What are the Advantages and Disadvantages of Forming an LLC in New York?
Forming an LLC enables you to take advantage of the protection offered to a corporation and shield your personal assets from a lawsuit. There are few disadvantages to forming an LLC in NY and plenty of advantages in personal protection, fast and easy setup, and a favorable tax structure.
Are you serious about growing your side hustle into a full-time business? Read on to learn more about forming an LLC in New York State, why it’s a good idea for sole proprietors and partners to form one, and how it enables you to build your business past the level of a sole proprietorship.
Why Forming an LLC in NY is Beneficial for a Start-up
A business just off the ground usually starts as a sole proprietorship, but it’s not ideal for many start-ups, especially if it’s poised for fast growth. Forming an LLC in NY gives immediate benefits in the form of limited liability and protection of personal assets from legal actions. The LLC also makes it easier to pay employees, handle business-related taxes, open business bank accounts, and access forms of funding.
All of these aspects of the LLC corporate structure enable a start-up to grow more easily than it would as a sole proprietorship. And there’s nothing that stops the LLC from becoming an S or C corporation when the time is right.
Fast Setup Process
The act of forming an LLC in NY is relatively quick and straightforward, but you have to take actions that include:
- Perform a corporation name search
- Appoint a registered agent
- Name members of the LLC
- Create an operating agreement
- Fill out and file articles of organization
A few steps are involved, but they’re all relatively quick and simple to complete. For example, the form for filing the articles of organization is two pages long. You may find that your operating agreement covers more pages than the form to register your LLC.
Protection for Personal Assets From Creditors
The words limited and liability in LLC mean liability is limited for all corporation members. In other words, the corporation’s members can’t be held responsible for any debts resulting from a lawsuit against the company. A creditor can sue an LLC but can’t expect the members to pay damages from their pockets or liquidate personal assets to pay the debt.
Contrast this to the fact that a sole proprietorship has no protection against liability if they lose a lawsuit and have to pay damages. The LLC protects the members of a start-up and helps them grow the business with minimal risk.
More Favorable Tax Treatment
The IRS treats an LLC as a pass-through entity for tax purposes. The profits that the LLC generates aren’t taxed at the corporate level. Instead, they’re passed through to the members, who then pay personal income taxes on their share. Double taxation on the profits is avoided, and the income is usually taxed at a lower rate.
Another advantage to forming an LLC in NY is that you can choose how your LLC is taxed. An LLC with a single member is “ignored” by the IRS for taxation and requires the single-member LLC to file its taxes as a sole proprietor. If multiple members exist in an LLC, the IRS will tax it as a partnership unless the LLC decides to be taxed as an S or C corporation. You can tell the IRS how you want to be taxed through filing IRS Form 8832.
It’s worth noting that filing as a C corporation triggers double taxation on the profits. The corporation pays taxes on its profits before passing the after-tax income to its members as dividends. Shareholders or members have to pay personal taxes on the dividends, resulting in double taxation. There are advantages to filing as a C corporation, but it’s a subject that should be discussed with a tax expert before deciding to file as a C corp.
Taxes for an S corporation are similar to the pass-through tax rules for an LLC but allow corporations with less than 100 shareholders to be taxed as a partnership instead of a corporation. The S corporation can pass business income, deductions, credits, and losses to shareholders, who can then report them on their personal tax returns.
Another advantage of the S corporation is that taxable business income can be divided into a salary and distribution. The compensation is subject to self-employment tax if no FICA taxes are taken out, reducing the corporation’s overall tax liability. The remaining profit is delivered to the shareholder, or owner, as a distribution that is not taxed.
Fewer Operating Rules and Restrictions
The LLC has more flexibility regarding its operation and annual reporting requirements than other corporations. You are required to file articles of organization to be recognized by the state of New York, but you don’t have to hold meetings with shareholders and keep minutes of the meetings. The Department of State asks LLCs to create an operating agreement to outline member responsibilities and have a document that can be referred to in court if a member brings a lawsuit. However, you don’t have to file the operating agreement with the state; it can be updated as needed.
An LLC can be owned by an individual, have unlimited members, or be owned by another LLC, corporation, or foreign organization. It’s not required to have a board of directors, and its members or non-members can manage it. If a member decides to leave, the LLC can be dissolved and re-formed with a new group of members with little difficulty.
As previously mentioned, the state doesn’t require filing an operating agreement, but you should create one as part of forming an LLC in NY. The operating agreement establishes a set of enforceable rules and outlines the responsibilities of each member. It’s a formal document that should be drawn up by a professional who’s familiar with its creation, and it’s a valuable document in the event one or more members decide they want out or don’t want to agree to the operating agreement going forward.
Not having an operating agreement can cripple a lawsuit if one is filed. The judge who hears the case has to resort to state law and apply those laws to the situation instead of ruling along the lines of the operating agreement.
Outside of the operating agreement, there are no other requirements or restrictions placed on the operation of an LLC in New York state.
The Credit Score of an LLC is Separate From Your Personal Credit Score
A business gets a credit rating the same as you, an individual, develop a credit rating. However, the credit rating of the LLC has nothing to do with your personal credit rating or that of the members. The corporate credit rating helps you access financial products that may not be as easily obtained as a sole proprietor and enables you to open up a business account to separate personal and business funds.
You must obtain a sales tax number to form an LLC in NY, especially if you sell retail goods. The sales tax number enables you to open a wholesale account with suppliers. Your business builds credit as long as you pay your bills on time and according to the billing terms. You can do this as a sole proprietor, but you may not get the same access to suppliers, and your personal credit rating is on the hook for unpaid bills.
Buying supplies through an LLC with a business bank account separate your funds and credit rating from your personal rating. You also get more access to wholesalers and more favorable terms for buying in bulk and paying on time.
How to Start an LLC in New York
Starting an LLC in New York state is straightforward. The Department of State has the forms on its website for you to print out and submit, along with payment, and become a formally organized corporate entity under LLC rules. Before filling out the articles of the organization, you need to have everything ready for filling out the form. That includes the contact information of the person forming the LLC, its location, the name and address of the registered agent, and payment for the filing fee.
How Windsor Publication can Help You Form Your NY LLC
Windsor Publishing Inc has over 20 years of experience helping clients form an LLC in New York state. We help people looking to start their first corporation and offer a fast turnaround from filing to acceptance by the Department of State. Our staff will explain the process to you, prepare the paperwork on your behalf, and let you know when you can expect confirmation of your articles of organization.
We offer filing packages designed to handle a basic filing to get your LLC filed to a full-service package, including customized corporate services and website hosting. Get in touch with us today to learn more about our services and how we can help you get your LLC off the ground.