1. What is Business Law?
Pennsylvania business law encompasses a broad range of areas as applicable to the establishment and operation of businesses in Pennsylvania. It involves the application of statutes, codes, rules, regulations and judicial decisions affecting businesses, managers and directors.
The practice of business law at BUELOW LAW OFFICES focuses on the needs of small and mid-sized businesses, and includes areas such as:
- Starting a business in Pennsylvania
- Forming business entities (corporations, LLC, LLPs, etc.)
- Business planning
- Contracts - drafting and reviewing
- Negotiations
- Employment matters
- Conflict resolution
- Business litigation
- Company policies
- Employee handbooks
- General legal counseling
SOLE PROPRIETORSHIPS
2. What is a sole proprietorship?
A sole proprietorship is a business that is owned by one person, and not registered with the state as another type of business entity, such as a corporation or a limited liability company (LLC). Effectively, from a legal perspective, a sole proprietorship and its owner are one entity.
3. How is a sole proprietorship formed?
A sole proprietorship is the easiest business entity to set up and maintain, in many cases requiring no specific actions. Effectively, operating your own business automatically establishes you as a sole proprietor.
Though a sole proprietorship is the simplest of business entities to form and maintain, that does not mean that there are no legal formalities that need to be observed. In many cases, business names must be registered with the Pennsylvania Department of State. Similarly, sole proprietorships must comply with any applicable local registration, business license, or permit laws.
4. How are sole proprietorships taxed?
Because a business operated as a sole proprietorship and the business owner are legally the same entity, the business owner of a sole proprietorship is personally responsible for paying tax on the income generated by the business. Generally, the income and expenses of the business are reported on the owner's personal income tax return.
5. What personal liability does a sole proprietor have for the business' debts?
Again, because a sole proprietorship and its owner are one legal entity, the owner can be held personally liable for any business-related obligations. Such obligations include not only typical business debts, such as those to suppliers and contractors, but also debts arising from lawsuit losses. Being personally liable for the business debts means that if the business defaults on any such obligation, the creditor can legally come after the owner's personal assets, including his or her bank accounts, house and other possessions.
6. What about a business with more than one owner (partnerships)?
Partnerships are much like sole proprietorships with regard to operation, taxation, and liability. The big difference is that partnerships involve multiple owners, all of whom are individually and jointly liable for the debts of, and judgments against, the partnership. That means that every partner can be held personally liable for the partnership actions and decisions taken by any of the other partners.
Partnerships are formed with a partnership agreement. The terms of such an agreement may vary greatly from one partnership to the next, depending on the needs and goals of the partnership, and the partners in that partnership. The importance of a skillfully drafted partnership agreement however, cannot be underestimated. The agreement must include all terms of the partnership (how it will be managed, partners' compensation, etc.), as well as be forward-thinking, anticipating how future issues and disputes will be resolved. Business persons contemplating entering into a partnership are urged to consult an attorney. In addition, each partner should be represented by separate counsel to assure that his or her interest is best represented in the partnership agreement.
CORPORATIONS
7. What is a corporation?
A corporation is a unique business entity that is legally independent and separate from the people who own, control, and manages it. A corporation may be wholly owned by one individual, or may have many owners. A corporation may issue stock, either private or public, or may be classified as a non-stock corporation. If stock is issued, the corporation will usually be governed by its shareholders, either directly or indirectly. The most common model or corporate management is a board of directors that makes all major decisions for the corporation, on behalf of all the individual shareholders.
Though a corporation, as a business entity, provides its owners (shareholders) protections from personal liability, many smaller business owners may find the statutory rules that must be observed to be cumbersome, time consuming and costly. For example, corporations must observe certain formalities such as holding and taking minutes of annual shareholder and director meetings and documenting important decisions. Also, corporations must set up and keep accounts and records independent of those of the owners (shareholders) of the corporation, including a double-entry bookkeeping system to record business transactions, complete with daily journals and a general ledger.
