One of the first decisions you must make when starting a business in New York is to determine the legal form of your new venture. This decision is especially critical when you go into business with others. New York law recognizes several business forms, each with their own legal and tax advantages and disadvantages. Here is a brief overview of the common legal forms used by New York businesses.
Business corporation – A business corporation (as distinguished from a not-for-profit corporation) is organized by one or more shareholders. A corporation exists as a legal entity separate and apart from the shareholders. This means individual shareholders are not personally liable for any debts contracted by the corporation. In theory, a corporation may continue in perpetuity, as individual shares can be bought, sold, and transferred, without affecting the operation of the business.
A corporation pays profits to its shareholders in the form of dividends. Unlike other business forms, a corporation is also taxed as a separate entity. This means the corporation pays income taxes to both the federal government and New York State on its profits, while the shareholders must also pay personal income tax on any dividends received. This “double taxation” can pose a major disadvantage to the corporation form, especially for smaller businesses with only a few shareholders.
General partnership – A general partnership is basically a contract between two or more persons who agree to act as partners in a business venture. A partnership is not incorporated, therefore each partner is individually liable for any business debts. On the other hand, profits are only taxed once, as any profits are “passed through” to the partners and taxed at the individual income tax rate.
Limited liability company – A limited liability company (or LLC) is formed by one or more individuals who are members for the LLC. One can think of an LLC as a halfway point between a business corporation and a general partnership. Like a corporation, the LLC is recognized by New York State as a separate legal entity, so members are not personally liable for business debts. But for tax purposes, the Internal Revenue Service and New York State “disregard” the LLC as a legal entity, so any profits are passed through to the members and taxed only once, as with a general partnership.
Limited partnership – A limited partnership is a partnership with a twist. Unlike a general partnership, where each partner is considered an equal participant in the profits and losses of the business, in a limited partnership, only some of the partners are general partners. The others are limited partners who do not directly participate in the business. They are not liable for partnership debts.
Limited liability partnership – This type of entity is commonly used by professional groups such as law firms. A limited liability partnership is essentially a limited partnership where everyone is a limited partner. This means one partner is not liable for the professional debts of the others. This is useful in a law or medical group where individual partners may face malpractice lawsuits or other types of professional liability.
This is only a brief overview of the corporate forms available to a New York business. There are many other factors to consider before selecting and forming a business entity. An experienced New York business attorney can advise you on the merits of each type of entity and help select the right form for your business.Contact our office today if you have any questions.