A Pennsylvania fictitious name does not provide liability protection and other important benefits. Most business owners have heard about the pros and cons of different business structures but do not fully understand the implications for their businesses.
Fictitious names are commonly used by sole proprietorships and general partnerships, which are the simplest and least burdensome forms of business ownership. Many people choose these forms of ownership because they perceive other structures to be overly complex, which is not entirely true.
What about costs? Most people think a fictitious name is the least expensive type of business name registration. This is simply not true.
While sole proprietorships and partnerships were once the norm, over the last couple decades, the landscape of business structures has changed with the emergence of limited liability companies (LLC). LLCs have completely changed the game for small business owners. Small business owners that are armed with the right information stand to take advantage of the business structure that is right for them.
This blog post will outline several myths surrounding fictitious names. First I’ll explain the reasons for registering a fictitious name.
Reason to register a fictitious name
A Pennsylvania fictitious name satisfies the minimum requirement for registering your business name. Unless your business name contains your legal name (surname), you have to register a fictitious name or an entity, such as an LLC or corporation. With a fictitious name, you remain a sole proprietorship (one owner) or a general partnership (two or more owners) by default. Many people register a fictitious name because they don’t want to form an entity.
Registering a fictitious name is sufficient for meeting the name registration requirement but has serious implications and risks. This brings us to the first myth about fictitious names.
Myth 1 – A Pennsylvania fictitious name is protected
A fictitious name carries no name protection whatsoever. Anyone can come along and register a business entity even if an identical fictitious name has already been registered. That means that you can register a fictitious name and find out down the line that someone has registered a corporation or LLC with the exactly same name. On the other hand, if you registered an LLC or corporation, the state would reject any registration under the same name.
A fictitious name can be protected by taking the extra step of registering a trademark, which provides protection throughout the United States. While an entity (such as an LLC) gets name protection in Pennsylvania, it would need to register a trademark to get the same protection nationwide. Registering a trademark is a more costly and involved process, but a worthwhile one if you wish to achieve maximum protection of your name. To fully understand the name protection implications, contact an intellectual property attorney for more information.
Myth 2 – Most small businesses don’t need to be an entity
Using a Pennsylvania fictitious name and operating as a sole proprietorship or general partnership exposes you to unlimited legal liability risk. In these cases, you are the business, which means that all of your personal assets are exposed in the event of a lawsuit. You could lose your home, car, savings, retirement… everything. LLCs and corporations are limited liability entities, meaning your personal assets are not at risk, provided you comply with the law and properly maintain the entity (more on this later).
In today’s society, lawsuits are more common than ever. While certain businesses inherently carry more liability than others, it is fair to say that very few business owners fully understand the liability risks they face in business. Lawsuits typically arise over violation of a contract, whether in writing or verbal. Any business that has physical property where someone can be injured is exposed to unlikely but serious risk.
Lawsuits can arise from any of the following:
I am always surprised by how many sole proprietors are out there that are exposed to serious risk. For instance, my local farmer’s market has several sole proprietors who are not only in the heavily regulated and risky food preparation industry, but also have employees, a physical presence, and substantial income. Any one of these factors represents notable liability risk. In my opinion, all business owners should evaluate their liability exposure prior to doing business and periodically reevaluate their exposure as their business grows.
If you are looking to attract financing or investment, being a sole proprietorship or general partnership will not get you very far. Banks and investors want to see that you are an established business, and having an entity such as an LLC or corporation helps provide that credibility. Clients and vendors also take note of whether you are a registered entity, and you may lose business if you operate solely under a fictitious name.
Myth 3 – Registering an entity is costly and complicated
Few people actually understand the economics behind Pennsylvania fictitious names and business entities, which creates a lot of misinformation and confusion for entrepreneurs. Take a look at the the following registration costs:
Pennsylvania fictitious name – $270, estimated
It costs $70 to register a fictitious name with the Pennsylvania Department of State. The law requires you to publish notice in two newspapers in your county. Publishing can range anywhere from $150 to over $200 depending on the newspapers and the length of your advertisement.
