By Angela M. Ward, Attorney
Starting a new venture can be exciting. Whether you’re creating a new private club, association, business, partnership, or nonprofit, you want to ensure that your organization thrives. In Pennsylvania, many laws govern the creation, regulation, and taxation of each type of entity. To avoid unpleasant surprises (and possible legal actions,) it’s essential to understand the requirements of each type of business or organization.
That’s why we’ve provided this list of the “ABCs” of legal terms for creating new companies and organizations. Get familiar with this list, and you’ll be prepared to start right.
An association is a collection of people who have joined together for a particular object or goal. Associations can be formed to raise money, increase awareness, promote understanding, develop industry, or regulate entities.
Pennsylvania has recognized the separate existence of an association by statute. This means that unincorporated associations have the status of legal entities and are therefore able to acquire property and to be sued as an entity. PA law also sets forth requirements for the articles of association and formation of bylaws. If your organization is raising money to spend on your goals, it will probably be considered an association and subject to PA laws governing associations.
Board C Corps and S Corps
Unless they have only one shareholder, these entities must maintain a board of directors, elected by the corporation’s shareholders, to oversee the business. This board doesn’t handle day-to-day operations. Instead, it is responsible for overseeing the strategy and long-term operations. The directors must also serve as the fiduciaries of the shareholders, so their actions are subject to certain legal standards.
For nonprofits, the board serves as the governing body that oversees the organization’s activities. At a minimum, all board meeting must be present for an annual meeting. Other sessions can occur throughout the year, but all board members do not need to be present. Most nonprofits have term limits for board members, often set at between two and five years.
The board of directors is the governing body of the association and manages the affairs of the organization. The board is responsible for policymaking, and the legal responsibility lies with the board. Employees or officers are responsible for executing day-to-day management.
Bylaws are the legal term given to the rules and regulations that govern your business, association, club, or nonprofit. Pennsylvania law mandates formal bylaws for some types of entities. Whether your bylaws are broad and directional, or detailed and executional, they set the parameters of an association’s mandate. Operating without recognized bylaws exposes you to legal risk that can be as small as minor fines, or as extensive as a lawsuit or incarceration.
Capital is the term used to describe the funds and materials used to build a business. Capital comes from a sole proprietor, provided by a partner, loaned from a financial institution, provided by an investing organization, or solicited from individual investors in the form of stock. Capital may also be contributed in the form of labor, materials, or assets such as land. Unless you are a single-employee, sole proprietorship business providing all of your own capital, the source of your capital, and the conditions of its use, should be documented in a written agreement. Include rules for withdrawals, and the division of capital if one or more partner or owner should leave the organization.
A cooperative business, also known as a co-op, is both owned and controlled by its members and is often a nonprofit organization. Many are formed to create enhanced buying power, such as a grocery co-op. Others are built to create an enhanced ability to sell consistently, such as farming co-ops. In either situation, the larger group structure creates improved stability and attractive economies of scale. Some co-ops require members to sign contracts, make commitments, or buy shares, which requires bylaws and legal oversight.
A C Corporation is formed by filing articles of incorporation with the Corporation Bureau of the Pennsylvania Department of State. C Corps are owned by one or more individual or entity shareholders. The management of a C Corp involves three stages: shareholders, a board of directors, and officers. Shareholders vote for a board of directors who make the major business decisions. Members of the board of directors elect officers to take care of day-to-day operations.
The Department of Revenue taxes C Corps as separate entities. This means that profits are distributed as dividends to its shareholders, who then pay income tax on that distribution. This is why they say that C Corps suffer double taxation. Despite this, C Corps are often chosen because the company pays a low tax rate on the first $75K in profit. This type of incorporation also provides various tax and cost advantages for owners such as paying non-reimbursable medical expenses and disability insurance.
The role of the director will vary based on your organization’s structure. In smaller C Corps, a single individual may replace the board of directors, becoming simply a director, if they are the company’s lone shareholder, officer, and employee.?Association members usually elect directors to operate the association for them and specify the duties of a director in their bylaws.
C Corporations, or C Corps, pay regular sums to its shareholders out of its profits or reserves. These dividends are taxable to shareholders. C Corps are the only business structure responsible that requires the business to pay taxes on profits. That means that for these types of companies, dividends’ are taxed twice — to both the “corporation” and the shareholders.
This is a business’s after-tax net income, also called profits. Earnings are usually the most significant determinant of a company’s share price.
This is the term used to describe the expenses, income, profits, debt, losses, investments, and capital of a business. Financials sometimes include prospective profit and growth, but always include a history of financial activity. Some types of business will have to provide full financials to investors or partners regularly. Financials are often required to get a business loan.
This business type allows participants to structure their businesses as they see fit, allowing partners to control operations more closely. To be a general partnership, the company must include at least two people. All partners must agree to any liability that their partnership may incur. While written agreements are preferred, oral agreements are also legally valid. Also known as a partnership.
HOA Homeowners Association
When homeowners of a condo, development, or neighborhood band together to preserve or enhance their homes surroundings, with mandatory membership dues, they form a non-profit corporation. These associations are subject to Pennsylvania law governing non-profit corporations and homeowner associations. Assessments or dues can only be used to pay for expenses that arise from having and maintaining common property.
An individual, organization, association, or business entity buys a share or percentage of a business with the intent of gaining future income from the asset. Whenever companies offer shares for sale, they must adhere to a list of financial requirements for management of funds, oversight, and reporting.
LLC Limited Liability Company
A limited liability company is formed by filing a certificate of organization with the Corporate Bureau of the Department of State. An LLC has members instead of shareholders, and members are issued certificates showing their percentage ownership instead of stock certificates. This type of entity can be owned by one or more member and has a flexible management structure. It can be member-managed, meaning each member has a say in all management, or the members can elect to be manager-managed, where only the persons selected as managers can have a say in the operations of the business.
