If you're running a business in Pennsylvania, this is what you need to know.
- Pennsylvania is home to more than 1 million small businesses, which employ 2.5 million people.
- The personal income tax rate in Pennsylvania is 3.07%, while corporate income taxes stand at a flat rate of 9.99%.
- Pennsylvania's relatively low unemployment rate of 3.9% has created an intensely competitive labor market.
In the state of Pennsylvania, 1 million small businesses employ 2.5 million people. According to the U.S. Small Business Administration, small businesses accounted for 99.6% of all private sector businesses operating in the state in 2018. They employed 46.7% of all Pennsylvania employees. Pennsylvania also boasts the sixth largest economy in the nation, worth more than $788.5 billion annually. It grew modestly in 2018 at a rate of 2.1%, nearly a full point slower than the national rate of 2.9%.
Pennsylvania's unemployment rate stands at 3.9%, similar to the national unemployment rate of 3.7%. While the low unemployment rate reflects the relatively healthy economic conditions, it also means the labor market is more competitive and skilled workers are more expensive to hire. However, Pennsylvania is a large and geographically diverse state where cost of living and doing business can vary greatly.
Business News Daily spoke to small business owners and professionals from the Keystone State to find out how the state's current economic landscape is impacting entrepreneurs and shaping their expectations for the future.
Proximity to large markets
Not only is Pennsylvania home to Philadelphia, a large city with a reasonable cost of living, but it's also located in the same geographical neighborhood as some of the biggest cities on the East Coast. This makes establishing business connections, bringing in potential investors, and accessing other large markets far easier for Pennsylvania's entrepreneurs.
"With its proximity to cities like NYC, Boston and D.C., and its growing tech community, Philly has become an attractive place for top tech talent," said Aaron Rovner, vice president of business development and marketing at contractor quotation platform ServiceWhale. "And the train ride for a VC coming from NYC to Philly is a little over an hour – definitely not a big concern, especially if the company has a promising business model."
Small businesses and startups can often benefit from partnerships and investment opportunities that tend to cluster around major metropolitan areas. For businesses in Philadelphia that want to reach across the border into New York or New Jersey's crowded marketplaces, the geographical positioning of the eastern Pennsylvania city could not be better.
For western Pennsylvanians, Pittsburgh offers a large population center with a similarly low cost of living and doing business. Also like Philadelphia, Pittsburgh has a tech startup scene that has launched some companies to success, including Duolingo, JazzHR and Gecko Robotics.
Manageable tax rates
The taxation landscape in Pennsylvania is a mixed bag. For pass-through entities, such as LLCs, the personal income tax rate is relatively low at 3.07%. The average state and local income tax collections per capita stand at $1,323, which ranks Pennsylvania as the 11th least-taxed state in the country. Sales taxes are about average at 6%, and property taxes are relatively low at an average of 1.46% of property values.
When it comes to business taxes, Pennsylvania can be a bit pricier. The top corporate income tax rate in Pennsylvania stands at 9.99%, placing the state in the bottom third in the nation. Ultimately, whether Pennsylvania's taxes are high or low depends on the structure of your business.
"Instead of graduated tax rates like most of our border states, Pennsylvania enforces a flat 9.99% corporate tax rate and 3.07% individual tax rate," said Dane Janas, owner of Boundless Bookkeeping and Accounting. "Our firm is currently legally structured as a single-member LLC, which is treated as a disregarded entity for federal and state tax purposes, thereby enforcing lower individual tax rates on our business."
Still, certain businesses do find the tax burden to be a challenge. Diane Szamborski, owner of a Primrose School franchise based in Royersford, said local taxes can significantly impact a business's tax bill. Overall, she added, the local economy appears strong.
"It was a real challenge to pay taxes for the first several years of opening our business because the taxes were set so high," she said. "Despite this fact, I've found that when the economic environment is good, our industry usually fares well despite taxation issues."
Competitive labor market
As in most states, Pennsylvania's labor market is fiercely competitive. Low unemployment rates have created high demand amongst employers for skilled workers, and it can often be difficult to fill more technical positions. This is compounded by the growing tech community based largely in Philadelphia.
"Although the area has plenty [of good workers and skilled talent], it doesn't seem to have enough for the demand of growing businesses and a healthy economic forecast," said Kornel Kurtz, president of web design and marketing company WebTek.
Most of the entrepreneurs we spoke to said they do eventually find suitable candidates for their open positions but that it often takes significant time and effort.
"It is a competitive marketplace with very low unemployment," said Linda Gerz, managing partner at Management Recruiters of Lancaster. "We are able to find skilled talent eventually; however, it is time-consuming and difficult."
The competitive labor market is not a unique challenge to the state, though, with the national unemployment rate even lower than Pennsylvania's.
Positive entrepreneurial outlook
Most of the Pennsylvania entrepreneurs we spoke to expressed optimism for the future growth of their business. Spurred on by opportunities and confident in their ability to overcome the challenges, Pennsylvania's small businesses expect success in the near term.
"The future looks bright, with continued economic success for families in our geographic area," Szamborski said. "The success of our families, in turn, affects the success of our child care business."
