An S corporation (S corp) is a tax designation not a formal business structure. Business owners that are looking to withdraw money from their company for their personal use may benefit from electing S corp tax designation for their LLC or corporation.
In order to start an S corp in Pennsylvania, a business must first have a formal business structure (i.e., an LLC or corporation) and then elect to be taxed as a Pennsylvania S corp. This guide will show you how to start an S corp in Pennsylvania and provide you with insights on keeping your Pennsylvania S corp compliant.
Grow Smarter with an S Corp
An S corp may offer your business tax benefits if you make at least $60,000 in net earnings. We recommend using Northwest to start your Pennsylvania S corp, handle your monthly accounting, and more.
An S corp taxation designation may offer business owners taxation benefits. In order to determine whether an S corp may be right for your business, consider the following factors:
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Jump ahead to Steps to Start a Pennsylvania S Corp if you already know that an S corp is the right choice for your business.
S corps benefit those who wish to take additional money out of their business for personal use in a tax efficient manner. If you plan on investing most of your profits directly back into your business, an LLC may be better suited for your needs. Furthermore, if you plan on seeking out investors or venture capital funding, a corporation would be preferable to an S corp.
Check out our LLC vs. C corp. vs. S corp article to better understand which option is best for your needs and whether an S corp taxation designation is appropriate.
An S corp tax designation requires the business to treat the owner(s) of the company as employees for tax purposes. Therefore, all S corps must run payroll. In addition, S corp are required to pay business owners a “reasonable salary.” The true tax benefits of an S corp tax designation come from distributions, money taken out of the company for personal use. S corp distributions are not subjected to self-employment taxes.
Generally, businesses with net earnings over $60,000 that take out $20,000 in annual distributions will receive enough tax benefits to justify the additional payroll and reasonable salary costs associated with electing an S corp taxation designation.
To ensure that you take full advantage of S corps taxation benefits and better understand the costs associated with an S corp, take a look at our S corp tax savings calculator.
To start an S corp, your business must meet various requirements including:
There are two main ways to form a Pennsylvania S corp:
Because an S corp is a taxation status and not a business entity, a business must first have a formal business structure before it can elect S corp tax status. Since an LLC is easier and cheaper to form than a corporation, we recommend forming an LLC and then electing S corp tax status.
If you already have an existing LLC or corporation, skip to Step 5: File Form 2553 to Elect S Corp Tax Designation
If you do not have a pre-existing business entity in Pennsylvania and want to be taxed as a Pennsylvania S corp, we recommend first forming an LLC (limited liability company) and then electing S corp taxation designation.
Follow these five steps to start a Pennsylvania LLC and elect Pennsylvania S corp designation:
Continue reading to learn how to start an S corp yourself, or save yourself the hassle and consider using a formation service like Northwest to form your S corp.
It is important that your Pennsylvania LLC has a name that attracts customers and follows Pennsylvania naming requirements. Follow these steps to find a great name:
1. Brainstorm a Name — Find a name that will effectively communicate your brand and the purpose of your business. If you don’t know where to start, check out our free business name generator tool.
2. Follow the Pennsylvania LLC Naming Guidelines:
You can also read the Pennsylvania state statute about LLC naming guidelines for more information.
3. Verify that your name is available in Pennsylvania — Use the Pennsylvania Department of State’s business entity search to ensure that your desired LLC name is available and not currently in use.
4. Obtain a URL — Most businesses will eventually need a website, and we suggest you verify that your business name is available as a web domain. Even if you don’t anticipate starting a website until later, buying a URL now will reserve it for the future.
Domain Name Search
Unlike most states, Pennsylvania does not record individual registered agents. LLCs must instead list a Pennsylvania street address for their registered office on the Certificate of Organization.
Although you can serve as your business’s registered office, we recommend using a professional service like Northwest to simplify the process and ensure your business remains compliant.
To officially register your Pennsylvania LLC, file a Certificate of Organization with the Secretary of State and pay the filing fee.
