If you're thinking of running a limited liability company in New York, you need to know the pros and cons of this business structure before you file.
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by Diane Faulkner
Diane is a writer, speaker, and human resource consultant with over 30 years of experience working in and covering em...
Updated on: March 18, 2024 · 15 min read
More than 26,000 New Yorkers decided to go into business for themselves in September 2023 alone. If you're one of the thousands who are thinking about starting a small business for yourself, you have many things to consider, not the least of which is the type of business structure you are going to form.
To make the best decision about whether or not to run an LLC in New York, you first need to know the different types of business structures available to you.
There are seven common business types:
Let's break them down.
A sole proprietorship is the simplest business entity type, especially for small business owners. Generally, there would be either a single person or a married couple responsible for all business profits and debts. This form of business is generally the best option if you intend to work alone. It is especially appealing because you record your income and expenses on your personal tax returns.
You record profits and losses on the IRS Schedule C form, and the amount transfers to your personal income tax return. Your losses offset your earned income from other sources.
With this form of business, you have complete ownership and make all business decisions. You also don't have to file articles of organization with the state.
Con: The biggest disadvantage of a sole proprietorship is that you're personally responsible for your company's debts. Your personal assets, such as your home, car, personal bank accounts, and personal property, are at risk should you have to satisfy a business debt or settle a legal claim against your business.
If you are going to start a small business with at least one other person, a general or limited partnership are two options to consider.
In a general partnership, each partner assumes responsibility for business debts. A limited partnership (LP) has both general and limited partners. General partners own and operate the business and assume liabilities, while limited partners are only investors. They don't have any control over the business and aren't subject to liabilities.
In a limited liability partnership (LLP), all partners have limited liability, and the LLP protects everyone from debts against the business and the actions of the other partners.
A limited partnership model isn't the best model if you aren't going to have multiple investors, as the administration is complex and there is extensive filing required. A general partnership is simpler if you expect to have two or more partners actively involved in the business.
Cons: A partnership doesn't pay tax on the business income, but profits and losses pass on to the partners. Partnerships are also typically more expensive to start as you must extensively use accounting and legal services.
A nice feature is that C corporations are completely independent of shareholders.
Personal assets are safe in the case of a lawsuit or debt. C corporations also have an advantage when raising capital because they can raise money by selling stocks.
Cons: Formation cost is high. This business structure requires extensive reporting and recordkeeping, and operational processes are complex. C corporations pay income taxes on profits and, in some cases, can experience double taxation.
An S corporation has additional tax benefits and the liability protection of corporations. The personal assets of owners are safe in this business structure. S corp owners can use the cash method of accounting if they don't have inventory. It is also easier to attract more capital because they can have up to 75 shareholders.
Cons: S corporations must file articles of incorporation and hold director and shareholder meetings. Shareholders must also be allowed to vote on major decisions. An S corp can only issue common stock, which can affect its ability to raise capital.
A benefit corporation, commonly referred to as a B Corporation or B Corp, is a for-profit organization led by mission and profit. Their tax category is the same as C corporations, but B Corporations focus more on purpose, accountability, and transparency.
Con: A company must receive a certification that recognizes the company's dedication to social and environmental responsibility and transparency.
As the name implies, nonprofit (sometimes called not-for-profit) organizations focus on philanthropic work. They receive tax-exempt status and don't pay taxes on profits because their work benefits the public.
Cons: Organizational rules are similar to those of a C corp, but they also have special rules regarding profits.
A limited liability company, also called a limited liability corporation, is one of the most common entities formed in New York. An LLC allows owners (called “members"), partners, and shareholders to limit their personal liability to protect personal assets. Though not incorporated, an LLC structure enjoys the limited liability of a corporation. For tax purposes, you can file an LLC as a sole proprietorship, partnership, or corporation.
While you may want to create a single-member LLC, you should know that there aren't any limitations on the number of shareholders the business can have. Also, any member can fully participate in the business operation. The limited liability protection of an LLC protects the business owners from being personally liable for bankruptcy or lawsuits against the company.
There's also flexibility concerning profit distribution; LLCs don't have to distribute the company's pre-tax profits and losses proportionate to the money an investor puts in.
Cons: How the business will pay taxes can vary by state. Tax authorities consider LLC owners as self-employed, so they must pay self-employment taxes.
Aside from protecting your personal assets from business debts and lawsuits against your company, there are many other advantages to choosing an LLC.
An LLC has the most flexibility regarding how it's taxed for federal tax purposes. A single-member LLC has the choice of being taxed as a sole proprietorship, an S corporation, or a C corporation. A multiple-member LLC can choose to be taxed as a partnership, as well as an S corp or C corp. A tax expert can help you make the best decision for which choice is right for your situation.
