The Second in a Series of Articles for Entrepreneurs
by Bukre Ayan, Esq.
Regardless of whether you choose to create a legal entity or to operate your business without the benefit of a legal entity, you need to be careful. If you do not comply with the legal requirements applicable to your type of business, huge personal liabilities may result. In this article, operating your NY business will be discussed. The formation process and what happens right after the formation will be discussed in next month’s article.
Annual Meetings and Biennial Filings – LLC’s and Corporations
After formation, initial meetings of Limited Liability Companies (LLCs) and corporations are required to be held, with annual meetings required each year thereafter. Corporations and LLCs also have to file biennial statements with the NY Department of State. Compliance with filing requirements, as well as properly holding and keeping records of meetings, help to protect owners (members in LLCs shareholders in corporations) from personal liability – from ‘piercing the corporate veil’ as explained in our previous article.
One of the statutory requirements for the sole proprietors and general partnerships is to certify their business’s name. The certification is filed with the County Clerk’s Office where the business is located. The requirement applies to LLCs and corporations if they are conducting business under a name other than their official, legal name. These filings by entities are called ‘Doing Business As’ (DBA) certificates and are done with the Department of State. (Please see this link for more information https://dos.ny.gov/certificate-assumed-name-domestic-and-foreign-business-corporations)
Sole proprietors report their business income on their individual tax returns. Partnerships have “pass-through taxation” – although tax returns are prepared for the partnership, its income flows through to its partners. The partners include their share of the business’s income, and then pay taxes on it, on their individual income tax returns. Thus, the earnings of these businesses are taxed only once. LLCs are treated as partnerships for federal income tax purposes, with their members reporting the LLC’s income on their individual tax returns. But please be aware – owners (whether sole proprietors, partners or members) pay taxes on the business’s earnings, even if the business never distributed its earnings to its owners.
Profits of a NY corporation are often double-taxed – the corporation pays its taxes as an entity, then the shareholders pay taxes after they receive their dividends. However, eligible corporations may elect “S-corporation” status, at both the federal and state levels. Once they do, they pay no income tax, but instead are treated as ‘pass-thru tax entities,’ with their individual shareholders having to report and pay tax on their portion of the corporation’s earnings – – whether or not they ever received them. (For more information, please consult your accountant).
Doing business without forming an entity seems easier. You don’t have to deal with state formation procedures, and there are no other requirements, like filing biennial statements or holding meetings. You do not have to pay taxes from your business’s profits twice. But all of this simplicity comes with a potential cost – doing business without forming an entity puts your personal assets at risk.
If you form an entity, your decision between an LLC and a corporation should be based on several factors. If you are going to be the sole owner or the majority owner, an LLC may help you skip some formalities. As it will be explained in the next article, LLCs are run day-to-day and long-term by their owners or managers, but in corporations it is the officers who are responsible for daily business decisions, and it is the board of directors who are responsible for major business decisions. And many major business decisions need to be affirmed at board of directors meetings, which have to be recorded and kept in the corporation’s book. While similar requirements apply to LLCs, too, in most cases business decisions can be made and actions can be taken easier in LLCs than corporations.
Finally, a little-known fact that can be a large factor is this: NY legislation provides more protection to minority shareholders of corporations than to minority members of LLCs. Therefore, if you are going to be a minority owner, you should consider buying into a corporation less risky than buying into an LLC.
(For more information, please consult with an attorney. Next article will be on “How to Operate Your NY Business – Part 2”. The formation process and what happens right after the formation will be discussed.)
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 firstname.lastname@example.org or find them at www.reedbusinesslaw.com.
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