Start an S Corporation in Pennsylvania

When you create a small business, one of the first things you must do is choose the appropriate business entity. Your choice matters because it affects how the IRS views and taxes your company. 

Here, we’ll explain why creating an S corporation in Pennsylvania may be a good option and what to do to achieve S corp status.

S Corporation in Pennsylvania: Key Points

• An S corporation is not a business structure but a tax classification that applies to existing C corps and LLCs.

• S corp status eliminates the corporate tax elements, which means it’s a pass-through tax entity.

• LLCs and C corporations can elect S corp status after officially forming the business.

What Is an S Corporation?

Many people think an S corporation is a business structure similar to a C corporation (C corp) or limited liability company (LLC). It isn’t. An S corp is a tax classification that applies to existing C corps and LLCs.

But why would you want the S corp classification?

In a typical corporate setup, your business has to pay taxes to the state and IRS on its income. After paying those taxes, the money your business earns goes to employees and shareholders, who must pay personal income taxes. As such, the money your company generates undergoes double taxation.

S corp status eliminates the corporate tax element of this setup, meaning the business pays no tax on its earnings. Instead, only its shareholders pay income tax at their personal tax rates.

Consequently, an S corp is a pass-through tax entity. Like an LLC, all business income passes through to the shareholders or members. But unlike an LLC, an S corp shareholder can draw their income as a salary, meaning they may not have to pay self-employment taxes.

Tax Considerations for an S Corporation in Pennsylvania

Given that most entrepreneurs choose S corp status because of the preferential tax treatment it offers, it’s worth examining exactly what that treatment looks like for a Pennsylvania S corporation.

Pennsylvania Tax Treatment of S Corporations

The state of Pennsylvania has a corporate tax rate of 9.99%, which is applied to all C corporations that operate in the state. S corps don’t have to pay this rate on regular business income.

That’s not to say that an S corp pays no business taxes in Pennsylvania. If the company generates any built-in gains, the business owners must pay corporate tax at the 9.99% rate on those gains. Beyond that, S corp shareholders pay all taxes on business income at the state rate of 3.07%.[1]

Pennsylvania Franchise Tax for S Corporations

Assuming you’ve founded your business in Pennsylvania, you don’t have to pay a franchise tax as part of creating or operating your S corp.

The state ended its capital stock and foreign franchise taxes in 2016 for all corporations that aren’t subject to the state’s Corporate Net Income Tax, which includes S corporations.[2]

Pass-Through Taxation

In Pennsylvania, S corporations benefit from pass-through tax treatment. That means the company itself pays no business-related taxes on its income. Instead, all income, losses, dividends, deductions, and credits get passed on to the S corp’s shareholders.

From there, the shareholders declare their individual incomes on their tax returns and pay taxes at their personal income tax rates. In some cases, the shareholder will also have to pay self-employment tax. 

Regardless, an S corp structure allows a business to avoid the C corp’s double taxation problem.

Requirements for Forming an S Corporation in Pennsylvania

Though it’s possible to achieve S corp status whether you have a limited liability company or a C corp, not all businesses can qualify. The state of Pennsylvania follows the Internal Revenue Service’s rules for S corp formation.[3]

These rules are as follows:

• An S corp must be a domestic business entity, meaning you can’t form an S corp if the company is not based in the United States

• Your S corp must only offer a single class of stock

• No S corp can have more than 100 shareholders, who can only be individuals, estates, and certain types of trusts

• You can’t be an S corp shareholder as a partnership, corporation, or nonresident alien

• Your company has to be an eligible corporation, which excludes domestic international sales corporations, insurance companies, and some financial institutions

There are a lot of rules to consider when applying for S corp status. If you’re wary of making mistakes during filing or uncertain whether your business is eligible, Swyft Filings is here to help. Use our S corp filing service, and we’ll ensure your journey to S corp status is as smooth as possible.

Filing as an S Corp in Pennsylvania

Let’s assume you feel you can create a business meeting the S Corp status criteria. Even so, you still need to form your company before you can apply for the tax classification. With Swyft Filings’ six-step process, you’ll form your company and turn it into an S Corporation in Pennsylvania.

Step 1: Choose a Business Name

Fortunately, your name can be almost anything you want when creating a Pennsylvania business. Outside of the obvious, such as avoiding using profanity or discriminatory language when naming your company, the only real rule for choosing a business name is that it isn’t the same as any other business in the state.

Swyft Filings’ free business name search makes it easy to check if your desired name is available, though you can also use Pennsylvania’s Department of State website’s “Record Search” function.[4]

You may also operate under what the state calls a “fictitious name.” Often called a “doing business as” or DBA name in other states, a fictitious name is like a pseudonym for your business. They’re useful if your official business name isn’t conducive to snappy branding or marketing.[5]

With your name decided, you may want to claim it before you submit your formation documents. You can do that using the Pennsylvania Department of State’s name reservation form. In return for a $70 filing fee, you can reserve your business name for up to 120 days.[6]

If you want to permanently protect your business name, file a trademark with the state. You can do this before or after forming your business, though it’s best to do it before.[7]

Step 2: Appoint Directors and a Registered Agent

When creating an LLC, you don’t need to nominate any directors. The company doesn’t even need a board, as all members have freedom in how they run the business.

