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LLCs + Corporations

Starting Your Business

Company Formation

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.

Location Location Location

Generally speaking, the first question we try to answer is where the business should be located. If you’re a start-up looking to go out and raise capital, the answer to the question may be Delaware or Nevada. Both of these states are popular choices because they have developed corporate-friendly tax structures and legal regulations. Additionally, incorporating in Delaware may make your business more favorable to angels, venture capitalists, and private equity firms, who are generally more familiar with Delaware laws and regulations.

However more often than not, the best state to open your business is the state you live-in and are operating your business out of. For most of the businesses we work with that state is New York.

Structuring Your Business

In New York, there are four primary types of business entities, each with its own pros, cons, and formation requirements. They are reviewed in detail below.

Sole Proprietorships

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.

Limited Liability Companies (LLCs)

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-Corporations

‘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.

S-Corporations

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 and Knowlton 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.