What is an LLC?
A Limited Liability Company (LLC) is a business structure that is a hybrid of a corporation and a sole proprietorship or partnership, even though it is technically neither. Its hybrid nature exists from the fact that it offers the limited liability feature of a corporation wherein it shields its members from personal liability as a result of the debts or liability of the business. While on the other hand it offers the pass-through taxation benefits of a partnership.
This kind of flexibility in the structure of an LLC is what makes it popular among business owners as there are tax, legal, simplicity and other benefits involved with this type of business structure, that are not always found in other business structures.
Although registering a business as an LLC is a relatively straightforward process, there are some steps and/or requirements that must be met in order for the process to be successful, and for your business to legally come into existence.
Creating an LLC in New York. The Requirements
When starting up a new business venture, you will want to make sure that you do everything in your power to increase the likelihood of success. Setting up a formal business structure is one of such things that you should consider doing. An LLC is one such business structure. However, there are certain filing requirements that has to be met before an LLC can be registered. Here are the necessary steps and/or requirements to register a business as an LLC and information on each requirement:
- Choose Your Business or LLC’s Name
Your company must have a name that is unique and is not the same or similar to an existing business since it may cause public confusion. Also, the name you choose for your company must end in the term “LLC” or “Limited Liability Company”. Finally, you can reserve the name of your LLC for a small fee until you file your articles of organization with the state. (See below)
- Draft Your LLC’s Articles of Organization
Any and all LLC’s are required to file their Articles of Organization with the New York Department of State. An articles of organization, which is also called a certificate of organization in some states, is essentially a legal document that is used to formally establish an LLC.
The document usually contains some basic but important information about the company including the name of the LLC, the type of legal structure, names and addresses of all members and managers, the name and address of its registered agent, and more.
- Choose Your New York Registered Agent
Some states, including NY, require that a person be designated as the registered agent for a company and that he/she serve as a point of contact where all official and/or legal documents can be served. Usually, this agent must reside in the state where the LLC will be located.
- Business Licenses and Permits
Depending on the specific type of business you are going to run, you may need to obtain certain business licenses or permits from the state government. Some of the more common licenses that your business may need include a general business license, professional and trade license, sales tax permit, health and safety permits, construction, zoning or land-use permits and more.
People oftentimes find it quite challenging to know which licenses and/or permits their business may need to obtain, in addition to all the steps and requirements they need to meet to register an LLC. In such situations, our business attorney can save you the trouble by simplifying and going through the entire process from A – Z on your behalf, without you needing to lift a finger.
- Operating Agreement
This document essentially establishes and states all the powers, duties, rights, responsibilities and obligations of the members of the LLC, both between themselves and to the LLC. It is an internal document that does not get filed with the Department of State.
- Publish Notice of LLC Formation
Laws in the state of New York require that any LLC that is to be registered must publish a copy of its articles of organization in one daily and one weekly print newspaper for a total of six consecutive weeks. Within 120 days of the LLC’s formation.
- Pay Necessary LLC Filing Fees
After all necessary requirements have been met, you will then need to pay the appropriate processing and filing fees. Because this figure could potentially change in the future, it is best that we not include the figure at the present time.
Benefits of an LLC
|Advantages of an LLC||Disadvantages of an LLC|
|There is no limit to the number of owners.||LLC’s, unlike corporations, cannot issue stock. Often this can be a quick, efficient way to raise needed capital to start a business.|
|Profit or losses are passed through to the individual shareholders tax return.||Individuals have personal liability for the LLC’s debts.|
|The owners of the LLC, called members, are protected from some or all liability for acts and debts of the LLC, depending on state shield laws.||Some states impose a franchise tax or capital values tax on LLCs. The states that do include: Alabama, California, Kentucky, New York, Pennsylvania, Tennessee, and Texas.|
|There are no residency requirements for forming an LLC. If you are a non-citizen you can still operate an LLC according to the laws of the US.||Some jurisdictions outside the US treat LLCs like corporations meaning they do not share the tax advantages they would in this country.|
As previously pointed out, one of the main reasons why some people choose to register their company as a LLC is due to the unique way in which such entities are taxed, among others. LLCs are often be taxed based on how many owners there are.
