limited liability company

Choosing a Business Entity in New York

by Zachary Nathanson on May 2, 2011

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When you start a new business or start-up in New York, there are some major legal hurdles you’re going to encounter. It’s important to examine these issues carefully because they’re often confusing. Each issue should be discussed with an attorney because they can affect your business costs, tax structure, business organization, and liability. In forming a new business you need to choose a business entity type. There are four general types of business entities in New York: sole proprietorships, partnerships, S-corporations, and LLCs.

  • Sole Proprietorship: This is a type of business where one person owns all the assets of that business. In a sole proprietorship those assets that belong to you as an individual and not a single shareholder or a corporate parent. With this type of business entity there are low start up costs, there’s less paperwork involved, and there are no corporate taxes. The big problem with sole proprietorships is that you are personally liable for all your debts. Creditors can go after your personal bank account or even your house to absolve your debts.
  • Partnerships: A partnership is where two or more people jointly own and carry a business for profit. Under this type of entity, those entered in the partnership agree to share the business’s profits and/or losses. Unlike corporations, the company does not itself pay any tax, but the partners pay through their income or losses on their individual tax returns. In a partnership both partners are jointly and severely liable for business debts. Creditors can go after you for the debts of your partnership.
  • S-Corporations must make sure there are no more than 100 stockholders, and each must have consent. S-corporations are taxed through the owner’s income without taxing the entity itself, much like in a partnership.  All profits pass on to the owner without any tax from the shareholder to the owner, unlike in a corporation. The stockholders must be a U.S. citizen or a resident and can only have one class of stock. The owner of an S-Corporation can potentially use this structure to pay himself a smaller salary and pay less in taxes, however this can pose significant problems with the IRS. In a case in Iowa the head of an S-Corporation paid himself far less than his qualifications suggested. The IRS filed a case and succeeded in their suit.
  • Limited Liability Corporations (LLC) are a hybrid business entity where its members are treated as shareholders of a corporation but for tax purposes the members are treated as if they’re in a partnership. In LLC’s the owners are not personally responsible for the debts as they are in sole proprietorships and partnerships. Under certain circumstances an individual may be liable: if a member personally guarantees a debt, if the personal funds are intertwined with the funds of the LLC, if there is little capitalization or insurance, or if it fails to pay taxes or violates a state law. A major issue with LLCs is their cost that include formation fees, filing fees, and annual state fees. There are, however, lower insurance costs.

The Law Office of Frederic R. Abramson represents start-up businesses in New York State. If you have any questions about choosing a business entity in New York, contact me at 212-233-0666

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New York Tech Community Looks to Repeal LLC Publication Law

by Fred Abramson on April 7, 2010 · 7 comments

Crain’s New York Business reports that members of the group of New York Tech Meetup are working to repeal the law that requires companies to pay a publication fee to form a New York Limited Liability Company (LLC).

Publication fees range from $1000 to over $2000 and are a burden on many start-ups. The rates depend on the county where the business is located.

The New York LLC publication law is as follows:

1.  Within 120 days of formation of a New York LLC, the LLC must publish a notice in two (2) newspapers, once a week, for a period of six (6) consecutive weeks, as follows:

(a)  The notice must include the name of the LLC, the date of filing, the county in which the office is located, the full street address of the LLC, the purpose of the LLC, and a statement regarding service of process on the secretary of state. The information must be precise… there’s no room for errors.

(b)  The notice must be published “as though the copy or notice were a notice or advertisement of judicial proceedings.”

(c)  The two (2) newspapers must consist of one (1) weekly paper and one (1) daily paper of general circulation in the county where your LLC was formed. The newspapers must be designated by the county clerk for such publication.

2.  After the LLC publishing is complete, you must obtain affidavits of publication from the newspapers in which the legal publishing was completed.

3. The affidavits of publication must be filed with the state, along with other information contained in a Certificate of Publication. There are fees for this filing.

4. If you fail to comply with the LLC publishing law within 120 days of formation, the authority of your limited liability company to carry on, conduct or transact any business in NY state shall be suspended, effective as of the expiration of such 120 day period.

5. The suspension will be annulled upon the filing of the Certificate of Publication, even if filed late.

The main beneficiary of the publication law is print publications like the New York Law Journal and Crains New York Business.  Hat tip to Crains for disclosing the conflict. With advertising fees in traditional media in a free fall, expect newspapers to fight for this important source of revenue.

The purpose of the publication requirement is to notify members of the public to know who they are doing business with.  I have never heard of anyone who reads the legal notices of any newspaper.  Moreover LLC information can easily be searched for free on the New York State Department of State Corporation and Entity Database.

The time has come to abolish the New York LLC publication requirement is law from an era whose time has passed. What do you think?

The Law Office of Frederic R. Abramson represents businesses in New York.  If you have a question regarding LLC formation contact me at 212-233-0666.

LLC New York Business Taxation

by Fred Abramson on March 3, 2010 · 1 comment

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The IRS allows owners of LLC’s to make the decision themselves about how they want the company to be taxed.  The LLC can be taxed as in two general ways:

  • As a pass-though entity, like a s-corporation, sole proprietorship
  • Like a c-corporation

What is a pass though entity?

Usually business owners planning on forming a LLC at the startup stage decide that the LLC should be a pass through entity. What this means is that the corporation itself does not pay any taxes.  All tax profits and losses are reported by each business member on their tax return.  Like a sole proprietor, each owner files a schedule c.

If your LCC has more than 1 member be aware that each member must file the IRS Form 1065 and must be the same one used by the LLC.

How to Change your tax treatment

What makes LLC’s unique is the ability of its members to change the way it is taxed. You can elect to be taxed as a S or a C corporation.  To make this change, you only have to check the box that you wished to be taxed in form 8832 and simply file it with the IRS.  You can make this election at any time.  You will now be required to file corporate tax returns.

If you are interested in the entity being taxed as an S, simply file IRS Form 2553.  Be aware that to file as an S corporation, you have to meet its conditions.  Unfortunately, if you wish to change the way your LLC corporate taxed back to a partnership, you will have to wait five years to do so.

If you have any questions regarding starting a business in New York and tax issues related to it, contact me at the Law Office of Frederic R. Abramson at 212-233-0666.

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