The death of Pennsylvania’s capital stock tax may prompt many Pennsylvania companies to rethink their corporate structure.

From 1840 until the tax’s expiration in 2015, corporations, most limited liability companies and certain other businesses had to pay a capital stock tax based on the business’s net income and net equity attributable to its Pennsylvania activities.

The formula used to calculate the tax often resulted in a business having to pay capital stock tax even when it was not profitable.

Many businesses, particularly those involved in real estate ventures, limited or avoided capital stock tax by organizing as a limited partnership, which was not subject to the tax. LPs, however, are required by law to have a general partner, typically a corporation or LLC owning a small percentage of the limited partnership. This requirement significantly increased the costs and complexity of organizing a venture.

Now that the tax has expired, many ventures that would previously organize as LPs to avoid the tax are able to organize as LLCs. Limited liability companies offer similar advantages, including limited personal liability and “pass-through taxation, which means the taxes on the business’s profits are reported and paid on the individual owners’ income tax returns rather than on the business’s tax return. The difference is that the law does not require LLCs to have a general partner.

Pennsylvania had been gradually phasing out the tax for more than a decade, but the tax still served as a substantial source of revenue for the Commonwealth up until 2015.

It is possible that the legislature may reinstate the tax as part of a budget resolution. Thus, businesses reconsidering their corporate structure in light of the expired tax should move forward with caution.

— Kevin Israel, Meyer

Unkovic & Scott,

kfi@muslaw.com

Business Workshop is a regular feature from local experts offering updates on matters affecting business. To contribute, contact Business editor Teresa Lindeman at tlindeman@post-gazette.com.

First Published: April 12, 2016, 4:00 a.m.