Single-member LLCs: Single member LLCs are taxed as sole a proprietorship. A single member LLC can elect to be taxed as a corporation. The net income and expenses of single owner LLCs are prepared using schedule C.
Multiple-member LLCs: Multi-member LLCs pay income tax as a partnership. Additionally, the partnership does not pay the IRS directly. Rather, the partners pay taxes based on their ownership share in the LLC. They file IRS form 1065. Afterwards, a Schedule K-1 is prepared for each partner. Here is a breakdown of the forms typically used by LLCs. (You can get more information on these forms from the IRS website.)
- Form 1065: This is used by individual partners to file their income tax with the IRS.
- Form 1099: This form by contractors who did business with the LLC and were paid more than $600 by it during a particular year.
- Form 7004: This is an extension form that gives an LLC more time to file its taxes.
- Form 8832: This form is used when an LLC decides to file as by a different tax standard such as a corporation or disregarded entity. A single member LLC is an example of a disregarded entity.
- Schedule K-1: This is a tax document issued for an investment in partnership interests.
LLC’s vs Corporation
What is a Corporation?
A corporation on the other hand, is a legal entity that is owned by their stockholders who share in the profits and losses that are generated from the company’s operations. When someone decides to incorporate, he/she can decide how many shares he/she owns in that business. (Obviously, a one-person corporation would be owned by someone who has a 100% share in the company.) Corporations are able to buy, sell, own and enter into contracts with other persons and firms. However, they may also be sued by said persons or firms. Examples of famous corporations that most people know include: Microsoft, Google, Ford Motor Company, Bank of America, Yahoo!, et al.
C vs. S Corporations
When incorporating, a business has the option of filing taxes as either a “C” corporation or as an “S” corporation. (LLCs can also choose between “C” corporation or an “S” corporation tax models.) The distinctions between the two kinds of corporation are based on the manner in which they are taxed. An S corporation is a pass-through entity which means that the business can avoid the burden of double taxation. Owners don’t pay income taxes at the corporate level. Reported income tax is from the shareholder’s personal tax returns. In contrast, a C corporation profits are taxed under subchapter C of the Internal Revenue Code hence the term “C” corporation.
LLC vs Corporation: The Pros and Cons
As you may have guessed, business structures are not a one size fits all solution for its owners and investors/shareholders. Both LLCs and corporations come with distinct advantages and disadvantages that business owners must consider before registering their company. How a person decides to register a company will matter a great deal on how that business will be taxed, the time it takes to form the business, etc. With that in mind, let’s take a look at the pros and cons of corporations, and you can compare and contract them with the pros and cons of an LLC which has previously been discussed above.
Advantages and Disadvantages of a Corporation
|Advantages of a Corporation||Disadvantages of a Corporation|
|Corporations enjoy personhood status much to the chagrin of many.||Incorporation can be expensive as there are state filing fees, franchise tax, attorney fees (if you need an attorney), and other government fees involved.|
|Can raise money via selling stock. Corporations can have thousands of investors.||There is often much paperwork involved in forming a corporation.|
|Perpetual life. Corporations have unlimited life and can therefore pass through generations of investors.||Corporations are subject to double taxation since you are taxed at the individual and corporate level.|
|Incorporating offers better protection of personal assets. Creditors can generally only seek recompense from the corporation and not the assets of individuals.||Dissolving a corporation is much more complicated than dissolving other kinds of business entities.|
LLC or Corporation – Which Structure is Best for Your Business?
The best answer to this question is likely to be that it depends on the specific needs and situation of the business and it’s owner(s.) The success or failure of a business is based upon a great number of factors. Some of these factors include the capacity and ability of the management and staff of the company, profitability of the markets which it operates in, effectiveness and efficiency of its sales and/or marketing function, the company’s external operating environment, and a whole list of others.
Having said there, there are often certain heuristics or general practices that will often be followed by business owners, or even advise that will be given by lawyers to their clients. Some of which might include the advice to start-ups or businesses that plan to eventually go public or raise funds from investors to register the business as a “C” corporation. Another will be for small businesses to register as an LLC, while real estate based businesses are also often advised to opt to register as a LLCs in order to gain the best tax advantage.