How to start a business in Pennsylvania
Starting a business is exciting and challenging whether you are a seasoned entrepreneur or a first-time business owner. With a strong local economy and workforce, and strategic location on the East Coast, Pennsylvania offers many benefits to small business. In fact, Pittsburgh is ranked as one of the top 5 cities for startup businesses in America.
If you’re planning to start a business in the Commonwealth of Pennsylvania, understanding the process is crucial to setting a strong foundation for your enterprise. The following is a step-by-step guide that outlines the process of starting a business in Pennsylvania.
What are the steps to opening a business in the state of Pennsylvania?
1. Develop your business idea
Whether you’ve had a small business idea in your head for years or are just dipping your toes in the water of becoming an entrepreneur, a successful business starts with a solid plan.
If you need inspiration, start by creating two lists. On the first list write down your interests and skill sets. On the second list, brainstorm the problems you think those skill sets and interests could solve for customers or other businesses.
Do you enjoy arts and crafts and have a great eye for color? Opening a screen printing business could be a perfect option. Ready to give the famous “Pittsburgh Sandwich” a run for its money? Opening a food truck could be the right business for you.
Once you’ve narrowed the list to a handful of business ideas, it’s time to start researching and evaluating the local market. Market research is a critical part of testing the viability of your idea. Analyze your potential competition to understand their strengths and weaknesses and identify what makes your business unique. You should also evaluate customer demand, pricing tolerances, and seasonal trends. Use surveys, interviews, and focus groups to gain insights into consumer behavior and preferences.
Luckily, you don’t have to be a research pro to find the information you need. Take advantage of Pennsylvania's resources for small businesses. The Pennsylvania Small Business Development Centers (SBDC) offer assistance in market research and business planning. SCORE Pennsylvania offers mentorship programs and workshops for aspiring entrepreneurs that can help teach techniques and methods for developing business ideas and conducting market research.
2. Create your small business plan
No matter what type of business you’re launching, creating a well-constructed business plan is a critical element, and depending on your funding needs, it might even be a requirement. A business plan helps you build a path to revenue growth and success and can be used to apply for small business loans, private financing, or outside investment.
Your business plan should be a full overview of the business you plan to start and the steps required to achieve long-term success and stable growth. You need to document all financial requirements and details, organizational structure, major marketing initiatives, projected revenue and profit, cost of goods sold and other anticipated expenses.
A strong business plan should include:
This is a concise and compelling introduction to your business, including the product or service offered and basic information regarding the leadership team, staff and business location.
Your mission statement is the overarching purpose of your business. It should include your company values, goals and emotions that drive the business.
A brief summary of your company that details your legal structure, location, areas served and any other elements that make your business unique.
This should be a well-researched summary of your target market, customers, pricing strategies, competitive analysis results and elements of your target customer base that present specific challenges or opportunities.
Information about business owners, key employees, org charts or labor hierarchies.
Products and services
A detailed overview of the products or services that your business will be selling. You should also include a summary of vendors or supply chain partners required for success.
Finance and funding
This section should cover all financial details of your new business. Include details about how the initial startup costs will be funded, anticipated operating costs, fixed and variable expenses, long-term funding needs, anticipated business loans and projected revenue and profit.
Sales and marketing strategy
An overview of how you plan to break into target markets and customer bases. This section should cover specific marketing channels you plan to use (social media, direct mail, cold calling, etc.), your expected results and any business development or marketing costs.
Appendix and additional material
While not always required, having an appendix in your business plan can provide a place to include any relevant documents that help support the points you’ve laid out. This could be detailed market and competitor research, zoning and location research or marketing plans.
3. Secure necessary funding
Unless you’re in a position to fund your new business entirely out of pocket (and accept the risks that come with that), you will need additional capital.
The most common funding options for small businesses include the following.
Personal savings: This is one of the most common ways to fund a startup. It's straightforward, but it involves some risk as you invest your money. Your personal bank accounts will take a hit if the business struggles or fails.
Friends and family: Those who believe in your idea and abilities might be willing to contribute financially to your new business. This approach requires careful planning and clear communication to protect personal relationships.
Bank business loans: Traditional banks offer a wide range of loan products for small businesses. You'll need a solid business plan and a good credit score to qualify.
SBA loans: The Small Business Administration (SBA) offers loans to startups and small businesses. The SBA guarantees a portion of the loan, making it less risky for lenders.
Angel investors and venture capital: These investors provide capital in exchange for equity in your business. They usually seek businesses with high growth potential.
Capital lending companies: Many private organizations offer funding solutions to new businesses with options ranging from a few thousand dollars to over $1,000,000.
Crowdfunding: Websites like Kickstarter and GoFundMe allow you to raise money from many people, typically in exchange for product perks.
Grants: Pennsylvania offers a variety of grant programs to help new small business owners. The Pennsylvania Department of Community & Economic Development keeps an up-to-date list of funding and grant programs that Pennsylvania businesses can apply for.
