Frequently Asked Questions
There are many technical nuts and bolts to the structure of your business. This section helps you learn more about
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Do I need a lawyer to start a business?
No, but it's wise to get the best advice possible when you're starting out. An attorney is one source of the expertise you'll need to draw on.
Should I use a lawyer to draw up a contract or a lease?
Yes, if you do not feel confident of what you are agreeing to or if you want a legal review of the terms and conditions. The time for the lawyer is before you sign it, not after.
What are the differences in organizational structure and what legal structure should I choose?
There are three principal kinds of business structures: the Sole Proprietorship, the Partnership, and the Corporation. A brief description of each type is provided below:
Sole Proprietorship: a sole proprietorship is probably the simplest business structure to organize. A sole proprietorship business is owned by one individual (not a married couple) who has complete control of the business. Revenues are considered personal income and are taxed at the owner's personal tax rate.
Partnership: a partnership involves two or more people conducting a business together. This business structure is also fairly simple to organize, but may be more costly than a sole proprietorship because it requires a separate tax return for each partner.
Limited Liability Partnership (LLP): in this type of partnership, the liability of each partner can be limited to exclude obligations resulting from professional mistakes made by other partners or malpractice actions against other partners. The partners do, however, continue to share liabilities resulting from all other activities of the partnership.
Limited Partnership: a Limited Partnership is made up of two or more individuals who jointly own a business. This form of business allows for general partners and limited partners. Limited partners are generally financially liable for debts only to the extent of their investment. They have limited or no control over management of the company. The general partners manage the company and have the greatest potential risk/reward from the operations of the business.
Corporation: a corporation can be complex and expensive to organize. Legal assistance in setting up a corporation is strongly advised. The corporation is recognized as a completely separate legal entity from the owners. Because a corporation is a separate legal entity, the owners can implement pension, profit sharing, and other benefit programs as incentives for employees.
Limited Liability Company (LLC): a Limited Liability Company can provide the liability protection of a corporation and the federal tax benefits of a partnership. It is formed in a similar manner as a corporation, although directors are called managers while shareholders are called members. The name of the company must include the words “Limited,” “LLC,” or “Ltd.” In a LLC, the individual members or managers are not personally liable for debts, obligation, or liabilities of the company. Articles of Organization must be filed with the Secretary of State's office.
What kind of registration and licenses are generally required to start my business?
There are specific requirements in each state, county and locality, but it is possible to list the kinds of basic licenses and registrations a new business will need:
Local – a business license from city, town or county, depending on your location, will usually be necessary. In addition, you'll have to meet zoning laws, building codes, and similar regulations.
State – if your business isn't a corporation and your full name isn't in the name of the business, you'll have to register under what's called a Fictitious Name Registration. You should also file for a Sales and Use tax number. In some lines of business (like restaurants, barbershops, real estate offices) specific licenses are needed.
Federal – You'll need an Employer's Identification Number (EIN) and a it's a good idea to request the “Going Into Business Tax Kit, from the IRS.”
How do I register my small business?
If you decide to incorporate or become a limited partnership or a limited liability company, you will need to register that entity with the Bureau of Corporations at the office of the Department of State. If you organize your business as a sole proprietorship (a business owned and operated by an individual) or a general partnership, you do not need to register your business entity with the state. However, there may be certain city or town permits/licenses that are required to operate your business.
How different does my business name have to be?
It should be different enough to avoid confusion with other businesses. The reason you use a business name is to help customers identify you. If your name is similar to others, this identification is made difficult. Avoid trouble by picking a name that is unique and different enough not to be confused with another business.
How do I determine if the name I choose is okay to use?
State statute requires that every business enterprise operating under an assumed name must register that name in the city or town in which it is located. This is often called filing a “D/B/a”, which stands for “doing business as;” a nominal fee is typically charged. To determine whether a name you're considering is in use by another corporation, or is protected by a trademark or service mark, you should contact the Bureau of Corporations at (717) 787-1057.
Do I need to obtain a Federal Identification Number?
Sole proprietorships without employees can use the proprietor's social security number as a business identification number, providing he or she uses his or her own name in the business. Using a different name and/or hiring employees requires obtaining a federal identification number from the Internal Revenue Service (Form SS-4, Application for Employer Identification Number).
What are patents?
Patents are protections for inventions and discoveries. a patent is a property right that grants the owner an exclusive right to exclude others for a period of time (usually 20 years) from making, using, offering, selling, or importing anything that utilizes the intellectual property contained in the patent without the permission of the patent owner. Patents are expensive to obtain and generally require the use of an attorney who specializes in this field. In the United States, patents are handled by the U.S. Patent and Trademark Office. Other countries have their own patent systems that apply within their borders.
What are trademarks and service marks?