That’s not the case with an S corp. The corporate structure of this entity requires you to have at least one S-corp director. You’ll typically pull this director and any others from your pool of S corporation shareholders. Collectively, your directors oversee the running of your business and make important decisions related to its bylaws.

With your board established, you can then assign a registered agent for your business.

Pennsylvania is one of the few states where having a registered agent isn’t a legal requirement. You don’t need to assign an agent or register a physical address with the Pennsylvania Secretary of State.[8]

However, it’s still a good idea to designate somebody as your recipient of legal documents and communications from the state. Without a registered agent, sensitive documents come directly to your office, which could put you in a compromising position if you’re speaking to clients.

If you decide to employ a registered agent for your S corp, Swyft Filings offers the perfect Pennsylvania registered agent service. With 24/7 access to your online dashboard, our service gives you access to your documents and our expertise. 

Step 3: File Articles of Organization

With the early setup work completed, it’s time to officially apply to form a business in Pennsylvania. This process requires you to submit formation documents, alongside the relevant filing fees, to the Secretary of State.

The documents you submit vary depending on the business entity you create. Corporations must file Articles of Incorporation, which ask for general details about the business, such as its address and the names of all incorporators. The document costs $125 to file, which can be done via mail or online.[9]

For LLCs, you have to submit the Certificate of Organization. Also costing $125 to file, the form again asks for general details about your business. You must also highlight if you work in an industry for which professional restrictions apply.[10]

You can file online via the Pennsylvania Business Hub regardless of the document type. Alternatively, send the documents by mail, along with the $125 filing fee and a docketing statement, to the following address:

Pennsylvania Department of State

Bureau of Corporations and Charitable Organizations

P.O. Box 8722

Harrisburg, PA 17105

After successfully filing, you’ll officially have a business that can transact in the state of Pennsylvania. From there, you must keep the company in good standing with the state.

Operating legally as a business goes a long way toward maintaining this good standing. However, corporations and LLCs must also submit an annual report every tax year to reaffirm their business operations. The state offers templates for these reports each year, making filing a simple case of completing the template and submitting it to the Secretary of State.[11]

Step 4: Create an S Corp Operating Agreement

An operating agreement is a legal document in which LLC members outline the bylaws of their business. You can also use this document to solidify members' roles and responsibilities, in addition to confirming each member’s ownership stake.

The state of Pennsylvania doesn’t require LLCs (or S corps) to have operating agreements. However, they’re still something that business owners should consider for the following reasons:

• Lowering the possibility of internal disputes

• Determining what the business does if a member leaves or passes away

• Taking precedence over Pennsylvania’s standard treatment of LLCs during cases where the state needs to get involved with your business

• Solidifying the limited liability protection you get from the LLC structure

Step 5: Apply for an Employer Identification Number

Do you intend on hiring people to work for your S corp? If that’s the case, you need to apply for an Employer Identification Number (EIN). 

This unique nine-digit number works similarly to your Social Security Number (SSN). But where the IRS uses your SSN when looking at your income tax return, it uses an EIN to determine how much employment taxes you need to pay.

You’re not legally obligated to apply for an EIN if you don’t have employees. However, it’s still a good idea for the following reasons:

• Most major banks will refuse to open a business bank account for a company that doesn’t have an EIN

• An EIN means you’re prepared to scale your business up and you don’t have to worry about getting the EIN when you decide to hire someone later

• EINs give companies credibility by offering an official way to look the business up

It’s fairly easy to get an EIN because the IRS allows you to apply online.[12] Better yet, we’ll obtain your EIN for you so you can skip the hassle altogether. 

Step 6: File Form 2553 for S Corporation Election

Your business is official, and you can transact in Pennsylvania. But you don’t have S Corp status yet. You must file Form 2553, Election by a Small Business Corporation to achieve that status. As the name implies, this form allows you to complete the S Corporation election for your business entity.[13]

You have until two months and 15 days into the current tax year to submit this form, though it’s better to submit it during the tax year previous to the one in which you want S corp status.

If you miss the deadline, there’s a possibility you can still get S Corp status for the current tax year, assuming you have an LLC. If so, file Form 8832, Entity Classification Election, to reclassify your LLC as a corporate business entity. Filing alongside Form 2553 allows you to reclassify and elect to become an S Corp simultaneously.[14]

Pennsylvania S Corp vs. Pennsylvania LLC

It’s always worth considering applying for S corp status, assuming you qualify, for tax purposes alone. The preferential tax treatment the IRS bestows on S corps means you avoid the double taxation that C corps face.

