Launching a business in Pennsylvania has its perks: Keystone state entrepreneurs benefit from operating in a northeastern state with major urban centers just a short drive away from New York City and Boston, but enjoy a cost of living and housing prices that are far lower than those two cities. In fact, U.S. News ranks Pennsylvania 4th in the nation in terms of housing affordability.
Pennsylvania business owners have a better than average chance of success, too: 80.5% of the state’s startups survive their first year, a rate higher than the national average. The state’s startup early survival rate is higher than those of neighboring states New York and New Jersey, as well.
In order to ensure that your venture is among those 80.5% of businesses to move past that difficult first year, we’ve produced this comprehensive guide to starting a business in Pennsylvania. We’ll take you through all the key steps of bringing a business to fruition, while providing links to plenty of useful resources to further boost your odds of success.
Pennsylvania small business statistics at-a-glance
- 1.1 million small businesses are active in Pennsylvania, accounting for 99.6% of the state’s total businesses.
- 2.5 Pennsylvanians are employed by small businesses, which is 46.6% of the state’s workforce.
- The median income for Pennsylvania entrepreneurs self-employed at their own incorporated businesses was $52,358 in 2017.
- Healthcare and social assistance is the leading small business employer industry in the state, followed by accommodation and food services, and manufacturing.
- Tax Foundation ranked Pennsylvania’s income tax rate 19th and its property tax rate 21st in its 2020 Business Tax Climate Index.
- 80.50% of Pennsylvania startups make it past their first year of existence.
- Pennsylvania startups create 3.67 new jobs in their first year of operation, on average.
Starting a business in Pennsylvania in 12 steps
1. Develop an idea
Every successful business starts with a good idea. Ask yourself these questions:
- Which product or service can your business provide that doesn’t already exist on the market?
- How does your business idea refine an existing product or service?
Determine your personal strengths and interests: developing an idea that suits your personality and positive traits will provide motivation to put in the long hours necessary in addressing the myriad challenges you’ll face in getting your business off the ground.
Figure out how to market your expertise: if your business idea is not something you totally believe in and can sell effectively, it will be much harder to succeed.
2. Do the research
Once you have an idea, it’s time to put it through the wringer and decide if it’s viable in the market. Conduct market research to arrive at answers to these key questions:
- Is there demand for your product/service in Pennsylvania?
- Who is your target market?
- Do existing businesses in Pennsylvania offer a similar product/service?
- What makes your business unique compared to the competition?
Coming up with satisfactory answers may require refinement, or even a total overhaul, of your original idea. Be patient: you’ll only want to proceed with the next steps after determining that a niche exists in the Pennsylvania market for your business idea.
3. Draft a business plan
Now it’s time to write the blueprint of your business. A great business plan should chart the path of your company from infancy to success while being able to attract investors to provide the financing.
Your business plan ought to include the following sections:
- Executive summary – An overview of your business and why it will be successful
- Description of business – Explain the advantages of your business and the problems it solves
- Market research – Provide research on your industry, target market, and potential competitors
- Organization and staff – Detail the nuts and bolts of your business; how it’s structured and who will run it
- Product or service description – State what you are selling or offering
- Marketing plan – Explain your strategy for attracting customers
- Fundraising – The money you’ll need in the next five years to grow your business and how you’ll spend it
- Financial forecast – Data and balance sheets providing a financial forecast for your business
- Appendix – An optional section with supporting and/or requested documents like resumes, letters of reference, permits, etc.
4. Secure funding
Every business needs money to get off the ground. In fact 82% of businesses that fail do so because of a lack of cash flow, U.S. Bank found in a recent study. Your business plan should include a detailed estimate of the funds you’ll need to cover expenses for at least a year, so now it’s time to acquire the money.
If you aren’t wealthy enough to self-fund your business, you can choose from a number of other funding options. These include a loan from the U.S. Small Business Administration, taking out a loan from a commercial bank, launching an equity crowdfunding campaign, or securing funding from an angel investor or venture capitalist group active in Pennsylvania.
An angel investor is a wealthy individual who invests their personal finances in a startup, typically in the beginning stages, whereas a VC is a group of investors that will fund a business throughout its existence.