The Certificate of Organization can be filed online or by filing a hard copy of Form 15-8821 with the Pennsylvania Secretary of State. The filing fee is $125.
The Certificate of Organization will ask for your:
For additional support, check out our Pennsylvania Certificate of Organization guide.
If filing a hard copy, submit Form 15-8821, a Docketing Statement, and payment (payable to the Commonwealth of Pennsylvania) using the address below:
Mail the Certificate of Organization:
Pennsylvania Department of State
Bureau of Corporations and Charitable Organizations
P.O. Box 8722
Harrisburg, PA 17105
The processing time is about two to three business days.
An operating agreement ensures that your company’s management and ownership structure is legally documented in case of a lawsuit or legal dispute. Although Pennsylvania LLCs are not required to have an operating agreement, we recommend all business owners create one.
Obtain an EIN
Before electing an S corp tax designation, you’ll need an EIN. An EIN is a nine-digit number assigned by the US Internal Revenue Service (IRS) to identify and tax businesses. Applying for an EIN is free using the IRS’s website, and you will receive your EIN immediately after applying online.
File Form 2553
Once you have your EIN, file Form 2553 to officially elect S corp taxation designation for your LLC.
Verify Form 2553 Due Dates
Form 2553 must be completed:
Businesses can elect a variety of tax years and still be eligible for S corp election. To learn more, view the “general” section of the IRS instructions to Form 2553 or visit our guide to filling out Form 2553.
While you can follow these steps yourself, consider using a formation service to avoid the hassle and start your Pennsylvania S corp right away.
Streamline Your S Corp Setup
We recommend using a formation service like Northwest to easily form your S corp.
It’s important to understand the requirements for keeping your S corp compliant. S corps must:
Visit our S corp guide to learn more about S corps requirements and restrictions.
If you choose to use a professional formation service like Northwest, they will help keep your business compliant with regulatory obligations.
No. An LLC is a formal business structure, while an S corp is a taxation designation that an LLC can elect. If you want your business to be taxed as an S corp, we recommend forming an LLC and then electing S corp taxation designation.
To form a Pennsylvania S corp, you’ll need to ensure your company has a Pennsylvania formal business structure (LLC or corporation), and then you can elect S corp tax designation. If you’ve already formed an LLC or corporation, file Form 2553 with the Internal Revenue Service (IRS) to designate S corp taxation status.
S corps offer tax benefits that primarily benefit business owners who plan on taking annual distributions out of their company’s profits for their personal use. In order for an S corp’s benefits to outweigh the costs, you’ll need to be sure to take out at least $10,000 annually in distributions, pay yourself a “reasonable salary,” and set up payroll.
Use our S corp calculator to verify that your business will benefit from electing S corp taxation.
No. While both LLCs and S corps benefit from pass-through taxation, they are not the same.
With an S corp, owners pay personal income tax and self-employment tax on their reasonable salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and the owners must pay personal income tax and self-employment tax on the entire amount.
Both LLCs and S corps benefit from a provision in the Tax Cuts and Jobs Act of 2017 that allows qualifying owners of pass-through entities to deduct 20% of qualified business income (QBI) from their tax returns. However, for S corps, the deduction doesn’t apply to profits paid out as wages.
S corp business owners are classified as employees. As a result, S corp business owners are required to pay themselves a “reasonable salary.” The IRS stipulates that this salary must meet current industry standards.
A distribution is money business owners and shareholders receive from a business’s profits. This is money coming out of the business and personal income taxes must be paid on distributions. However, the benefit of an S corps is that you do not pay self-employment taxes on distributions.
All S corps and LLCs benefit from pass-through taxation. With pass-through taxation, a business is not taxed directly and the business’s profits and losses pass through to the owners’ personal tax returns. Therefore, owners pay the business’s taxes on their own personal income taxes. This process is much simpler and generally more cost-effective than corporate taxes.
LLCs and corporations that operate under a “doing business as” (DBA) name, known as a fictitious name in Pennsylvania, can elect S corp taxation. However, a DBA is not required and is recommended if you wish to have your business operate under a name that isn’t its legal business name.
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