In Pennsylvania, 1.1 million small businesses employ 2.5 million people. According to the U.S. Small Business Administration (SBA), small businesses accounted for 99.6% of all private-sector businesses operating in the state in 2021. These small businesses employed 46.3% of all Pennsylvania employees.
Pennsylvania also boasts the sixth-largest economy in the nation, worth nearly $839.5 billion annually. It grew by 4.4% in 2021, over a full point under the national rate of 5.7%. However, Pennsylvania’s unemployment rate stands at 4.8%, over a full percentage point higher than the national rate of 3.6%.
Pennsylvania is a large and geographically diverse state where the cost of living and doing business can vary greatly. We spoke to entrepreneurs and small business owners from across the Keystone State to discover how its current economic landscape impacts entrepreneurs and shapes their expectations for the future.
Here are four key facts you should know about doing business in Pennsylvania:
Pennsylvania is home to Philadelphia, a massive city with a reasonable cost of living. Additionally, it’s located in the same geographical neighborhood as some of the biggest cities on the East Coast. This proximity makes it easier to expand professional networks, access other large markets and pitch business ideas to potential investors.
“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, entrepreneur and former VP of business development and marketing at contractor-quotation platform ServiceWhale.
This proximity offers more access to angel investors and venture capitalists. “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,” Rovner said.
Small businesses and startups can often benefit from partnerships and investment opportunities that tend to cluster around major metropolitan areas. Philadelphia entrepreneurs, for example, can easily expand their businesses to another state by reaching across the border into New York or New Jersey’s crowded marketplaces.
For western Pennsylvanians, Pittsburgh offers a large population center with a similarly low cost of living and doing business. Like Philadelphia, Pittsburgh has a tech startup scene that has successfully launched some companies, including Duolingo, JazzHR and Gecko Robotics.
The taxation landscape in Pennsylvania is a mixed bag. For pass-through entities like LLCs, the personal income tax rate is relatively low at 3.07%. The average state and local income tax collections per capita stand at $1,416, ranking Pennsylvania as the 12th least-taxed state in the country. Sales taxes are about average at 6%, and property taxes are relatively low at an average of 1.49%.
When it comes to small business taxes, Pennsylvania can be a bit pricier. Pennsylvania is among the six states with the highest corporate income taxes, at 9.99%. Ultimately, your tax rate in Pennsylvania depends on your business’s legal structure.
“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, current senior tax analyst at Lehigh Valley Health Network and former owner of Boundless Advisors. “[Boundless Advisors was] 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 find the tax burden challenging. Diane Szamborski, owner of a Primrose School franchise based in Royersford, said that 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,” Szamborski said. “Despite this fact, I’ve found that when the economic environment is good, our industry usually fares well despite taxation issues.”
While Pennsylvania’s unemployment rate is significantly higher than the national average, the labor market is still fairly competitive, creating a challenge for small businesses. This competitive labor market is compounded by the growing tech community based mainly 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 and CEO of web design and marketing company WebTek.
Most of the entrepreneurs we spoke to said they eventually find suitable candidates with in-demand career skills for their open positions, but it often takes significant time and effort in the hiring process.
“We are able to find skilled talent eventually,” said Linda Miller-Gerz, managing partner at Management Recruiters of Lancaster. “However, it is time-consuming and difficult.”
The competitive labor market is not a unique challenge to the state, though, as most states have lower unemployment rates than Pennsylvania. The COVID-19 pandemic has also changed the hiring landscape, leading to more frequent employment and job demand fluctuations.
Most of the Pennsylvania entrepreneurs we spoke to expressed optimism for future business growth. Spurred on by opportunities and confident in their ability to overcome 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 crucial for 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.
For example, Pennsylvania’s abundance of farmland makes the state an ideal setting for agribusiness. Advanced manufacturing is another emergent field in the region. It employs highly educated engineers and skilled tradespeople to build materials the country needs using the most advanced manufacturing technology.
“I love seeing the innovation and major growth taking place around the Lancaster area,” Miller-Gerz said. “There are some major businesses moving into Lancaster more from a distribution arena.”
Legalizing internet gambling in Pennsylvania has also made online game companies more lucrative. However, it’s contributed to the decline of another industry in Pennsylvania: casinos. In the last several years, following the rise of internet gambling and the legalization of casinos in surrounding regions, Pennsylvania’s casinos have seen a decline in revenue.
There are over 250 universities in Pennsylvania, including the nation’s No. 1 business school, the University of Pennsylvania’s Wharton School. These universities create a large pool of employees and interns with relevant college majors and degrees.
If you’re in the early stages of starting a business in Pennsylvania, you might find yourself with a few logistical questions. 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.
Starting a business in Pennsylvania requires you to find the right business location, 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 road map.
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.
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.
To start a business in Pennsylvania, you will likely have to pay application and licensing fees. For example, obtaining a Pennsylvania LLC Certificate of Organization 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 want to do business under a brand name other than the legal name you’ve registered with the state (see below).
In Pennsylvania, you are required by law to get a business license before beginning operations. Licensing requirements vary based on the goods or services a business provides and the company’s structure. License and permit requirements and costs may also vary across local municipalities.
When it comes to small business insurance, businesses in Pennsylvania are legally required to have workers’ compensation insurance. Additionally, 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.
In Pennsylvania, you must file returns based on the sales tax you collect. 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 (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.
In Pennsylvania, you need a “doing business as” (DBA) name or fictitious name any time you want to operate a business under a title other than the legally registered name you used on your application forms. Otherwise, you could face up to a $500 fine.
To register a DBA name, first search to ensure your intended DBA 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 by mail.
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.
Whether you’re planning to start a new venture in Pennsylvania or you’re already a small business owner 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. Find a Pennsylvania SCORE location near you to get started, find a mentor and learn more.
The SBA offers financing, business grants, 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 hosts several 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. Find a Pennsylvania Small Business Development Center for your region to get started and learn more.
If you’re interested in starting a business in Pennsylvania, you’ll have no shortage of opportunities. The state’s proximity to major business hubs and the abundance of great universities can set up your small business for success.
As long as you’re prepared to manage tax rates and understand your administrative responsibilities before you get started, the Keystone State is an excellent locale for your latest venture.
Cailin Potami contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.