4. Choose your business name
Naming your new business is a major step. Your business name should be easy for customers to remember, easily searchable online, and not too similar to other national or local businesses in your area. Plus, it’s a good idea to have it relate to your products and/or services.
You’ll want to keep your growth plans in mind when naming your new business. For example, if you’re starting a business in Philadelphia, having “Philadelphia” in your business name could cause confusion down the road if you’ve expanded to Pittsburgh or outside of Pennsylvania.
You’ll want to keep your growth plans in mind when naming your new business.
Once you’ve landed on a name for your small business, you can check the availability of the name on the Pennsylvania Department of State's website using the Business Name Search function. If the name you want is available, but you’re not quite ready to officially launch your new business, you may want to file a Name Reservation application with the Pennsylvania Department of State for $70. This will reserve the business name for 120 days and prevent anyone else from registering it. You’ll need to create an account on the website in order to file the form online.
If you’re ready to launch your small business, you can register the business name directly with the Pennsylvania Department of State. If you’re registering the business name as a limited liability company (LLC), there is a one-time $125 fee. If you’ve decided to use a registered agent, they may charge additional fees for name registration.
If you’re going to use a DBA (doing business as) name for day-to-day operations, you’ll also need to file a Fictitious Name Registration with the Pennsylvania Department of State which costs $70.
5. Determine your business entity type and business structure
Deciding on a business entity type is one of the most confusing parts of starting a new business in Pennsylvania. It directly impacts your day-to-day operations, legal obligations, tax implications, and the level of personal liability you assume. Each business structure has its own pros and cons, and there’s no right answer. It all depends on your business needs.
Your business entity type has significant implications at both the state and federal levels. In Pennsylvania, businesses are required to register with the Pennsylvania Department of State, and specific reporting and compliance obligations vary depending on the chosen entity type. At the federal level, the IRS has tax rules and reporting requirements for each entity type, including different tax forms, filing deadlines, and tax obligations.
A sole proprietorship is the most basic business structure for Pennsylvania businesses. A sole proprietorship is an unincorporated business that is wholly owned and operated by a single individual, making it the default structure for businesses with a sole owner.
Not only is it the easiest and least expensive business structure to set up, but it’s also the easiest to deal with when it comes time for taxes. With a sole proprietorship, business income and losses are reported to the IRS and the state on the owner's personal tax return (Form 1040), simplifying the business tax filing process.
The downside to this business entity is that you have unlimited personal liability. The owner of a sole proprietorship is personally liable for all business debts and obligations, which means personal assets could be at risk in the event of lawsuits or financial liabilities. You may also have challenges getting a business loan or raising capital since a sole proprietorship cannot sell ownership interests or shares in the business.
A general partnership is a business structure used when two or more individuals or business entities come together to conduct a business venture. General partnerships don’t require any formal documentation or registration with the Pennsylvania Department of State. They could be formed with something as simple as verbal agreement or a handshake.
Like a sole proprietorship, though, general partnerships have uncapped liability, putting their personal assets at risk in the event of debts, lawsuits, or bankruptcy. They also have pass-through taxation, meaning the profits and losses flow through to the partners' personal tax returns.
In addition to the unlimited liability, and pass-through taxation, general partnerships also have to deal with joint and several liability. This means that partners are jointly and severally liable for the actions and debts of the partnership, meaning each partner can be held responsible for the entire partnership's liabilities. They also face the same challenges with raising capital.
Limited liability company (LLC)
Limited liability companies are the most popular business entity in Pennsylvania and the United States at large. An LLC has the flexibility of a partnership or sole proprietorship with the liability protection of a corporation. It offers a simple and cost-effective structure for small to medium-sized businesses. An LLC separates the business assets and liability from the business owner’s personal assets, providing protection in the event of lawsuits or debts.
Profits and losses in a single-member limited liability company are subject to pass-through taxation by the IRS and the State of Pennsylvania, so all revenue is taxed as personal income, simplifying complicated business tax filings. You’ll only be responsible for the Pennsylvania and federal personal income taxes. However, if you have other LLC business owners (members), you’ll need to file Form 1065 with the IRS rather than Form 1040 at tax time.
Subchapter "S" corporation (S Corp)
Commonly referred to as simply an S Corp, s subchapter "S" corporation has many similarities to a limited liability company. It offers limited liability protection to its owners and is taxed at the personal income tax rate rather than potentially higher corporate taxes. This helps S Corps avoid “double taxation” at the corporate and personal levels. Having your business as a corporation can also be seen as more formal and can help with outside investment. To elect S Corp status, you file with the IRS using Form 2553, "Election by a Small Business Corporation".
While an S Corp business structure can benefit small businesses, it has some potential drawbacks. An S corp is able to issue stock to 100 total shareholders, but it can only be one type of stock. This means that S Corps can’t have different classes of investors with dividends or distribution rights.
S Corps are also subject to slightly more stringent regulation by the government and have more IRS scrutiny. The IRS will pay closer attention to payments (salaries or dividends) made from an S Corp than it will an LLC because they want to ensure they are being classified correctly. If the payments are recharacterized, the business can lose deductions or be subject to employment tax liabilities.