Trademark and service mark registrations are protections for certain things that distinguish one source from another. This registration allows the holder to exclude others from using its mark, generally for as long as that mark remains in use by the owner. a trademark is a word, phrase, symbol or design, or a combination of words, phrases, symbols or designs, that identifies and distinguishes the source of the goods of one party from those of others. Slogans are registered as service marks. This provides trademark protection to a slogan which uniquely identifies your company or service. In essence, a service mark is the same as a trademark, except that it identifies and distinguishes the source of a service rather than a product. Trademark and service mark registrations are sometimes expensive to obtain and often require the use of an attorney who specializes in this field. In the United States, trademarks and service marks are handled by the U.S. Patent and Trademark Office. In Pennsylvania, call the Pennsylvania Corporation Bureau at (717) 787-1057. They will check to see if the trademark has not already been issued and mail you the required forms and instructions. Other countries have their own mark protection systems that apply within their borders.
What is a copyright?
Copyright is a form of protection provided to the authors of “original works of authorship,” including literary, dramatic, musical, artistic, and certain other intellectual works. a copyright generally gives the owner, for a period of time (usually life of the author + 70 years, or up to 120 years for works for hire) the exclusive right to do and to authorize others to do the following: to reproduce the work, to prepare derivative works based upon the work; to distribute copies of the work to the public, to perform the work publicly, and to display the work publicly. A copyright exists immediately upon creation of a work, however, registering that copyright provides additional protections. Copyright registration is fairly inexpensive and easy to obtain. In the United States, copyright registration is handled by the U.S. Copyright Office.
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What is the difference between a C corporation and an S corporation?
We also receive many questions on the difference between a C corporation and an S corporation in Pennsylvania. The IRS website not only explains this very well, but has the actual forms available for you to get a good idea of the types of documentation required both during and at the end of each tax year. To read through this information, click here.
How do I know what taxes are required for my business?
Once you start your business, you will have to start paying certain taxes to both the federal government and the Commonwealth of Pennsylvania. The specific taxes you are required to pay or remit depend on your type of business. The Pennsylvania Department of Revenue website provides information on business taxes.
Do I need a sales tax number and how do I register for one?
If you sell tangible personal property, or provide certain fabrication, rental, or other particular services, you must obtain a sales tax identification number, also known as a seller's certificate, from the State of Pennsylvania. To obtain the appropriate forms you may visit the Pennsylvania Revenue Services website or you can (717) 787-1064. If wholesalers and retailers are reselling your product(s) you would not charge sales tax, but would provide them your sales tax number for a resale certificate.
If I am self-employed, how do I report my taxes?
Self-employed business owners are required to pay state and federal income taxes, Social Security, and Medicare based on the profits generated by the business. Profits in a proprietorship are determined before you draw compensation from the business (i.e. your draw or wages are not considered an expense of the business.) Once your liability for federal income tax and self-employment FICA exceeds $5000, you will need to deposit the tax payments to the IRS. You can estimate and report your federal taxes by using the 1040-ES form, and your state taxes by using the 1040ES-ME form.
Which business expenses can I deduct for income tax purposes?
Generally, all the expenses you incur to start and operate your business are deductible, however many are subject to various IRS rules; for example, start-up costs, vehicle expense, meals and entertainment, and use of a home office. Start by reading IRS publications (such as the Business Tax Kit) and looking at the tax returns for your form of business.
Can I hire my children or relatives and get a tax deduction?
Yes. This is a common practice of small family owned businesses. As long as the child or relative is performing some needed service for the business and is paid approximately what a non-relative would be paid for the same work, it is allowed.
Can I buy a new car in my business and get a tax deduction?
Yes, provided the car is used in the business. If it is used exclusively in your business, you can deduct all of its cost and operating expenses. If it is used partly for business and part for personal use, you can allocate the business portion and claim a percentage of its cost and expenses.
If I operate my business from my home, what can I deduct from my taxes?
You can deduct all regular expenses associated with your business. This is no different from operating your business from a location outside your home. Consult IRS Publication 334, the IRS, a CPA, a tax lawyer, or some other source familiar with these rules.
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What is NAICS?
NAICS is the North American Industry Classification System. It replaced the Standard Industrial Classification (SIC) system on January 1, 1997. Federal government agencies that collect establishment based statistics are now required to use NAICS instead of SIC.
Why is NAICS used instead of SIC?
NAICS, first of all, classifies over 350 more industries than SIC does - that's 15% more. Most of these new industries are in the Services Sectors. NAICS identifies industries that SIC does not, industries that are more relevant to today's economy. For example, NAICS includes industries that manufacture semiconductor machinery and fiber optic cable, reproduce software, provide satellite telecommunications, paging, cellular and other wireless telecommunications. Warehouse clubs and superstores, telemarketing bureaus, hazardous waste collection and casinos are also new in NAICS.
NAICS is more consistent than SIC. Businesses that use similar production processes are grouped together. NAICS gives special attention to new and emerging industries, service industries in general, and industries that produce advanced technology. The SIC system, which was last revised in 1987, does not include many of these industries, or at least does not describe them well, and it will never be updated or changed.
How do I find out what my NAICS code is?
Simply enter your product or service in the description area and then locate your business area on the NAICS website.
Where can I find more information about small business size standards and NAICS together?
You may find more information about NAICS on the organization's website.
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