Should Your New York City Business Form an LLC?

Limited liability companies (LLC) are one of the most popular forms of business entity in the United States. In fact, statistics show that the formation of LLCs outpaces new corporations in many states, including New York...

Limited liability companies (LLC) are one of the most popular forms of business entity in the United States. In fact, statistics show that the formation of LLCs outpaces new corporations in many states, including New York. Limited liability companies are attractive because they offer all of the advantages of a general partnership form, with the added bonus of limited liability for its members, without all of the formalities required of a corporation.  

Advantages of Forming an LLC

When deciding what type of entity (e.g., partnership, LLC, corporation) is best suited for your business, it is important to understand the advantage and disadvantages with regard to management, liability, and taxes. Below are several key advantages that often tip the scale in favor of LLCs for many New York business owners:

• Management Options: An LLC to be formed and operated by a single owner, referred to as a member. Alternatively, several business partners can also form an LLC and determine how they would like to allocate both monetary and sweat equity. Under most state laws, members may include individuals, corporations, other LLCs and foreign entities.
• Limited Personal Liability: Unlike a sole proprietorship or general partnership, an LLC is considered a distinct legal entity that is separate from its owners. Accordingly, members of an LLC are not personally liable for the business’s debts or liabilities. While owners may lose their investment in the business, their personal assets, including a personal bank or home, are generally exempt from creditors.
• Fewer Recordkeeping Requirements: Compared to a corporation, LLCs are much easier to operate. While LLCs must file articles of incorporation with the state, their start-up and maintenance costs are typically lower than an S-corp. In addition, LLCs also have fewer reporting and record keeping obligations.
• Profit Sharing Flexibility: Unlike corporations, there is also no requirement that the profits and losses of an LLC must be allocated to members based upon their ownership percentages. As a result, members are free to establish their own distributions schemes in the operating agreement. For instance, if one member only owns 10 percent of the company, but is responsible for managing its day-to-day operations, the member may be entitled to a higher percentage of the profits.
• Tax Treatment: LLCs are typically not considered business entities for tax purposes.As a result, all federal income tax obligations “pass through” to the LLC’s members and are paid through their individual tax returns. In comparison, corporations are often subject to double income taxation. The corporation’s profits are taxed as income, and shareholders must pay income taxes on any dividends. Because corporate taxation does offer some fringe benefits, if they choose, LLCs with at least two members can elect to be treated as a corporation.

Corporations, of course, do have certain advantages that businesses should take into consideration. For instance, a corporation can go public and is more easily transferred through stock purchases, which can be attractive to investors, such as venture capitalists.

Forming a New York LLC

There are several required steps to legally form an LLC in New York. Pursuant to Section 203 of the Limited Liability Company Law, organizers form an LLC by filing the Articles of Organization with the Department of State. Organizers may be, but need not be, a member of the LLC formed and can be an entity or individuals.

The members of an LLC are required to adopt a written operating agreement. With the provisions of the operating agreement tailored to each unique business, an operating agreement generally sets out how the LLC will operate, including the scope of the LLC operations, the rights and obligations of its members, the contributions/ownership percentages of the members, the distribution of profits and losses, and the mechanisms for resolving disputes.

In accordance with Section 417 of the Limited Liability Company Law, the operating agreement may be entered into before, at the time of, or within 90 days after the filing of the Articles of Organization. The Operating Agreement, however, is an internal document of the LLC and need not be filed with the Department of State. 

Additionally, Section 206 of the Limited Liability Company Law requires a copy of the Articles of Organization or a notice related to the formation of most LLCs to be published in two newspapers for six consecutive weeks. The newspapers must be designated by the county clerk of the county in which the office of the LLC is located. 

The information in the published notice, including the name of the LLC, must be identical to the Department of State’s records exactly as set forth in the initial articles of organization.  The printer or publisher of each newspaper will provide an affidavit of publication. A Certificate of Publication, with the affidavits of publication of the newspapers annexed thereto, must be submitted to the Department of State. Failure to publish and file the Certificate of Publication with the Department of State within 120 days, will result in the suspension of the LLC’s authority to carry on, conduct or transact business. 

Key Takeaway

Since every business is unique, it is best to go over your entity options with an experienced attorney. At Scarinci Hollenbeck, our attorneys routinely assist businesses of all sizes in selecting the proper form and completing all of the requirements to get up and running.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Thomas Herndon, Jr., or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.