A New York Law Firm Advising Businesses on Selecting the Right Corporate Entity
When starting a business, choosing the correct entity can have a significant impact on its ultimate success and the personal liability of its founder or members. Business entities are created under state law, and business owners have a number of options, including limited liability companies, and corporations. These various entities provide different advantages and disadvantages in terms of personal liability for businesses debts, tax liability, formation cost, and book keeping requirements, and people who are considering creating a business entity should carefully consider all of their options. To this end, the assistance of an experienced lawyer can help ensure that you select the entity that is right for you and will most effectively help you achieve your business goals.
Limited Liability Companies (LLCs)
Limited liability companies, or LLCs, are a relatively new entity type favored by many entrepreneurs and business owners for their flexibility, ease of formation, and limitation of personal liability. They are probably the most common form of entity selected for new businesses.
LLCs can be single-member or multi-member entities. In either case, an LLC shields members from personal liability for any debts incurred by the business. The main advantage of an LLC is its flexibility. For instance, with regard to governance, possible structures include a board of directors, a designated “manager,” or management by agreement of the members. In addition, LLCs do not have the formalities and recordkeeping requirements (e.g., annual meetings, etc.) associated with corporate entities. As a result, many new ventures choose to form as LLCs to take advantage of liability protection and flexible governance options.
In terms of taxes, LLCs are ordinarily given flow-through tax treatment, although an LLCs can (but rarely do) elect corporation tax treatment in certain circumstances.
Though LLCs are probably the most common form of business entity now formed, there are potential disadvantages. One is that New York imposes an expensive publication requirement, not applicable to corporations, that increases the initial entity formation costs. Another is that structuring equity compensation, similar to a stock option plan, can be complicated (though it is certainly not impossible).
A corporation is the most long-established and widely recognized way to establish a business entity that exists separately from its shareholders and will shield its shareholders from the actions and debts of the corporation, providedcertain legal requirements are met..
Corporate governance does not have the flexibility offered by an LLC, as a corporation must generally be governed by a board of directors. Of course, parties often structure individualized governance paradigms by way of a voting agreement that gives certain shareholders greater representation on the board or the right to block particular corporate actions. In addition, corporations are more restrictive than LLCs in that certain formalities must be followed in order for the corporate form to be respected by the courts. These include electing a board of directors and holding annual meetings. Failure to do so will increase the risk that a creditor of the corporation could “pierce the corporate veil” and look to the shareholders individually to a satisfy a corporate obligation.
Business owners often choose corporations as their entity because they are so familiar. In addition, if the business is planning to obtain venture capital (VC) financing, a corporation is typically selected because many VC funds may be restricted from investing in LLCs as they are pass-through entities. And, unlike LLCs, forming a corporation does not involve an expensive publication requirement. Finally, corporations can have different tax treatment, depending on whether the entity formed is a C-corporation (generally imposing two levels of tax) or a S-corporation (pass through treatment, but only one class of stock allowed).
Sole Proprietorships and Partnerships
There are business structures that do not require the filing of any documents or other complications seen with LLCs and corporations. For an individual, this would be a sole proprietorship, which is simply a business owned and run by a single person without any corporate entity formed. For two or more individuals, there is a general partnership. Ordinarily, however, both of these choices should be avoided for the reason that there is unlimited personal liability for the debts and liabilities of the business. There are also structures known as “limited partnerships,” in which the business is managed by a general partner, which has unlimited liability, and is co-owned by at least one limited partner, whose liability is limited. As a practical matter, however, these are no longer commonly used, having been supplanted by LLCs.
Why You Should Consult a New York Business Entity Formation Attorney
After reading this overview regarding some of the business entities that are available , you may have a good idea of what type of business entity is right for you. Keep in mind that whether a particular business entity is appropriate in a given situation is a complicated question, and it is always best to fully evaluate your needs with an experienced lawyer, together with tax counsel.
An attorney can also provide significant help when it comes to actually forming the business entity you wish to form. Many of the required filings are complicated, and any errors can result in a significant delay in getting your business up and running. In addition, the assistance of an attorney is essential when it comes to ensuring that documents like an operating agreement for an LLC , or a shareholders’ agreement and/or corporate bylaws, in the case of a corporation, accurately reflect your wishes. Finally, if you fail to form your LLC or corporation correctly or fail to follow the various formalities required by the law once you are in businesses, you and others involved in your venture may face personal liability for certain business debts.
Call Today to Speak With a New York Business Entity Formation Lawyer
If you are considering forming a business entity in the state of New York, speak to an attorney as soon as you can. Braverman Law PC combines the skill, experience, and aggressiveness that you usually find at a larger firm with the responsiveness and personal attention only a boutique law firm can provide. To schedule a consultation with an experienced New York business attorney, call Braverman Law PC today at (212) 206-8166 or send us an email through our online contact form.