Innovation and startup growth are key to Pennsylvania's continued success, as they are in any growing market around the country. Small businesses not directly involved in tech startups or disrupting long-standing industries can also get involved in the growth-centric atmosphere, which promotes business activity, investment and profitability.
"I love seeing the innovation and major growth taking place around the Lancaster area," said Gerz. "There are some major businesses moving into Lancaster more from a distribution arena."
If you're considering launching a business in Pennsylvania, keep an eye open for these opportunities and plan for the challenges. The best way to succeed in business is to be prepared and knowledgeable, so do your homework and keep your bases covered.
Frequently asked questions about doing business in PA
These questions are commonly raised when one starts a business in Pennsylvania. The answers below will help you to file the necessary documents, pay the appropriate fees and understand the basics of starting a business in Pennsylvania.
- Stumped on what type of business you want to run? Check out our list of smart business ideas for 2019.
- Need help writing a business plan? These business plan templates should help you get started.
- Not sure which is the best legal structure for your business? We've broken down the various types, including sole proprietorship, partnership, LLC and various types of corporations.
- Looking for funding for your startup? These reviews and best picks for alternatives to small business loans can help.
- Make sure you're managing your money properly with the right accounting software for your business.
What should you do to start a business in Pennsylvania?
Starting a business in Pennsylvania requires you to choose a business structure and register your new business with the appropriate state agencies. Before beginning the process, you should develop a business plan to serve as your roadmap, then select the appropriate legal structure and fill out the related application.
Many entrepreneurs incorporate as LLCs, although Pennsylvania businesses can also register as sole proprietorships, partnerships and corporations. Each business structure has its own set of rules and might be taxed differently.
You will also have to select a legal name for your business and ensure it is not taken by another company already. To do so, use the state's business name search tool.
Once you've selected the right structure for your business and determined that your company's legal name is available, find the related application form and fill it out. You will likely need to file applications with the Pennsylvania Department of State, Department of Revenue, and Department of Labor and Industry.
How much does it cost to start a business in Pennsylvania?
To start a business in Pennsylvania, you will likely have to pay application and licensing fees. To obtain a Pennsylvania LLC Certificate of Organization, for example, costs about $125. Additional fees might be required if your business is structured as a corporation, sole proprietorship or partnership. You will also have to pay for a fictitious name if you would like to do business under a brand name other than the legal name you've registered with the state.
Do you need a business license in Pennsylvania?
It is a legal requirement to obtain a business license before operating a business in Pennsylvania. Licensing requirements vary by the goods or services a business provides and the structure of the company. License and permit requirements and costs may also vary depending on local municipalities.
Do you need business insurance in Pennsylvania?
Businesses in Pennsylvania are legally required to have workers' compensation insurance. In addition, any business that operates company vehicles must also obtain commercial automobile service. Depending on local regulations and your business type, you might also be required to obtain general liability insurance. [Read related article: How to Buy Small Business Insurance]
How often do you file sales tax returns in Pennsylvania?
In Pennsylvania, sales tax returns must be filed according to the amount you collect in sales taxes. You might be required to remit taxes monthly, semiannually, quarterly or annually. Sales tax returns are always due on the 20th of the month after the reporting period. For example, quarterly sales tax filers will be required to remit Q1 sales taxes on April 20.
You can file sales tax returns with the state in one of three ways: online with the Pennsylvania Department of Revenue, by phone at 1-800-748-8299, or by mail. Pennsylvania also allows small businesses to keep 1% of collected sales tax revenue as compensation for the labor associated with compliance.
Do you need a DBA in Pennsylvania?
In Pennsylvania, you need a "doing business as" (DBA) name or fictitious name anytime you want to operate a business under a name other than the legally registered name you used on your application forms. Otherwise, you could face up to $500 in fines to the Pennsylvania Department of State.
To register a DBA, first search to ensure the name is not already in use by another business. If it is available, you must then register your DBA with the Department of State by filling out a Registration of Fictitious Name form. This can be done online or sent in by mail.
How much does it cost to get a DBA in Pennsylvania?
The cost of registering a DBA or fictitious name in Pennsylvania is $70, which is your application filing fee. Once accepted, your DBA does not need to be renewed. However, if you ever wish to withdraw your DBA, it costs an additional $70.
Resources for small businesses in Pennsylvania
If you're a small business owner in Pennsylvania looking for resources to help you move forward, here are a few organizations you might want to learn more about.
SCORE's volunteer business professionals and expert "mentors" give counsel and guidance to entrepreneurs looking to start or expand their businesses. The services are free and volunteer-driven. Here are some of the chapters in Pennsylvania:
U.S. Small Business Administration District Offices
The SBA offers financing and grants, as well as consultations and counseling services. There are also opportunities to apply for federal government contracts through the SBA and avenues for obtaining assistance after natural disasters.
Pennsylvania Small Business Development Centers
Pennsylvania hosts a number of centers dedicated to supporting the development and retention of small businesses, helping entrepreneurs do everything from crafting business plans to navigating the state's tax code. You can find your region's small business development center at the link below:
Some source interviews were conducted for a previous version of this article.