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Introduction

Deep Dive: Business Structures & How to Form Them in NYS

Deep Dive: Business Structures & How to Form Them in NYS

Business Plan-amico

Deep Dive: Business Structures and How to Form Them in NYS

Hello there! Welcome to the latest installment of WISE WBC’s Deep Dive, a monthly offering where we go into the nitty gritty of a topic of interest to small business owners. The theme of this month is business structure & formation. We’ll cover all the steps it takes to get your business up and running in New York State, including:

  • Choosing a business structure
  • Filing the correct paperwork with your county and the state
  • Requesting an EIN

The format on this Deep Dive is a little different as there aren’t many exciting media options out there on this topic. Instead, we’ll dive deep into legal structures, outline the steps to take to form your entity in New York, then share some useful links at the end. 

Dive deep into choosing a business structure

In a second, we’ll go over the most common business structures for small businesses, including the pros and cons for each. We’re not covering them all, though, so see the SBA guide at the bottom for a full overview of all available structures and how you might combine them. Ultimately, this decision should be made by you and any business partners, with input from your accountant and attorney.

Why business structure matters

The business structure you choose will affect the taxes you pay, the paperwork you need to file, your personal liability, and more. When choosing a structure, think long-term. How much profit will your business make, realistically? Is it just you, or do you have partners? How likely are you to be sued? Will you someday want to raise venture capital? The answers to these questions will help you decide which structure makes the most sense.

Sole proprietorship

A sole proprietorship is the default business structure; if you do business using your legal name and don’t create an entity, you’re considered a sole proprietor, even if you don’t file any paperwork. That’s because a sole proprietorship is not an entity; you and your business are one in the same. If you use a fictitious name (anything that isn’t your full legal name), you’ll need to file a DBA with your county clerk before doing business using that name. For those of you in Onondaga County, see this link for more.

As a sole proprietor, there is no line drawn between your business and personal assets or liabilities, which means you can be held personally responsible for debts and legal issues associated with your business. Therefore, this isn’t a good option if there’s a chance you’ll incur serious debt or potentially get sued in the course of doing business. Another downside is that it can be hard to access external financing - you can’t sell stock as a sole proprietorship, and many banks won’t lend to you without a more formal structure. Finally, consider the future you envision for your business. It is more difficult to sell or succession plan as a sole proprietor, given you and your business are one in the same. 

On the other hand, if you’re just testing out your business idea, or have a very low-risk business, it could be right for you. Sole proprietorships are easy to form and you have full control, which is why many people choose this route. 

Partnerships

Partnerships come in two flavors: general partnerships (GP) and limited partnerships (LP). A general partnership is two or more people (or entities) carrying on a business for a profit. Similar to the sole proprietorship, a general partnership does not have any liability protection. 

A limited partnership has one main partner (the general partner) who bears full liability and generally has most of the control, with the other partner(s) having limited liability and limited control. Profits (or losses) are “passed through” to everyone’s personal tax returns, and the main partner also pays self employment tax. 

There are also limited liability partnerships (LLP), where all partners have limited liability. Every partner is protected from debts incurred by the entity and can’t be held liable for actions taken by other partners. Only licensed professionals in NYS are permitted to form this type of entity.

In any kind of partnership, be sure to create a partnership agreement governing profits and losses, liability, and control -- and have a lawyer review it.

Corporation

A corporation is totally separate from the people that own it and provides protection from liability. They’re also the most expensive to form and to run, plus they require intense reporting, recording-keeping, and adherence to specific operational processes.

The way corporations are taxed is also generally less favorable than other entities because unlike those other structures, corporations pay income tax on their profits. Some are also taxed again when they pay dividends to shareholders; this is generally known as “double taxation.” When it comes to raising money, having a corporation can make it easier as you’ll be able to sell stock to an investor or even someone else working in your business. 

If you’re considering raising money, going public down the road, or have a higher risk business, a corporation is a good structure to consider.  

LLC

A Limited Liability Company (LLC) is like a blend of a corporation and a partnership and gives you advantages from both. An LLC protects you from personal liability in most cases, so that things like your house and savings aren’t at risk if your company is sued or faces bankruptcy.  On the financial side, if you have an LLC, you have the option to be taxed as a sole proprietor (assuming there is one owner), a partnership (assuming there is more than one owner), an S-Corp. or a C-Corp.

So, if you have a medium or higher risk business and want your personal assets protected without paying a separate corporation-level tax, an LLC might be right for you.

S-Corp. 