Which route you choose depends on the specifics of your business: angel investors typically invest smaller sums to help get a startup off the ground, while VCs invest larger sums of money in exchange for a greater say in the operations of a business. Smaller startups usually opt to pursue funding from angel investors. Plenty of both types of investors are operating in Pennsylvania.
Pennsylvania Angel Investors and VCs
- PA Angel Network – A group of 18 making investment decisions for over 500 individual angels contributing to the network’s fund. PAN uses Gust, the world’s largest online startup network, to review entrepreneur applications.
- Robin Hood Ventures – A Philadelphia-based investment group that has been active in investing in early-stage startups since 1999. The group typically makes investments ranging between $250K and $1 million.
- Blue Tree Allied Angels – Since 2003, this group has been the most prominent angel network in western Pennsylvania, specializing in high-tech field investments.
- Wharton Alumni Angels – A young investment group founded in 2016 with a membership mainly comprising University of Pennsylvania alumni with a focus on seed-stage and Series A investments. The group does not focus on a particular industry, and instead chooses portfolio companies based on the most promising pitches.
Additional Investor Resources
- AngelList: Pennsylvania Angel Investors – A directory of 5,000 investors interested in funding PA startups. Click individual listings to learn more about an investor’s professional background and areas of interest.
5. Decide on a legal business entity
The form of business entity you choose will affect many factors going forward. There are 3 main options to decide from:
- Sole proprietorship – The name for running a business by yourself. Legally, you and your business are one and the same, with no separate legal entity for your business. A partnership is legally identical to a sole proprietorship, except that it comprises two or more people.
- Corporation – A complex legal structure that is a separate entity (providing legal protection to owners) from the owner and comprises directors, officers, and shareholders.
- LLC – AKA “Limited Liability Company”, this is a hybrid entity between a sole proprietorship and a corporation that possesses advantages of both. An LLCs provides the liability protection of a corporation, yet isn’t subject to double taxation as the profits go through your personal tax return.
Nowadays, LLCs are the option of choice for small business owners as they are easy to manage and provide the benefits of a corporation while lacking their complex structure. Taxwise, they operate more like a sole proprietorship.
You may want to consult with an attorney to help decide which entity works best for your business.
6. Register your business
After you settle on a business entity, it’s time to register your business with the state of Pennsylvania. The registration process follows different paths whether you are establishing a sole proprietorship, an LLC, or a corporation.
For sole proprietorships
Sole proprietors using their legal name for their business are not required to register with the state government and may move on to step 7. However, those that intend to use a business name different from their legal name must register a fictitious business name with the Pennsylvania Department of State.
First, search the PA Department of State Business Entity Database to confirm that your chosen name is available for use in the state. If it’s free, you can go ahead and file your fictitious name. The application form is available here. Once you fill out the form, mail it to the address at the top of the form. The filing fee is $70.
The last step is publishing an advertisement in two newspapers in the county in which your business is located, one of which must be a legal newspaper. There’s no need to send proof of your advertisements to the Department of State, but it’s wise to keep copies of the ads for your records.
For LLCs and corporations
The first step in forming either of these two entities is assigning a registered office (typically referred to as a registered agent in most states) to handle service of process and other government correspondence on a business’s behalf. Your business’s registered office must have an address in the state, however, you can appoint yourself if you choose to do so.
Next, perform a search to confirm that your desired business name is available for use in the state, and then you can move on to filing the legal document forming your business in Pennsylvania.
- An LLC is created in Pennsylvania through the filing of a Certificate of Organization. This can be done online, or through the mail. The processing fee is $125.
- A corporation is created in Pennsylvania through the filing of Articles of Incorporation, either online or through the mail. The processing fee is $125.
Visit the Department of State for a directory of all the forms issued pertaining to business registration.
7. Acquire federal and state tax IDs
Now you should obtain a Federal Employer Identification Number (EIN), which is like a social security number for a business and allows you to open bank accounts, handle payroll, and file taxes.
Each state has its own laws and taxes regarding businesses. Visit the Pennsylvania Department of Revenue: Business Taxes portal to learn more about state taxes that may apply to your business. You can also register your business, and file taxes online through the portal.
8. Open business banking and credit accounts
Opening a bank account for your business is crucial because it allows you to separate company assets from your personal assets, and makes filing taxes a lot easier. This is a recommended step, even if you are operating a sole proprietorship.