8. How is a corporation formed?
To form a profit corporation in Pennsylvania, an application, including Articles of Incorporation and a docketing statement must be filed with the Corporation Bureau of the Pennsylvania Department of State. The application must contain specific and detailed information pertaining to a broad range of issues, such names and addresses of incorporators, an initial registered address of the corporation, the statute under which the corporation is formed, a statement of the period during which the corporation shall continue existence, and the number of shares which the corporation has to issue, or that the corporation is organized under a non-stock basis.
In addition, the incorporators will need to prepare By-laws and publish either the intent to file or the actual filing of Articles of Incorporation in two newspapers of general circulation, including a legal journal.
Since failure to meet any of the formalities of forming a corporation could result in the existence of the corporate entity being challenged, and the protections a corporate entity offers to shareholders not realized, obtaining competent legal advice when forming a corporation is certainly advisable.
9. How is a corporation taxed?
How the profits of a corporation are taxed depends on the type of corporation:
C corporations are the most common types of corporations in the United States, and most larger corporations are C corporations. C corporations pay taxes both at the corporate level, on the profits of the corporation. Then, shareholders are also taxed personally on any dividends they receive. This "double taxation" can often by avoided by the smaller corporation if it opts for the status of an "S" corporation.
S corporations are virtually identical to C corporations, except that they have a special tax status with the Internal Revenue Service. Smaller corporations, with a very specifically limited number of owners (shareholders) will often opt for the S corporation status. S corporations do not tax both the income of the corporation and the dividends paid to shareholders. Rather, tax liability is shifted to the dividends paid to shareholders, eliminating the double taxation of the C corporations.
10. What personal liability does an owner (shareholder) have for the corporation's debts?
The primary distinguishing feature of a corporation, and primary reason many business owners consider the corporation model, is the so-called limited liability of the officers, directors, and shareholders (the "principals") of the corporation. When a corporation is properly organized, maintained, and capitalized, neither the shareholders, nor the officers or directors can be held personally liable for the debts of the corporation. Accordingly, if the corporation defaults on a debt or otherwise breaches an obligation or causes injury to a third party, the corporation alone is held responsible - the principals bear no legal responsibility for the corporation's obligations. This means that the corporation's creditors are not entitled to seek recompense from the personal assets of the principals.
As a word of caution, however, if the corporation is not properly organized or maintained, or if it is under capitalized or under insured, then creditors may be able to pierce the corporate veil and sue the corporation's principles, and go after their personal assets, for satisfaction of the corporation's debts. It is, therefore, essential to assure that all formalities are met in both organization and maintaining the corporation.
LLPs and LLCs
11. What is an LLC? What about an LLP?
A limited liability company (LLC), or a limited liability partnership (LLP), like a corporation, is considered a legal entity separate and distinct from its owner. The owners of these business entities, called members, enjoy limited liability protections similar to those offered to shareholders of a corporation. That is, members on an LLC or LLP are not typically held personally responsible for the debts and liabilities of the business. These entities also enjoy the "pass through" taxation benefits of an S corporation.
Why, one might ask, would one consider an LLC or LLP over a corporation as a business entity? While the totality of circumstances to be considered in making such a decision are too numerous and detailed to go into in these brief FAQs, for many, there are some advantages to forming an LLC or LLP (as compared to a corporation) for the sole proprietor or partnership. For example, LLCs and LLPs generally do not have some of the ownership restrictions that some corporations do. Similarly, members of these entities have more flexibility in structuring the management of the company than do shareholders of a corporation.
Finally, while LLCs and LLPs do have certain formalities requirements regarding formation and maintenance, perhaps most attractive feature of these entities is that those requirements are generally less burdensome than they are for a corporation. The deciding factor for many considering forming a business entity is that an LLC or LLP does not require as much annual paperwork, or have as many formalities, as a C corporation or an S corporation.
WHICH ENTITY IS RIGHT FOR ME?
12. Which Entity?
The decision to form an LLC, LLP, corporation or partnership, or the decision to remain a sole proprietor are decisions of considerable consequence in starting and operating a business. Such decision should only be made after thoroughly considering your circumstances, goals, needs and options, and in consultation with knowledgeable business professionals, including your attorney and your accountant.
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