Choosing a Business Structure

Choosing a business structure is one of the most important decisions to make when starting a business.  Tax and legal considerations, as well as personal needs and the needs of the business will help determine your final choice.  There are advantages and disadvantages of each business structure.  As an entrepreneur, you should examine each of the legal characteristics and consult a knowledgeable professional when considering the form of your business.

The business structure section offers useful information about various business structures.   However, the Pennsylvania Open for Business website is not intended as a replacement for professional consultation with qualified practitioners.   The laws and regulations governing business start-up, operation, and expansion are varied and compliance with such standards depends upon the particular circumstances of a business. 

A Pennsylvania S-Corporation is a domestic corporation that has elected to reduce its tax liability by obtaining Federal S corporation status.  In a PA S-Corporation, shareholders include their share of income, loss or credit on their Pennsylvania Personal Income Tax returns.  A Pennsylvania corporation cannot  be an S-Corporation unless it has also applied for Federal S Status. Effective for tax periods beginning on or after January 1, 2006, all federal S corporations are automatically Pennsylvania S Corporations. A federal S corporation that does not want to be a Pennsylvania S Corporation must file an Election Not to be Taxed as a Pennsylvania S Corporation, REV-976.

Partnerships, both limited and general, are required to file PA Schedules RK-1/NRK-1 for each partner, the PA-20S/PA-65 Information Return, and the C-F Reconciliation Form, if applicable to reconcile federal expenses to Pennsylvania rules, and PA Schedules C, D, E, F, etc. (or the corresponding federal schedules).  However, partnerships that have elected to be treated as a corporation for Federal Income Tax purposes are subject to Corporate Net Income Tax and Capital Stock/Foreign Franchise Tax.

The income and expenses are reported using PA Schedules C (Profit or Loss from Business) for each business that is operated as a sole proprietorship.  The profit or loss is then reported on PA-40 and taxes are paid at the PA Personal Income Tax rate of 2.8%.  Click here for more information about reporting Pennsylvania income.