If you’re thinking of starting a business or expanding your portfolio to invest in real estate, have you considered the kind of corporate structure to use?
Odds are good that a limited liability company, or LLC, is at the top of your list.
The flexible ownership structure and favorable tax treatment have made LLCs increasingly popular in Pennsylvania over the last 20 years.
More than 57,000 LLCs were started last year in the commonwealth, and the numbers have grown by nearly double digits each year for the last five years. Many newly formed LLCs are for real estate purposes.
In addition to LLCs, the other most common business structures are: sole proprietorships, general partnerships, limited partnerships and corporations.
• Sole proprietorship: Simplest form with one owner who is on the hook for all business liabilities. No incorporation documents needed but you should file a fictitious or “doing business as” name with the Department of State.
• General partnership: Two or more people needed to form and no filing with the state is required. All profits or losses “pass through” the business to individual partners, who pay taxes on their profits or deduct losses on individual income tax returns. All partners are equally responsible for all debt and liabilities. If one partner dies, the partnership is dissolved unless there is a business continuation plan in place.
• Limited partnership: Two or more parties with at least one general partner who makes day-to-day decisions and is typically a limited liability company. There is pass-through tax treatment and unlimited personal liability, plus LPs need to file a certificate of limited partnership with the state.
• LLC: Ownership can include individuals or entities such as corporations or other LLCs. These companies can be member-managed or a manager may be appointed to run operations. The structure combines the limited liability protection of a corporation with the pass-through tax treatment of partnerships. A certificate of organization must be filed with the state.
• Corporation: Articles of incorporation must be filed with the state. There is limited liability for shareholders. Double taxation is the primary disadvantage as corporations are taxed, by default, as C-corps unless they choose to be S-corps, which receive pass-through treatment. Net business income of a C-corp is subject to corporate income tax, while shareholders are taxed again on their dividends. There is no limit on shareholders under C-corps, while S-corps are capped at 100 and one class of stock, plus foreign investors are not allowed. S-corp shareholders are typically individuals.