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.
Business structure types
There are seven common business types:
- Sole proprietorship
- Partnership
- C corp
- S corp
- B Corp
- Nonprofit
- Limited liability company
Let's break them down.
Sole proprietorship
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.
Partnership
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.
C corp
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.
S corp
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.
B Corp
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.
Nonprofit
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.
Limited liability company
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.
LLC pros
Aside from protecting your personal assets from business debts and lawsuits against your company, there are many other advantages to choosing an LLC.
Federal tax implications
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.
Flexible ownership
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 it will be subject to double taxation and more regulations regarding its operations.
Simple creation and operation
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.
Ability to raise capital
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.
Disadvantages of a New York limited liability company
While there are many advantages to running an LLC, there are some other disadvantages to consider before making a final structure decision.
- More administrative requirements. A limited partnership (LP) and sole proprietorship have fewer administrative requirements than an LLC. Since little legislation exists for LLC operations, you must create an LLC operating agreement.
- Registered agent requirement. A registered agent is a person or company you designate to receive official legal documents for your business, such as lawsuit papers, subpoenas, wage garnishments, and other government notices. Unlike a sole proprietorship or general partnership, an LLC, LP, LLP, and corporation are all required to have a registered agent. If you hire outside registered agent services, you can add between $40 and $500 per year to your annual cost of doing business.
- LLC taxes are more complex than corporate taxes. In many states, an LLC is subject to an additional capital value tax, also known as a franchise tax, which is not charged to corporations, so there can be double taxation. The fee allows the owner to benefit from limited liability. The tax can come as a flat fee or as a percentage of profits and revenue.
- LLCs are sometimes treated as corporations when doing international business. In the United States, an LLC is a pass-through entity, but not all countries treat LLCs in the same way, so double taxation could be in your future. If your LLC shows a profit for a specific period, the member is taxed on the profits even if the share is reinvested or distributed to shareholders. In addition, an LLC member not participating in the company management structure will not receive tax benefits from LLC income.
- Members who work for the LLC are self-employed. As a result, those members pay Social Security and Medicare tax, often at a higher rate than the corporate taxation rate.
- Establishing an LLC carries substantial filing fees. You also need to publish a letter of intent to form an LLC in your local newspaper, which is expensive in some cities.
- Checks written to LLCs cannot be cashed. You must deposit checks into a business account. Some banks charge a higher fee for an LLC account than for a sole proprietor account.
- LLCs must have detailed records. Owners must keep careful records and meeting minutes to ensure they maintain personal and business assets separately.
Three additional disadvantages of operating an LLC in New York
In New York, there are a few other disadvantages, like:
- High sales tax rates. In New York, the sales tax rate is 4%. With local taxes added in, however, the total tax rate can go up to as high as 8.875%.
- High state taxes. New York's graduated individual income tax ranges from 4% to 10.9%. There are also some local jurisdictional income taxes. The corporate tax ranges from 6.5% to 7.25%.
- High LLC startup fees. The fees start with a name search fee of $5. To submit your LLC application, you pay a fee of $200. Other required fees are $200 for your articles of organization and $50 for your certificate of publication. All told, the cost is $455.
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.
Can I have more than one LLC in New York?
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.
What are the benefits of multiple LLCs?
There are three big benefits to having several LLCs.
- Multiple LLCs limit liability. An LLC already has limited liability. Making a different LLC for each new business further segments and limits the potential of liability between your companies. Say you have four businesses. One of them fails. The other three are not on the hook for anything that goes wrong. You can shutter the failed business with no risk to the others. Real estate managers and investors typically form a new LLC for each individual property they own.
- Multiple LLCs are easier to split. As an entrepreneur, you might want to sell a business when it's profitable to do so. If several of your businesses are under one LLC, selling just one business becomes a complex task. You must segregate and bundle up the paperwork, assets, and contracts associated with the business you want to sell. If you have each business under its own LLC, however, the extra paperwork becomes a benefit. It's much easier to tie up loose ends and sell the whole package without worrying about transferring ownership or pulling the business out of a multi-business LLC.
- Multiple LLCs are separate entities. Come tax time, you'll be thankful you have multiple LLCs. Corporate taxes are complicated enough with all the loopholes. Keeping several businesses in individual LLCs opens up the opportunity for being in a lower tax bracket as they're taxed completely separately, whereas the combined income of all the businesses in one LLC would likely be in a higher bracket. There can also be opportunities to take advantage of incentives for new businesses that newly registered LLCs capture, but new businesses opened under an existing one cannot.
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.
FAQs
Is there an annual filing fee for New York 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.
Where can I get a federal Employer Identification Number?
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.
What legal documents are required to open a business bank account for my New York LLC?
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's behalf. If there are any other LLC owners, they may be required to apply for the account with you.
Is a Federal tax Identification Number the same as an Employer Identification Number?
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's federal tax obligation.
Where can I make a payment on my LLC's New York state taxes?
You can visit the Taxation and Finance website's Make a Payment page.
Can I file for a business license in the state of New York with the county clerk?
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.
Can I write my own operating agreement?
Yes. A plethora of websites can lead you through how to write an operating agreement, and using a comprehensive NY LLC operating agreement template can help you cover the basics with greater ease. But because of the complexity and long-term legal and financial consequences, especially in multi-member LLCs, it's often smart to have an attorney review or help tailor the agreement to your unique situation.
Can I write my own articles of organization?
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.
What are the New York LLC publication requirements?
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.
What are the LLC tax filing rules?
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.
How does the Uniform Commercial Code work for an LLC?
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.
Is there such a thing as a verbal operating agreement?
No. A written operating agreement is the only recognized type.
Do I need to be a New York resident to open an LLC in New York?
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.
Where can I find out information about New York's LLC law?
You can find information on the New York State Department of State website.
Where is the New York Department of State located?
The address is One Commerce Plaza, 99 Washington Ave., Albany, NY, 12231-0001. The department is open during regular business hours.
Where is the New York tax department located?
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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