Subchapter "C" corporation (C Corp)
C corporations offer limited liability protection to their owners and have additional tax benefits unavailable to S Corps or LLCs, like the ability to deduct employee benefits. C corporations are much more attractive to outside investors because they can have several different stock options, meaning different investors and companies can have different dividend and distribution rights.
C Corps come with some potential disadvantages as well, though. They are far more complex than LLCs or S Corps, requiring more paperwork and legal help than any other business structure. They are legally required to have a board of directors that manages the business, and regular board and shareholder meetings must be held with minutes of the meeting kept.
C corporations are also subject to double taxation. The corporation is a separate tax-paying entity and is required to file corporate tax returns with the IRS and the state. Profits are taxed at the corporate level, then dividends given to the shareholders are taxed at the personal level.
6. Register your small business in Pennsylvania
The process for registering a business in Pennsylvania depends on your business structure and the type of business you’re starting. The State of Pennsylvania office government website has a handy checklist to help you determine precisely what you need for your specific type of business. Certain business types have special registrations. Professional service businesses will be required to submit their licenses for verification, and home improvement contractors are required to file a Home Improvement Contractor (HIC) Registration with the Pennsylvania Attorney General’s Office.
Registering an LLC with the Department of State requires a Certificate of Organization, Articles of Incorporation, and a Docketing Statement. These documents are filed with the Pennsylvania Department of State Bureau of Corporations and Charitable Organizations. Next, you’ll need to create an Operating Agreement that lays out how the company will operate and who controls it.
Starting a corporation (incorporating) in Pennsylvania is similar to an LLC. You’ll need to file Articles of Incorporation and the accompanying Docketing Statement with the Pennsylvania Department of State Bureau of Corporations and Charitable Organizations and then elect S-Corporation status with the IRS by filing IRS Form 2553.
7. Apply for an Employer Identification Number (EIN)
If you’re starting a new Pennsylvania business as a corporation, hiring W2 employees, or getting a business bank account and credit card, you’ll need an EIN. A Federal Employer Identification Number or EIN is a unique tax identification number issued by the IRS that can be used in lieu of your social security number for business tax and banking purposes.
If you’re a sole proprietor or single-member LLC, you’re not required to get an Employer Identification Number, but it can help protect your personal information so you’re not sending W9s with your social security number on them. Getting an EIN is free; it can be done 100% online on the IRS website.
8. Open your small business bank account
After you’ve been issued an EIN, the next step is opening a business bank account. Even if you’re a sole proprietor, having a dedicated business bank account and credit card is a smart way to keep expenses separate. If you plan to hire employees or launch your business as an LLC, S or C corporation, you must have a separate business bank account.
9. Obtain your business licenses and permits
The State of Pennsylvania doesn’t require a general business license for new businesses. However, specific permits or business licenses may be required depending on your business type and location. The most common business license that new Pennsylvania businesses need is a sales tax license. The PA Business One Stop Shop can help you determine which business licenses, zoning permits or local licenses your new business might need.
10. Understand your Pennsylvania business taxes
Your business tax burden will dependend on the type of business structure you have. The most common taxes that Pennsylvania businesses are required to pay are a sales and use tax and self-employment tax. Your business type and structure may have other state tax or federal tax requirements. The Pennsylvania Department of Revenue is the best resource for determining your business taxes.
Frequently asked questions (FAQs)
What are the requirements to start a business in Pennsylvania?
Starting a business in Pennsylvania requires selecting a business structure, registering the business with the state, obtaining a federal EIN from the IRS, and applying for necessary licenses and permits. You also need to register for state taxes, including sales, unemployment insurance tax, and employee withholding tax, if applicable. Check for any local requirements as well.
What is a seller’s permit called in Pennsylvania and how do I get one?
In Pennsylvania, a seller's permit is known as a Sales, Use, and Hotel Occupancy Tax License. You can apply for this license through the Pennsylvania Department of Revenue's online PA-100 Business Registration form. You'll need to provide details about your business, such as its name, address, and the nature of your sales.
Does Pennsylvania require a business license?
Pennsylvania doesn't issue a general business license, but specific industries may require state-level licenses. Additionally, local municipalities may have their own licensing requirements. It's recommended to check with the Pennsylvania Department of State and local authorities to understand what licenses or permits may be needed for your specific type of business.
How much does it cost to set up an LLC in Pennsylvania?
The cost to set up an LLC in Pennsylvania in 2023 is $125, which is the filing fee for the Certificate of Organization. Fees may vary, and additional costs can arise from registered agent services, operating agreement drafting or publication requirements.
What is a foreign LLC in Pennsylvania?
A foreign LLC in Pennsylvania refers to a Limited liability company (LLC) that was initially established in another state but wishes to do business in Pennsylvania. It's "foreign" in the sense that its origin is from outside Pennsylvania. To operate in Pennsylvania, the foreign LLC must register with the Pennsylvania Department of State by filing a Foreign Registration Statement and paying the required fee. The LLC also must maintain a registered agent in the state for service of process.
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