Advantages of Forming an Entity

Advantages of Forming an Entity in NY

The First in a Series of Articles for Entrepreneurs

by Ms. Bukre Ayan

When you decide to do business in New York you have options: sole proprietor, partnership, or legal entity. To grow and protect yourself you will want to form an entity. But why? And which type of entity is best for you?

Doing Business Without an Entity

As a sole proprietor (sometimes called ‘dba’ or ‘doing business as’) or partnership, all business activity is ‘personal’. Whenever there is a claim against your business, such as a breach of contract or lawsuit for personal injuries, you and your personal assets will be responsible for any damages.

Doing Business as a Legal Entity – Corporation

A corporation is formed under NY’s Business Corporation Law. It normally has a name that ends in “Inc.” or “Corp.” Its ‘owners’ are called shareholder(s), it is guided by a board of directors, and is run by its officers on a day-to-day basis.

Doing Business as a Legal Entity – Limited Liability Company

A limited liability company is formed under NY’s Limited Liability Company Law. It has a name that normally ends in “LLC”, is owned by member(s), and either its members or its managers (who may or may not be members) guide and run the LLC.

Personal Liability

Individuals conducting business as a dba or as a partnership face place their personal assets at risk. But, Corporations and LLCs can protect an individual’s assets, whether owners, directors, officers or managers. A court can only “pierce the corporate veil” – holding individuals personally liable – if it determines the only reason the legal entity was formed was to shield its owners and their personal assets from liabilities. We’ll explain in a future article the simple steps owners can take to avoid this outcome.

But Which Entity is Best?

If you wish to protect your personal assets by forming a corporation or LLC, how do you decide which entity is right for you? The answer depends on a lot of different factors.

Do you need investors? Most investors prefer Corporations. Founders become shareholders; shareholders elect directors to guide the entity; and the directors appoint officers to manage the day-to-day business of the corporation. While an individual can simultaneously be a shareholder, director and officer, corporations still require multiple meetings and documented minutes to operate properly. Annually officers report their work to the board of directors, and the board reports to the shareholders. Even in a small business with one shareholder who is the only director and the officer, the records of decisions must be signed and recorded. If these procedures are skipped, an individual shareholder’s assets could be risk.

Do you want simpler operations? Most LLCs are run by their owners. There are two basic options for LLC management: members or managers (though the managers are often members, too). Therefore, an LLC may be easier for small business owners to manage.

What about taxes? Both Corporations and LLCs can take advantage of a “pass-through taxation” option that requires the members (or shareholders) to report the business’s income on their personal income tax return, thus avoiding “double taxation”. Please consult with your accountant for more information)

In conclusion, to protect you and your family’s assets from business liabilities, it is best to form a legal entity. A Corporation may be the right option for you if you like to do business more formally. Conversely, if you would like to avoid board and shareholder meeting requirements and other formalities, an LLC is likely the better option for you.

For more information, please consult an attorney. Our next article will be, “How to Form and Operate Your NY Business”. Additional topics will be covered each month, including Contracting and Invoicing, Hiring and Firing, Buying and Selling Businesses, and Dissolving your entity.

Article photos by Ekaterina Bolovtsova and Pavel Danilyuk from Pexels

Ms. Bukre Ayan is an international associate with the firm of Reed CNY Business Law, P.C., specializing in business, immigration and real estate law. Bukre received her LLM degree from Syracuse University College of law in 2020, and is admitted to practice in both New York State and the Republic of Turkey. The Spanish translation was done by Ms. Sylvia Espinosa, a Mexican law student who is completing her studies at SU College of Law.

If you have any questions or comments about these articles, you can contact them at Reed CNY Business Law, P.C. at (315) 558-0642 or email bayan@reedbusinesslaw.com or find them at

www.reedbusinesslaw.com

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