But what if you have a limited liability company? In that case, you should consider the pros and cons of the S Corporation election compared to keeping your Pennsylvania LLC.

Advantages of Starting an LLC in Pennsylvania

• Creating an LLC and keeping the structure is far simpler than setting up an S Corp.

• You don’t have to meet specific requirements for an LLC, meaning you can have as many members as you want

• You get greater control over your management structure with an LLC

Disadvantages of Starting an LLC in Pennsylvania

• Though LLCs offer some liability protection, it’s not as much as you’ll get with an S corp

• You must pay more self-employment taxes with an LLC than an S Corp.

• LLCs often find it harder to attract investment than corporations

Advantages of Forming an S Corporation in Pennsylvania

• There are plenty of tax advantages to forming an S corp

• The corporate structure you adopt offers greater personal liability protection and makes it easier to attract investment

• You don’t have to dissolve an S corp if one of its members leaves or sells their stake

Disadvantages of Forming an S Corporation in Pennsylvania

• There’s a lot of paperwork involved in filing for S corp status

• Failing to follow the strict rules for S corp formation means you lose out on your S corp status

Ready to File for S Corp Status in Pennsylvania?

The Commonwealth of Pennsylvania provides plenty of opportunities for entrepreneurs to spread their wings and establish new businesses. As a budding entrepreneur, you may see S corp status as a way to reduce the amount you pay in taxes.

And it can be, as long as you have somebody by your side who can help you overcome S corp limitations so you can create your S corporation in Pennsylvania.

Swyft Filings is here for any small business owners who need help filing for an S corp. Our team helps you create your business, offering any additional information you need along the way. And when you’re ready to apply for S corp status, our dedicated service ensures you have the highest chance of achieving it.

We’ve helped over 250,000 businesses with their filing needs, and we can get you S corp status in as little as 10 minutes. Check out our S corp service to find out more.

Frequently Asked Questions

What is an S Corporation in Pennsylvania?

An S corporation is a pass-through tax entity that doesn’t have to pay corporate taxes.

Does Pennsylvania recognize S Corporations?

Pennsylvania recognizes businesses with S corporation status per the IRS’s guidelines.

What is the turnaround time for filing for S Corp status with the IRS?

The IRS can take up to 60 days to grant S Corp status, though the process is usually much quicker.

What is the difference between an S Corp and an LLC?

An LLC is a business entity, while an S corp is a tax classification. Both benefit from pass-through tax structures, meaning business income is declared on your personal federal income tax return.

What are the requirements for an S Corporation in Pennsylvania?

Pennsylvania grants S corp status to any business that meets the IRS’s filing requirements mentioned in the article.

Are taxes for LLCs and S Corps the same?

Taxes for LLCs and S corps are only sometimes the same. LLC owners may have to pay self-employment taxes. S corps may also have to pay corporate taxes on built-in gains in Pennsylvania.

What is the S Corp tax rate?

S corp shareholders pay taxes at their personal income tax rates, which vary depending on how much they earn.

How do I dissolve an S Corporation in Pennsylvania?

You must submit Articles of Dissolution to the Pennsylvania Department of State to dissolve an S corporation.

Bibliography

1. Pennsylvania Department of Revenue. “Partnerships/S Corporations/Limited Liability Companies.” Accessed March 27, 2023.

2. Pennsylvania Department of Revenue. “Capital Stock and Foreign Franchise Tax.” Accessed March 27, 2023.

3. Internal Revenue Service. “S Corporations.” Accessed March 27, 2023.

4. Pennsylvania Department of State. “Record Searches.” Accessed March 27, 2023.

5. Pennsylvania Department of State. “Fictitious Names.” Accessed March 27, 2023.

6. Pennsylvania Department of State. “Name Reservation/Transfer of Reservation.” Accessed March 27, 2023.

7. Pennsylvania Department of State. “Registration of a Trademark.” Accessed March 27, 2023.

8. Pennsylvania Department of State. “Commercial Registered Office Providers (CROPs).” Accessed March 28, 2023.

9. Pennsylvania Department of State. “Articles of Incorporation – For Profit.” Accessed March 28, 2023.

10. Pennsylvania Department of State. “Certificate of Organization Domestic Limited Liability Company.” Accessed March 28, 2023.

11. Pennsylvania Department of State. “Annual Reports in Pennsylvania.” Accessed March 28, 2023.

12. Internal Revenue Service. “Apply for an Employer Identification Number (EIN) Online.” Accessed March 28, 2023.

13. Internal Revenue Service. “About Form 2553, Election by a Small Business Corporation.” Accessed March 28, 2023.

14. Internal Revenue Service. “About Form 8832, Entity Classification Election.” Accessed March 28, 2023.