This article was originally published by CPA Practice Advisor on July 9, 2015. Click here to view original article.
Starting a business sounds simple – take your idea, get a federal ID number and a bank account, and you’re ready to go. Unfortunately, that level of simplicity is a myth. There are many complexities and nuances when creating a business at the federal, state, and local levels.
Each state has its own set of rules and regulations and no two are alike. Non-compliance can saddle the new business owner with fees and penalties that could have been avoided with knowledge of the requirements. In this article, we offer insight on the varying regulations throughout New Jersey, New York, New York City, Pennsylvania, and Philadelphia with a focus on the limited liability company (LLC) structure.
The first things a prospective business owner needs to do is apply for a federal identification number using form SS-4, file Articles of Organization with the Department of State and comply with any required employment tax return filings. If you’re going to create a multi-member LLC, having an Operating Agreement drawn up is also strongly recommended. This internal document lays out the rights, duties, liabilities and obligations between the members and the LLC – a very important item to have.
All limited liability companies formed in New Jersey, or filing to do business in New Jersey, must first determine if the business name is available and then file formation documents to register and receive a Certificate of Formation. To register for tax and employer purposes a NJ-REG must be completed and, to ensure the continued use of your business name, an annual report filing must be completed for a small fee.
Income taxes will be reported on your individual tax return whether you are a single or multi-member LLC, but there is an additional filing of Form 1065 if you are a multi-member LLC. If you employ at least one individual, you will need to review the requirements for employer and workers’ compensation insurance. Depending on where in the state your business is located and what type of industry you are in, there could be additional local permits, business licenses, certificates, registrations and/or sales and use tax filings to comply with.
To form an LLC in New York you need to be a New York resident and/or have a business entity in New York State and file Articles of Organization with the Department of State. New York LLCs are also required to update their contact information every two years by filing a Biennial Statement with the New York Department of State.
Income tax treatment is similar to that of New Jersey, being reported on your personal tax return with an additional filing of Form IT-204 if you are a multi-member LLC. If you have employees, the business will need to register with the New York Department of Labor and be mindful of any filings and/or payments for withholding taxes and wage reporting as well as unemployment, workers’ compensation, disability and health insurance.
Depending on the type of business, you may be required to register as a New York State Sales Tax Vendor, apply to the New York Department of Taxation and Finance for a sales tax Certificate of Authority, and comply with any required sales tax filings. New York has a voluminous list of business types that are required to apply for additional licenses and/or permits, which all new business owners should review.
New York City business owners beware – the city may have separate registrations for these items! Additionally, if you conduct business in NYC you may be subject to the New York City Unincorporated Business Tax which is filed on Form NYC-202 along with your personal tax return.
An LLC operating in the state of Pennsylvania must file Form 8913 – Organization Domestic Limited Liability Company and Docketing Statement with the state. LLCs must register under a business name that is not already in use, and determine whether or not the name of the business is considered a fictitious name.
A fictitious name can be registered by completing Form 311 – Application for Registration of Fictitious Name; the name is required to be advertised in a newspaper of general circulation in the county in which the business will be located. A newly formed LLC is required to complete the Pennsylvania Enterprise Registration Form (PA-100) and file with the Pennsylvania Department of Revenue, which will allow the entity to establish employer withholding, unemployment compensation insurance, and sales and use tax accounts.
The state of Pennsylvania has a 6% sales and use tax rate, and there is an additional 2% local sales and use tax for purchases made in Philadelphia and a similar local tax of 1% for Allegheny County. Use tax liabilities are reported on the PA-1 Use Tax Return. An LLC reporting as a partnership is required to file a PA-20S/PA-65 Information Return, and provide each resident and non-resident member with a PA Schedule RK-1 or NRK-1 in order to report income taxes on their individual tax returns. Additionally, LLCs doing business in the state of Pennsylvania are subject to a capital stock/foreign franchise tax.
Businesses operating in the City of Philadelphia are required to obtain a Commercial Activity License from the Department of Licenses and Inspections. In order to obtain the Commercial Activity License, a business must first obtain a City of Philadelphia Tax Account Number, which requires a Federal EIN and Pennsylvania State Sales & Use Tax Number, both of which are also prerequisites for obtaining a Commercial Activity License.
An LLC doing business in the City of Philadelphia is required to file a Business Income & Receipts Tax (BIRT) Return, which is computed based on the gross receipts and net income, and a Net Profit Tax Return. In addition to State and Federal payroll withholding, an employer who pays wages to residents of the city of Philadelphia, or a non-resident working in the city, must withhold and remit a City Wage Tax. Based on the location and industry in which the business operates, there are various state and local business licenses and permits which must also be obtained.
In conclusion, one should seek competent tax advice to stay in compliance with the laws that govern their business in the states in which they will operate.