiary typically range from $1,000-$2,000 (U.S.), depending on the nature and complexity of the subsidiary relationship. The Commonwealth of Pennsylvania charges a fee of $125 to file the documents needed to register your company.
For more information: www.dos.pa.gov/BusinessCharities/Business
The decision to organize an enterprise as either a corporation or as an LLC (“limited liability company”) is made on a case-by-case basis according to each enterprise’s unique requirements. While both structures provide a degree of “limited liability” (which generally prevents creditors from targeting the personal assets of the business owners to satisfy the liabilities owed by the company) we recommend that firms seek appropriate legal and accounting advice before determining whether to conduct business as a corporation or an LLC. Often, international companies forming U.S.-based subsidiaries will opt for the corporate entity structure.
Until recently, Delaware was known for having certain unique laws that protect corporate directors from liability for decisions that they make on behalf of their corporation, as well as for having a number of legal decisions that provide helpful guidance as to how corporate matters will be decided in the future — thus promoting legal certainty and planning. In 1988, however, Pennsylvania revised its Business Corporation Law so that it now provides substantially the same protection to directors as Delaware does, thus closing the gap between the two legal systems. Again, it is best to discuss these matters with legal counsel.
While there is no way to completely shield an enterprise from litigation or liability, firms can significantly reduce these risks by following certain well-established business practices, such as ensuring that the terms of contracts are clear, and by anticipating problems before they emerge. Maintaining accurate books and records (with the Subsidiary’s transactions and funds being completely segregated from those of the Parent) also helps to limit liability. Of course forming good working relationships with suppliers and customers, and retaining counsel to review contracts and other legal documents are also effective ways to reduce the likelihood of such problems.
As a general rule, firms are not required to pay income taxes (and are not assessed any by the state) in years in which they do not generate any profits.
Pennsylvania does, however, have a Capital Stock and Franchise Tax (CSFT) that is assessed against the ownership interests of both Corporations and LLCs. The amount of CSFT that is charged is determined by examining value of the enterprise based on a fixed formula, which primarily examines an enterprise’s net income and net worth. As a result, the amount of the CSFT that is ultimately assessed against your firm could be very low, if there is no profit. In recent years, Pennsylvania has been steadily lowering the rate of the CSFT, which will be entirely phased out by the year 2016.
Also, tax losses incurred in the early years of operations may be available to offset profits in later years.
The corporate net income tax (CNI) is only assessed against corporations — not most LLCs. Secondly, and perhaps more importantly, the income tax is only one consideration in determining where to do business. Other factors include the availability of suitable facilities, qualified workers, efficient logistics and transportation services, and location relative to major markets. Pennsylvania leads in all of these categories. Other considerations include the level of support that the government and other entities will provide for new businesses, and the desirable living opportunities that Pennsylvania offers.
It is important to remember that firms are generally required to pay CNI tax in each state in which they conduct business, according to the proportion of the business activities that they perform in each state. In addition, firms located in Pennsylvania can often reduce (or offset) the amount of CNI tax that they would otherwise be required to pay in Pennsylvania based on the amount of taxes they pay to other states. This means that if a corporation from another state does business in Pennsylvania, it will be required to pay Pennsylvania corporate net income tax based on the amount of business it does in Pennsylvania. Conversely, Pennsylvania corporations that also conduct operations in other states often are able to reduce Pennsylvania income tax liabilities through the appointment of taxable income to other jurisdictions.
Additionally, Pennsylvania recently moved to a 100 percent single sales factor to apportion income to the commonwealth for corporate net income tax purposes.
*Source: Brian J. Hoffman, CPA CFE | Citrin Cooperman & Company LLP | www.citrincooperman.com