Congrats on choosing Philadelphia for your business location! This guide will help to distill some of the basic operational issues as you set up shop here. This guide is no replacement for legal or accounting advice tailored to your business and industry and is only intended to provide the “tops of the waves.” For more information, contact your lawyer.
What do I need to get started?
We are assuming your company is organized as a limited liability company, which is a common entity type for small businesses. There can be other compelling reasons to organize in another form, such as a limited partnership or a corporation. Do remember to:
- Register to do business in Pennsylvania (if an out-of-state company);
- Obtain a state tax ID number; and
- Obtain a Philadelphia Commercial Activity License.
These will require that you obtain an EIN number from the IRS. Depending on your organization, and after appropriate legal advice, it may make sense to incorporate a Pennsylvania limited liability company specifically for your Pennsylvania operation.
After completing these steps, your company will be legally subsisting in Pennsylvania and in Philadelphia.
What taxes do I need to pay?
The good news is that the taxes in Philadelphia are generally lower than other East Coast cities. The bad news is that there is still a lot to keep track of.
- Business Income and Receipts Tax (BIRT). You may hear locals refer to it by its former name – the Business Privilege Tax. This has two components.
- Gross receipts. This means you pay on your total revenue. $1.415 per $1,000 in revenue. The first $100,000 is exempt.
- Net income. 6.35% on net income.
Let’s say you earn $150,000 net income on $300,000 in gross receipts your first year. You owe $283 in gross receipts tax ($300k-$100k/1000 * 1.415). You owe $9,525 in net income tax.
- Net Profits Tax (NPT). For 2018, the Philadelphia Net Profits Tax is 3.8907% for residents of Philadelphia, or 3.4654% for non-residents. This may seem duplicative with the BIRT. You may be able to take a credit on the NPT based on the amount of tax owed from the BIRT.
- Philadelphia Use and Occupancy Tax (U&O) is levied on commercial property in Philadelphia. For rented commercial properties, U&O is paid by the tenant, collected by the landlord, and sent to the City monthly. This tax is based on the product of the assessed value for property tax purposes, less a $165,300 exemption, times the tax rate of 1.21%. The person collecting the tax may discount 1% as compensation for collecting and remitting the tax.
Let’s say you signed a lease for a single tenant office building at a property assessed at $600,000. You would owe $5,259.87 in total U&O, paid in monthly installments of $438.32.
- Personal Income Taxes. Pennsylvania has a flat 3.07% income tax with new exemptions and minimal deductions. For 2018, the Philadelphia City Wage Tax is a 3.8907% for residents of Philadelphia, or 3.4654% for non-residents. This may change from year to year.
- Property Tax. The City conducted a comprehensive reassessment in 2013 known as the Actual Value Initiative. This meant that the City assessments should approximate the true value of the property. Right now, the City considers the market value to be 102% of the assessed value. The tax rate is 1.3998% of the assessment, with no exclusions. Commercial and residential property is taxed at the same rate.
Going back to your business in the $600k office building, assuming your Landlord requires you pay the real estate taxes, this would be an additional $8,398.80 to pay.
- Corporate Net Income Tax. 9.99% for any corporation in Pennsylvania.
- Sales Tax. Philadelphia has a sales tax of 8%, representing 2% to the City and 6% to the Commonwealth. If you are a retailer, restaurant or similar business, you must collect this tax and remit it to the City and the Commonwealth.
- Realty Transfer Tax. This is a transfer tax that is paid upon recording a document such as a Deed or Memorandum of Lease. The law and regulations governing realty transfer tax often come as a surprise to out-of-state real estate professionals.
- Purchases and Sales. In Philadelphia, 4.278% of the value paid for the Property, representing 3.278% to the City and 1% to the Commonwealth.
- Leases. Leases for 30 or more years, including renewal periods, are subject to realty transfer tax. If you are thinking of being a landlord or a tenant under a lease with a term (including renewal periods) of 30 years or more, you need to retain a lawyer to review (1) whether the tax is triggered and (2) the amount on which to pay.
- Capital Stock Franchise Tax. You may have heard about a separate tax on limited liability companies in Pennsylvania. It was repealed effective January 1, 2016.
How Long Will it Take to Open?
This is going to be dictated by permitting and what you would like to do. The basic process is obtain a Zoning Permit, then Building Permits, and then other licenses and certifications (including applicable Health Department regulations if preparing or serving food). Applications for zoning and building permits are made to the Department of Licenses and Inspections (L&I). The total time it takes depends on (i) whether your plans conform to regulations, and conform to regulations with minimal revisions and (ii) how many other projects are in progress. As of early 2018, L&I was very active.
A new zoning code took effect in Philadelphia on August 22, 2012. Many neighborhoods across the City have been rezoned to render existing conditions non-conforming, so zoning analysis is crucial. If you are denied a zoning permit or building permit along the way, there are avenues for relief. If denied, proceed to the Zoning Board of Adjustment for zoning and Board of Building Standards for building permit. Going to the ZBA requires meeting with certain neighborhood groups called Registered Community Organizations.
Some other agencies may have jurisdiction:
- The Planning Commission will review all new construction and have hearings for major projects called Civic Design Review.
- The Historical Commission will review permits related to historic properties and properties in a historic district.
- The Streets Department.
- The Water Department for projects with a certain amount of “earth disturbance.” This number depends on the location within the City; but check for anything over 5,000 sq. ft.
What if You Have Employees?
While we are not employment lawyers, here are 3 quick tips on Philadelphia requirements:
- Ban the Box. Employers in Philadelphia may not ask prospective employees about criminal history.
- Salary History. Employers in Philadelphia may not ask prospective employees about their salary history.
- Wage Tax. An Employer must withhold this from all Philadelphia employees. The amount will differ if the employee is a Philadelphia resident or not.