When starting a new business, the legal structure you choose is one of the most important decisions you will need to make. Your ultimate choice will affect the way the company is run, your degree of personal liability for business debts, the taxes you pay, and more. The key is to decide which entity accomplishes your personal goals while delivering the most operational and financial advantages.
In New York, there are five primary types of business entities, each with its own pros, cons, and formation requirements. They are reviewed in detail below.
According to the Small Business Administration, more than 70% of U.S. businesses use this entity. It is easy to form and operate, no state filing is required, and you have the freedom to develop the company as you see fit. With a sole proprietorship, however, you are responsible for all of your company’s profits and losses, and must report them on your personal tax return. You are also personally liable for any debts that the business incurs.
This type of business entity is owned by two or more individuals. There are general partnerships, where you and your fellow partners share all profits and losses equally, and limited partnerships, where only one of you controls the company operations while the others contribute to and receive a portion of any profits. Like sole proprietorships, no state filing is usually required, the partners remain personally liable for all debts, and each of you must report company profits and losses on your personal tax returns.
Limited liability companies (LLC) are hybrid business entities that combine the characteristics of a partnership/sole proprietorship and a corporation. Owners report profits and losses on their own tax returns, there is no limit on the number of owners, and there is no requirement to record minutes or hold annual meetings, although LLCs are governed by operating agreements. Because LLCs are independent legal structures, members cannot be held personally liable for business liabilities, so your personal assets are not generally subject to seizure to satisfy a company debt.
Formation is comparatively easy. You draft and file Articles of Incorporation with the New York Secretary of State, apply for a business license, and obtain an Employer Identification Number (EIN) from the IRS.
‘C-corps’ are the most commonly formed corporation for several reasons. There is no limit on the amount of shareholders they can have; they offer unlimited growth potential through stock sales; and company directors, officers, shareholders, and employees are not liable for business debts. C-corporations also have a perpetual existence, meaning that they can carry on even if the owner leaves or passes away.
Potential drawbacks that need to be considered include a double taxation that occurs when revenue is taxed, both at the company level and in the dividends paid to shareholders, and the fact that shareholders cannot deduct losses on their personal tax returns. C-corporations are also relatively expensive to start and tend to experience more government oversight than other entity types. Once formed, the board of directors and owners must hold annual meetings and record meeting minutes.
To form a C-corporation in New York, you draft and file Articles of Incorporation with the Secretary of State, issue stock certificates to the initial shareholders, and obtain an Employer Identification Number (EIN) from the IRS. Since you will likely be required to remit certain payroll taxes, you will also need to apply for all necessary tax ID numbers.
Like a C-corporation, ‘S-corps’ offer limited liability protection to its members, have a perpetual existence, and are permitted to solicit investors. A major difference lies in the taxation requirements: owners report their share of profit and loss on personal tax returns, and income is not taxed twice (as corporate and dividend income). S-corporations must only file taxes once a year, whereas C-corporations must file quarterly.
Potential disadvantages that need to be considered include a limitation of 100 shareholders, all of whom must be U.S. citizens or permanent residents, closer IRS scrutiny due to the fact that payments can be distributed as salaries or dividends, and the fact that certain tax filing mistakes can accidentally terminate S-corporation status.
Formation of an S-corporation is essentially the same as forming a C-corporation, except that you are required to file the IRS form 2553 within 75 days of company formation.
Regardless of business structure you choose, Bergstein Flynn Knowlton & Pollina PLLC can advise you on the correct procedure for establishing the company and governing it afterwards. We would love to help you to make your dreams of business ownership a reality.