It’s also a wise idea to obtain a credit card for your business because it will help you isolate business expenses and build up credit for your company, which may help in securing investment in later stages.
Banks operating in Pennsylvania good for small businesses
9. Get the necessary licenses and permits
Depending on the type of business you are opening, you may need to apply for a number of permits and licenses to operate legally. For example, a restaurant will need a liquor license, and a pawn shop will need a reseller’s license. The paperwork may prove a hassle, but it’s a necessary ordeal that will protect you from fines, lawsuits, and other legal hazards.
Pennsylvania makes it easy for business owners to get the licenses and permits they need to operate. With the Pennsylvania Licensing System, you can register an account, apply for licenses, and keep track of the status of applications and previously acquired licenses all in one place. The site also offers an application checklist to fill you in on the documents you’ll need to complete the application.
10. Choose a location
Whether you are running an online business or opening a restaurant, location is everything. Be aware of the demographics of the neighborhood or town that you are considering: Are the local residents likely to visit your business? Will nearby competitors take a share of your potential profits?
Entrepreneurs starting a business in Pennsylvania must contend with higher than average tax rates, however, the cost of living is below that of nearby states like New York and Massachusetts, which relaxes the expense burden, somewhat.
For those not opposed to urban life, Philadelphia, the state’s largest city, is the best city in PA to start a business in. The City of Brotherly Love is immensely livable, with plenty of history, great food, decent sports teams, and a culture all its own.
Pittsburgh is a viable alternative, boasting an average tech salary in the top 10, adjusted for cost of living.
11. Get insured
No matter what type of business you form, buying insurance coverage to protect yourself in the case of property damage or legal action is a good idea. In fact, businesses with employees are required by the federal government to have two types of insurance, while others are strongly encouraged, or required at the state level, depending on your business type. Consult with a licensed insurance agent to find out which types of insurance you should get.
Required forms of insurance:
- Workers’ compensation: Covers medical costs and disability benefits if an employee is injured or becomes ill on the job.
- Unemployment insurance: Provides benefits to workers after a loss of job through no personal fault.
Recommended forms of insurance:
- Professional liability insurance: Covers losses as a result of property damage, medical expenses, libel, slander, and negligence claims.
- Commercial property insurance: Covers property damage to business owned properties and possessions as a result of fire, theft, or storm.
- Disability insurance: Provides short-term benefits for employees suffering an illness or injury. Required in certain states such as California, New York, and Hawaii.
12. Develop an internet presence
Establishing an identity on the web is an important investment in a business’s future development. Here are some key steps in the process:
- Register a domain name for a company website (You can use domain.com, Bluehost, GoDaddy.com, Namecheap.com). Design the website and fill it with content.
- Create profiles on the popular social media services (Twitter, Facebook, Instagram)
- Register a Google profile for your business
- Create accounts on review sites such as Yelp, Google Reviews, and TripAdvisor
Pennsylvania small business resources
- Pennsylvania Department of State: Registration Forms – The forms necessary for forming a corporation or LLC, registering a fictitious name, and more, all in one place.
- Pennsylvania Department of Revenue: Business Taxes – Register an account and file to pay state-administered business taxes.
- Pennsylvania Licensing System – Keep all of your business license and permit applications in order.
- Pennsylvania Small Business Development Center – A statewide organization dedicated to boosting state entrepreneurs through a free consultation, occupational workshops, and more.
- Keystone Edge – A great site for PA’s startup community, with the latest startup news and spotlights on successful area businesses.
- NFIB: Pennsylvania – The Pennsylvania chapter of the nation’s leading small business advocacy group.
- Dreamit Ventures – A Philadelphia accelerator program with over 11 years of experience that gives accepted applicants the choice of participating in-person or online in 3 different programs.
- 1776 Philadelphia – One of the largest incubator networks in the Northeast corridor, boasting over 800 participating startups utilizing the services of over 1,000 mentors.
- AlphaLab – A leading software incubator located in Pittsburgh. Accepted startups participate in an intensive 4-month program.
Pennsylvania SCORE chapters
The nation’s leading business mentoring network has numerous chapters spread across the Keystone State: