Structuring your business as a limited liability company (LLC) in New York has both pros and cons. Whether a certain feature is an advantage or a disadvantage may depend upon the type of business structure being compared with creating a New York LLC.
An LLC is often seen as having the same limitation of liability for owners as a corporation, but with more potential tax benefits and less complexity. However, as will be seen, it's not quite that simple. These factors, as well as others, will be discussed in comparison with other ways of structuring a business.
Limitation of liability
LLC pros: Owners of an LLC (called members) are not personally liable for the debts of the business, including debts resulting from most lawsuits against the company. This means that a creditor of the business cannot go after the personal assets (home, car, bank accounts, etc.) of an LLC member.
A corporation and a limited liability partnership (LLP) also afford limited liability, but the LLC has other advantages that will be discussed below. A limited partnership (LP) gives limited liability to the limited partners, but not to the general partners, who are the ones who create and run the business. There is no limitation of liability for a sole proprietor or a partner in a general partnership.
LLC cons: None.
Tax treatment
LLC pros: For federal tax purposes, an LLC has the most flexibility as to how it will be taxed. An LLC with one member (called a single-member LLC) has the choice of being taxed as a sole proprietorship, an S corporation, or a C corporation. An LLC with two or more members (called a multiple-member LLC) can choose to be taxed as a partnership, an S corporation, or a C corporation. The choice will depend upon various factors, and is best made in consultation with a tax expert.
Unless the LLC elects to be taxed as a C corporation, all of the LLC's profits are passed through to the members. The members will need to pay federal and state income tax, and federal self-employment tax, on their share of the profits, even if they do not actually receive a share of those profits. LLCs that have elected to be taxed as a corporation are also subject to the New York business franchise tax.
LLC cons: None.
Flexible ownership
LLC pros: There are no restrictions on the number of members of an LLC, 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.
LLC cons: None.
Complexity of creation and operation
LLC pros: Establishing an LLC is less complex than forming a corporation. New York LLC formation requires that articles of organization be filed with the New York Department of State, Division of Corporations (commonly referred to as the Secretary of State). There is no requirement for an LLC to hold annual meetings or to keep detailed minutes, as there is with a corporation.
LLC cons: An LLC involves more complexity than a sole proprietorship and a general partnership, neither of which is subject to state requirements regarding registration, conduct of meetings, or keeping of minutes.
Registration costs
LLC pros: None. An LLC offers no advantage in terms of registration costs.
LLC cons: The New York LLC filing fees are $200 to register a new business, and $9 every other year thereafter. The fees are the same for a limited partnership (LP) and a limited liability partnership (LLP), and $125 for a corporation. Neither a sole proprietorship nor a general partnership is required to register.
Registered agent
A registered agent is a person or company that is designated to receive official legal documents for a business, such as lawsuit papers, subpoenas, wage garnishments, and other government notices.
LLC pros: There is no particular advantage to having a registered agent, although it may be a convenient way to be sure that legal documents are received and handled in a timely manner.
LLC cons: Unlike a sole proprietorship or general partnership, an LLC is required to have a registered agent. If your LLC hires an outside registered agent, it will cost from $40 to $500 per year, depending upon the agent you hire. A registered agent is also required for every corporation, LP, and LLP.
Ability to raise capital
LLC pros: Other than borrowing money, an LLC may find it easier to raise capital than if it were structured as a sole proprietorship or general partnership. Neither of these other forms of business can take on investors without making them a partner, but it is possible for an LLC to add new members without giving them a full say in management.
LLC cons: Unlike a corporation, an LLC cannot issue shares of stock to raise capital. Any new investor would need to become a member of the LLC, which is a more complicated process. Furthermore, many outside investors consider LLCs risky, and prefer to invest in corporations.
Also, banks and other lenders may be more reluctant to loan directly to an LLC than they would to a corporation. Members of the LLC may be required to personally guarantee a loan, which eliminates the limitation of liability as to such loans. However, lenders may also require a personal guarantee from the owners of a small start-up business formed as a corporation.
The New York Department of State's Division of Corporations website can provide additional information to help you determine the best way to structure your business. To ensure that your business registration goes smoothly, you may also want to consider utilizing an online services provider.
