INCORPORATING A BUSINESS
Choosing the right business entity is very crucial and may seem very difficult without solid legal advice. Our qualified lawyers can provide valuable legal advice for an entrepreneur ready to open a small business. The choice of the best entity for a business is crucial especially when it comes to considering issues such as simplicity, tax consequences and liability.
To start with there are four basic choices when it come to creating a corporation:
73% of all new businesses are formed as sole proprietorships. This is the most common choice for new companies. The sole proprietorship is the easiest of the formats to set up and maintain over time. That’s a big advantage for many small companies worried about finances and other issues. However, from a liability standpoint, there is no way to separate you and your sole proprietorship. If you are sued, all of your personal assets are at risk.
A partnership is an association of 2 or more persons who carry on as co-owners of a business for profit. There is no separation of liability from the company and the partners. There are general and limited partners. An investor who wants to share in the company’s profits but not worry with the day-to-day management is a limited partner. The rights and limits on limited partners are generally spelled out in a partnership agreement.
Corporation S or C
Setting up a corporation is a much more complicated process than a sole proprietorship or partnership. For tax purposes, a corporation can either be a “C” corp or a “S” corp. Generally, when a corporation is first formed it’s automatically a “C” corp. A “C” corp requires that taxes be paid on profits as well as on any money paid out to shareholders in the form of dividends. This is commonly referred to as “double taxation” and can be very costly for an individual or a small group of investors.
An “S” corp is similar but allows the profits of the company to pass through to individual owners, which means there is no separate tax on the corporation. This is commonly referred to as a “pass through” entity. This can be a huge advantage for a start-up where a shareholder is looking to use the start-up losses to offset profits on their own personal return. One advantage of incorporating is that it exits in perpetuity. If one or all owners die, their stock can be transferred to others and the corporation continues unlike in a sole proprietorship or partnership.
Limited Liability Corporation (LLC)
An LLC is a hybrid between a corporation and a partnership in which the owners, who are called members, have the same rights and limited liabilities as a shareholder of a corporation plus the benefits of partnership tax treatment. LLC members are not personally liable for the obligations of the LLC and being taxed as a partnership is less costly than the double taxation concern as seen with a “C” Corp.
Some other differences between a LLC and a corporation is the lack of a formal hierarchy and meeting requirements. An LLC has no requirement to elect directors, appoint officers, nor have annual meetings of shareholders and directors as with a corporation. An LLC is not burdened with the ownership restrictions imposed on a corporation. This means that the interests of an LLC may be held by corporations, trusts or partnerships.
An LLC is operated by managers who handle the day-to-day activities. The managers may be the members of the LLC or people who have no ownership interest in the company. When forming an LLC, it is always a good idea to protect your interests by entering into an Indemnification Agreement.
In New York, an Operating Agreement is required by law and must be adopted within 90 days after filing the Articles of Organization. The Operating Agreement contains the nature of the business of the LLC, including its operations. It also contains the rights, duties, and responsibilities of its members, managers, and employees. Our attorneys can help draft this agreement during the formation of your LLC.