Pennsylvania LLC – $125
The Pennsylvania Department of State charges $125 for an LLC and there is no publishing requirement. This saves you considerable money upfront!
Pennsylvania corporation – $325, estimated
The state charges $125 and requires you to publish notice of your incorporation. Publishing varies but averages around $200.
The forms for registering an LLC are virtually no more complicated than the forms to register a fictitious name. Whether an LLC requires more business registration requirements is the subject of a more detailed discussion but in most cases is not the case. For instance, an LLC may be required to obtain a federal tax ID (EIN) however many sole proprietors obtain an EIN anyway.
Myth 4 – It is costly to have an entity
So at this point you’re probably saying that it may be cheaper to register an LLC but there are substantial additional costs involved with an LLC. Let’s break this down and see if it is true.
In many states, LLCs have to file annual reports, which can be costly. In Pennsylvania, there is no annual report requirement. Only restricted professional LLCs (doctors, lawyers, CPAs, etc.) have to file an annual report and pay an annual fee. For all other LLCs, THERE IS NO ANNUAL FEE!
What about taxes? Paying taxes as a corporation is an involved affair, but paying taxes as an LLC is no different than paying taxes as a sole proprietorship or partnership. That is because an LLC is taxed as a sole proprietorship or partnership. Most accountants do not charge LLCs more than sole proprietorships or partnerships to file their tax returns.
What other costs are involved? Regardless of your business structure, it is a good idea to involve an attorney to help you with your legal documents. While entities such as LLCs certainly bring about the need for more legal documentation, your decision whether to hire an attorney or to use free templates is purely a matter of preference. Many startups defer most or all of their legal expenses until they have the money to spend and their businesses have grown to the point where there is more on the line.
Myth 5 – Maintaining an entity is complicated and time-consuming
So now you’re saying, okay fine, I understand the costs aren’t higher for an LLC, but what about all those added complexities and maintenance requirements? It is true that corporations have numerous formalities they have to follow such as meetings, minutes, and reporting. That is not the case for LLCs. LLCs do in fact have some requirements such as having an organizational meeting and having an operating agreement. But having a meeting and creating a document governing the business and the relationship between the owners are all steps you are already taking or you should be. It just makes good business sense.
An LLC is designed to be informal and flexible. It was created for small businesses and was designed to make the lives of business owners easy. Learning the requirements and following them is not difficult. If you are investing your time and money in starting and growing your business, ask yourself, does it not make sense to invest in creating some basic legal protections and legitimacy?
When a Pennsylvania fictitious name is appropriate
You may ask when a fictitious name is appropriate. The most justified use of Pennsylvania fictitious names is by existing entities that wish to build a brand under a different name. Since fictitious names carry no inherent protection, the entity that owns a fictitious name typically registers a trademark either nationally or internationally. In such scenarios, the business has liability protection provided by the entity and name protection provided by the registered trademark.
]In my opinion, a Pennsylvania fictitious name is rarely justified for a small business in place of an entity. The costs of a registering a fictitious name are greater and they carry more risk. These costs and risks outweigh the additional complexity of an LLC, which as I’ve stated is minimal.
Some companies wish to leave their corporate designator, such as “LLC”, off of their name. The state does not allow fictitious name registrations for this purpose.
The needs and resources of a large multi-national corporation are very different than those of a small business. Most small businesses should register an entity instead of a fictitious name. Fictitious names will continue to be used by businesses of varying sizes however as the education improves, LLCs will continue to become more and more common.
If you are testing the market or doing something as a hobby, then you may decide to risk it and not register anything. But if you find get market validation and you decide you’re going to turn your hobby into a business, then you should consider skipping the name registration and go straight to an entity.
There you have it, the most important considerations you need to make before registering a Pennsylvania fictitious name. Were you surprised to hear these five myths dispelled? Please leave comments below!
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