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Swyft Filings is committed to providing accurate, reliable information to help you make informed decisions for your business. That's why our content is written and edited by professional editors, writers, and subject matter experts. Learn more about how Swyft Filings works, our editorial team and standards, what our customers think of us, and more on our trust page.
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.
Unlock tax savings and ensure compliance with critical regulations with our assistance.
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.
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.
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]
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]
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.
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:
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.
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.
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]
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.
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
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]
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:
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:
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.
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]
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.
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.
An S corporation is a pass-through tax entity that doesn’t have to pay corporate taxes.
Pennsylvania recognizes businesses with S corporation status per the IRS’s guidelines.
The IRS can take up to 60 days to grant S Corp status, though the process is usually much quicker.
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.
Pennsylvania grants S corp status to any business that meets the IRS’s filing requirements mentioned in the article.
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.
S corp shareholders pay taxes at their personal income tax rates, which vary depending on how much they earn.
You must submit Articles of Dissolution to the Pennsylvania Department of State to dissolve an S corporation.
No matter the business type, Swyft Filings can help you form your new company.
