You are ready to start a business or maybe it’s time to take your business to the next level. Congratulations! Now, where do you begin? Determining what type of entity your business will be, or become, is extremely important and complex. If you’re wondering how to choose a business structure, we work with clients in New York to build and grow business entities, whether they are in the brick-and-mortar space or offer services online.
There are multiple types of business entities:
Sole Proprietorship
A sole proprietorship is often best for a freelancer or someone selling homemade creations online. You are working alone, and you alone are the business. (Often you can file a “doing business as” – DBA- certificate to distinguish yourself from the business, but it still applies to you for all intents and purposes). The downfall here is that your personal assets are not protected. There is no separation between your personal accounts and business accounts because a sole proprietorship is a “pass-through” entity. What is a pass-through entity? It means profits made by the business are included on your personal tax return. The benefits of a sole proprietorship include lower start-up fees, fewer tax reporting obligations, no corporate income tax, and straightforward paperwork for starting or closing this type of business.
Partnership
This is two or more individuals working together in a business, sharing responsibility and liability. How does a Partnership differ from a Multi-Member LLC we discussed above? In a Partnership, you have unlimited liability, so your personal assets are not protected the same way they are in an LLC. A Partnership is actually easier to form than a Multi-Member LLC, with no formal state paperwork required. It is also a “pass-through” entity, so each partner reports earnings on their personal tax returns.
LLC
A step up from a sole proprietorship, there are various types of LLCs, and there are benefits to forming an LLC. A single-member LLC is still just one person, but the difference here is that you have protection around your personal assets, as the business is separate. This type of LLC is considered a “disregarded” entity, so expenses and income are still reported on your personal taxes. If you decide to add members, it’s easy to change your single-member LLC to a Multi-Member LLC through state paperwork. A Multi-Member LLC is owned by more than two individuals.
While each state has different regulations, typically an LLC must create a name, appoint a registered agent who will receive legal documents (yes, you can be your own), submit the Articles of Organization, obtain an EIN number (not necessary, but can be helpful if you don’t want to use your social security number with clients), and open a designated business account. One of the cons of an LLC in New York, is that you have an added step of publishing its formation in a local newspaper. This can be expensive (there are ways to lower the cost, though).
What is an EIN number? It’s a nine-digit Employee Identification Number assigned by the IRS to the corporate entity for tax purposes.
S Corporation or S Corp
An “S” Corp is often used when someone wants to form a corporation but not an LLC. A corporation is a separate legal entity. It has to pay taxes. By electing under Subchapter S of the IRS code, you are electing to be treated as a “pass-through” corporation. This means that while you still file a corporate tax return, the profits of the corporation are “passed-through” to your personal tax return, without having to be taxed first at the corporate rate. If someone begins at this level, it’s usually because of taxes. As your business grows and your profits increase, paying self-employment tax can become quite expensive. As an S Corp, you will enjoy more tax benefits and avoid double taxation, but you will have additional filings required such as those for shareholders and employment taxes. Protection here is the same as an LLC, limited liability, so your personal assets are protected in an S Corp. Each state has its own regulations. In New York, you must gain S Corp status from the IRS first and then fill out Form CT-6 with the New York State Department of Taxation and Finance to be recognized as an S Corp in the state.
C Corporation or C Corp
A C Corp is a completely separate entity from its owners, who are named shareholders. There can be an unlimited number of shareholders in a C Corp, which is different from an S Corp, which caps that number at 100. A C Corp also has the highest level of taxation, not only taxed on its profits, but shareholders have to pay individual tax on their dividends. These corporations are typically large organizations, and because it is separate, the company goes on even if the original shareholders are not part of the company anymore. A C Corp can issue common stock or preferred stock to raise capital.
Other Corporate Entities
Other corporate entities make an honorable mention here. If you are a professional, like a doctor, an architect, a lawyer, or an accountant, you can form a PC or a PLLC – Professional corporation or a professional limited liability company. These have the extra step of getting a certificate from your licensing department stating that you are in good standing before you can file your necessary formation documents.
If you want to talk in more detail about forming business entities in New York or legal protection for small business owners, Sugarman Law can assist you. Feel free to reach out!
Firm News
Did you know that Sugarman Law offers per diem work to attorneys? Our Per Diem services are designed to assist law firms, real estate professionals, and other legal entities by providing legal support on a day-to-day basis. Whether you need assistance in court appearances or other legal matters, we provide flexible solutions tailored to your needs. Services are available for Suffolk and Nassau Supreme Court, District Court, and Surrogate’s Court.
Speaking of courts, I was recently in Washington D.C. to be admitted to practice before the Supreme Court of the United States! It was a wonderful trip. The experience was incredible.
All the SCOTUS Justices were present, and they read my name in court with the other members of my bar association, and we swore to uphold the US Constitution.
I had not visited D.C. since I was a teen, and seeing the monuments as an adult was such a different experience. Visiting the Smithsonian National Museum of Natural History and being in the same room as The Hope Diamond was certainly a highlight, as was the Lincoln Memorial.