One big note to start: an S-Corp is NOT a true business structure. It’s a tax status that LLCs and corporations can choose to elect. To get S-Corp tax status, you have to apply at the federal level by submitting a form to the IRS. Therefore, when you read up on business structures at the state level, don’t be surprised if you don’t see S-Corp listed as an option. 

Okay, with that out of the way, here’s why many do choose this tax status: because it MAY save you money. With this status, owners who are employees receive wages that are passed through to their personal income tax returns, like with an LLC, and don’t pay corporate tax. Additionally, remaining profits can be distributed to owners and potentially save social security and/or Medicare taxes.  

On the other hand, as an S-Corp, there are more compliance rules to track. As an owner, you’ll also need to put yourself on payroll, and this is a cost that many new businesses want to avoid.

Whether it makes sense for you to apply for S-Corp status for your Corporation or LLC depends in part on how much you’ll make. If you think that, after paying all employed owners a reasonable salary, you’ll have leftover profits you can take as a draw or dividend, then it might be a good choice. If you don’t think you’ll make that much, it probably makes more sense to forgo this option.

Steps to Take to Form Your Entity

Once you’ve decided on your structure, see below for a quick rundown on how to officially set up your company. Note that if you choose to operate as a sole proprietorship using your own legal name, you don’t need to do anything formal, though you may need to get an EIN. If you want to use a different name, like Kim’s Kleaners, for example, you’d need to file a DBA (“doing business as”) with your county before doing business using that name. 

The process below is geared towards those incorporating as an LLC or corporation. 

  • Choose a name. You need to make sure a business with this name doesn’t already exist by searching this database from the NYS Department of State Division of Corporations. 
  • If you want, you can then reserve your business name by mailing a form and a check for $20 to the same division.
  • It’s also a good idea at this point to see what kind of url you can get for a website. Pro tip - try using NameCheap.com’s Beast Mode Search. 

For a partnership, you’ll need to…

  • File the appropriate paperwork. 
  • Create a partnership agreement
  • Apply for any necessary permits or licenses. Use the NYS Business Express Wizard to determine what you need to do. 
  • Publish a notice of your partnership (for LPs and LLPs only)
  • Apply for an EIN via the IRS
  • Apply for a sales tax number via NYS Business Express, if applicable. See this link to determine if you need to collect and remit sales tax.

For an LLC, you’ll then…

  • File your Articles of Organization with the NYS Department of State. You can do it online or by mail. If you do it yourself, the fee is $200. You can also hire a lawyer (expect fees around $1200). Check the box to be taxed as a corporation if you plan to elect S-Corp status later.
  • Prepare an operating agreement within 90 days. This is an internal document that doesn’t need to be filed anywhere. 
  • Publish notice of your LLC formation in 2 papers designated by the County Clerk in the county in which your business is located. You have 120 days for this. 
  • When you receive proof of publishing, you’ll need to file a Certificate of Publication with the state, which costs $50.
  • Apply for your EIN, or Employer Identification Number, via the IRS. Note that single-member LLCs who will not have employees or elect for S-Corp status do not need an EIN.
  • Apply for any necessary permits or licenses. Use the NYS Business Express Wizard to determine what you need to do. 
  • Elect for S-Corp status, if you wish to do so, by filing Form 2553 and Form 8832 with the IRS and Form CT-6 with New York State. You have no more than 2 months and 15 days after the beginning of the tax year to file this form for it to be effective for that tax year. 
  • If you are not electing S-Corp status, be prepared to pay your annual state filing fee. The fee itself depends on your business income, and is paid via form IT-204-LL.
  • Be prepared to file a Biennial Statement every two years.

For a corporation…

  • You’ll prepare, sign, and file form 1239, your Certificate of Incorporation, online or by mail, and pay the $125 filing fee.
  • Hold an initial organizational meeting to adopt by-laws, elect directors, and conduct any other business. See section 404 of the Business Corporation Law.
  • Understand and be prepared to keep the required records, including a book of accounts, meeting minutes, and directory of all shareholders. 
  • Complete form CT-198, which you should receive from the NYS Dept of Taxation, to receive your federal identification number. 
  • Be prepared to file a Biennial Statement every two years from the month you incorporate.
  • Apply for any necessary permits or licenses. Use the NYS Business Express Wizard to determine what you need to do. 
  • Elect for S-Corp status, if you wish to do so, by filing Form 2553 with the IRS. You have 2 months and 15 days to file this form. 

Again, choosing a business structure is a major decision with both legal and tax implications. Please consult with an attorney and tax accountant to decide which structure is right for you.

Helpful Links