Unless the LLC chooses to be taxed as a C corp, all of your LLC's profits will pass directly to the members (LLC owners). Members then need to pay federal and state income tax and federal self-employment tax on their share of the profits, even if they don't actually receive a share of the profits.
In New York, LLCs that choose to be taxed as a corporation are also subject to a business franchise tax.
An LLC has no restriction on the number of members it can have, whereas an S corporation cannot have more than 100 members. A C corporation can have more members but will be subject to double taxation and more regulation regarding its operations.
Forming an LLC is less complex than forming a corporation. All New York requires is that you file articles of organization with the New York Department of State, Division of Corporations (commonly referred to as the New York Secretary of State). There's no requirement for an LLC to hold annual meetings or keep detailed minutes as a corporation would.
Other than borrowing money or selling stock, it is easier for an LLC to raise capital than a sole proprietorship or a general partnership. The latter business forms cannot take on investors without making them partners. With an LLC, you can add new members without giving them a full say in management.
While there are many advantages to running an LLC, there are some other disadvantages to consider before making a final structure decision.
In New York, there are a few other disadvantages, like:
The good news is that you can still succeed as an LLC in New York. It just takes a little additional time and money to do so.
Creating multiple LLCs is perfectly legal. There isn't a limit to the number of LLCs you can register. That said, each LLC has its own set of paperwork you'll have to contend with. Taxes, too, are individual for each LLC rather than one aggregate whole. You'll also have to have multiple business licenses, Employer Identification Numbers (EINs), and separate fees, all of which add up to more administrative time as well as money spent.
There are three big benefits to having several LLCs.
Of course, in any multi-business situation, you'll want to consult with a business attorney and accountant to make the best decision. You should just be aware of the advantages of having multiple LLCs.
Yes. A financial institution is going to require that you obtain a federal Employer Identification Number (EIN) before you apply to open a business bank account.
You can go to the Internal Revenue Service website to start your application. Simply click the box for limited liability company, enter the required information, and submit your application.
To open a business bank account for your New York LLC, you will need to provide personal identification, such as a passport or driver's license, your home mailing address, birth date, personal phone number, email address, and Social Security number. Non-U.S. residents must provide an individual taxpayer identification number (ITIN).
You will also need to provide your federal Employer Identification Number (sole proprietorship LLCs with no employees may use the owner's Social Security Number). The financial institution will need your business name, the address of your New York registered agent, phone number, LLC formation date, business type, and industry type. If your industry requires it, you will need to provide proof you're licensed to conduct business.
You will also need to provide your business name reservation form, articles of organization, and the New York LLC operating agreement (if you are not operating as a sole proprietor) that shows you are authorized to open an LLC bank account on your business' behalf. If there are any other LLC owners, they may be required to apply for the account with you.
Yes. A federal tax identification number is the same as an employer identification number or EIN. The number has nine digits and determines and tracks your business' federal tax obligation.
You can visit the Taxation and Finance website's Make a Payment page.
Yes. Every applicant must register with the New York Department of State or the County Clerk's office of the county where the business address is located. If you want to use a trade name, however, you must file with the New York state department.
Yes. A plethora of websites can lead you through how to write an operating agreement, but because of the complexity, LLC operating agreements are typically drafted by lawyers.
Yes. While each state has different requirements, you must at the very least include your LLC name, description or purpose of your LLC, LLC address, name and address of your registered agent or registered agent service, information about the LLC members, manager, and officer, and the formation date.
A new LLC must publish legal notices in two local newspapers for six weeks, obtain an Affidavit of Publication, and file a Certificate of Publication with the New York Department of State.
With an LLC, there is more flexibility in choosing how the Internal Revenue Service taxes your business earnings. There is no set of tax rules that specifically apply to LLCs, as you can choose to use sole proprietor, partnership, or corporate tax rules.
The Uniform Commercial Code, or UCC, is a set of laws that regulate the sale of personal property and other types of transactions. If you've ever purchased a business, you likely signed a UCC-1 statement, which says the title remains in the lender's possession until the loan is paid off.
No. A written operating agreement is the only recognized type.
No. If you are not a New York resident, you can still open an LLC in New York if the business is in New York.
You can find information on the New York State Department of State website.
The address is One Commerce Plaza, 99 Washington Ave., Albany, NY, 12231-0001. The department is open during regular business hours.
The New York State Department of Taxation and Finance address is W. A. Harriman Campus, Albany, NY, 12227. The local offices can be found on the NY Connects website.
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