For tax purposes, an LLC can be either taxed separately or taxed to the member-owners as pass-through taxation. Many of these businesses are single member-owned and taxed as the individual taxation rate. However, it can choose to be taxed separately (by filing an S Corp tax election) to avoid the imposition of self-employment tax.
In Pennsylvania, these authorities govern grant permission to, and oversee, eligible organizations that apply to conduct games of chance in the commonwealth. They also issue special raffle permits. For tavern gaming, the PLCB is the licensing authority. For businesses seeking to offer small games of chance, the county treasurers in each of Pennsylvania’s 67 counties serve as licensing authorities. If there is no county treasurer, such as in a home-rule county or city of the first class, the licensing authority is the designee of the governing body.
Liquor Licenses in PA
In order to sell liquor in Pennsylvania, or serve it as part of a catering service, businesses must be licensed by the state. There are a wide variety of liquor license formats offered in Pennsylvania. Acquiring a liquor license in Pennsylvania requires a substantial amount of paperwork, extensive background checks, regulation, and fees.
Members govern associations. An association’s bylaws must indicate who can be a member, how members are chosen, and expectations, and rules for expulsion. Some associations offer membership by geography, by industry, by type of business, or by other criteria. The association’s bylaws will determine if members must pay a fee and if there are requirements such as meeting attendance or volunteer mandates.
This type of corporation is formed to perform specific tax-exempt activities. Nonprofit corporations can benefit the public, a set of individuals, or the membership of the nonprofit. Nonprofits can include religious organizations, political organizations, civic clubs, and country clubs. If your organization wants funds to be tax-exempt, they will need to follow guidelines as laid out in Pennsylvania law.
If you have an enforceable claim or title to an asset or property, you have legal ownership that is recognized by state and federal law. In all types of businesses, owners are responsible for managing the company in accordance with state and federal law and are liable when the business fails to do so.
This business structure allows participants to structure their businesses as they see fit, allowing partners to control operations more closely. To be a general partnership, the company must include at least two people. All partners must agree to any liability that their partnership may incur. While written agreements are preferred, oral agreements are also legally valid. Also known as a general partnership.
In Pennsylvania, Private Clubs have special regulations and considerations. State laws govern the creation and administration of private clubs. Related regulations are in place regarding the dispensation of liquor licenses, catering, concessions, and fundraising.
State and federal laws also regulate how private clubs can raise money, especially if they conduct games of chance, such as prize drawings or raffles. To stay in compliance with the law, it’s crucial to understand how to set up a private club, how to maintain financial and membership records, and how to create a constitution and bylaws.
While many organizations, associations, and private clubs create small games of chance to raise funds, the PA Department of Revenue has set ceilings on the amounts of the prizes, also known as payout limits. For example, an award for a single chance in any game may not exceed $2,000. An eligible organization is limited to awarding $35,000 in winnings during an operating week (seven consecutive, reoccurring operating or non-operating days). No more than $15,000 may be awarded in raffles during a calendar month. Several conditions and exceptions apply. If you are considering small games of chance for your organization, consult a qualified attorney to ensure you are within the limits of the law.
An S Corporation is formed by filing articles of incorporation with the Department of State. It is owned by no more than 100 shareholders, and cannot be owned by other corporate entities. Shareholders must be U.S. citizens or residents. Shareholders, directors, and officers manage an S Corp.
For tax purposes, an S Corp is a pass-through entity, meaning that it is not a separate tax entity and does not pay corporate income tax. Instead, the shareholders of this type of business pay taxes on profits via their individual tax returns at their individual tax rate. Shareholders also have the advantage of being able to offset non-business income with business losses.
Each business and situation differs. If you have questions about how to form and structure your business, contact us to talk more.
People who invest in a company by purchasing portions of the company are called shareholders. Corporations have no restrictions on the number of shareholders or the citizenship of those shareholders. S corporations are limited to 100 shareholders, and they must be U.S. citizens or residents.
Small Games of Chance
When patrons purchase a ticket or chance to win cash or prizes, they are playing a small game of chance. While these types of games are allowed, the payout limits, and even the choice of distributors or vendors are carefully regulated by the PA Department of Revenue. Permitted activities include punchboards, pull-tabs raffles (includes lotteries), daily drawings, weekly drawings raffles, raffle auctions, 50/50 drawings (including major league sports drawing), race night, and games pools, excluding sports pools. Unless otherwise authorized by law, all other forms of gambling are prohibited criminal offenses under the Pennsylvania Crimes Code.
State licenses must be obtained to operate small games of chance legally, and not all municipalities in PA permit such activities. To ensure compliance with the law, and to avoid legal consequences, get assistance from our team at Going and Plank.
Every type of business and organization is subject to taxation. Even tax-exempt organizations must report to the Department of Revenue. The way you structure your business or association can minimize your tax burden. Work with an experienced business attorney to help you evaluate your current business structure, and to help you transition into a format that benefits you and your business.
Unlimited Personal Liability
In a sole proprietorship, you have not created a legal separation between you and your business. As a result, you can be held personally liable for the debts and obligations of the company. This risk extends to any liabilities incurred as a result of employee actions. In an LLC, an S Corp, or a C Corp, the individual is no longer responsible for the debts and liabilities incurred by the company. For example, if an individual sues a sole proprietorship, they may need to sell their home and property to pay damages. However, if that individual is an LLC, their personal property is considered separate, and would not be considered an asset to be seized in a lawsuit.
Want to learn more about business law and the benefits of including attorneys in your business decisions? Check out these articles.