When it comes to New York, if you can make it there, you’ll make it anywhere. It’s a prestigious state with a lot of successful companies. If you’re looking to form a business, you need some form of protection for your personal assets. Creating a separate entity is the best way to do that, and New York offers plenty of incentives to corporations looking to operate within the state.
What is a Corporation?
A corporation is one of many business structures that provides benefits when operating a company. Creating a corporation separates the actions of the business from the owner(s), establishing two distinct entities. There are typically multiple individuals, stockholders, or shareholders involved with owning portions of the business, as well as a board of directors and executive officers who help manage daily operations. The purpose of a corporation is to earn a profit, which is divided among its owners.
As a legal entity, a corporation has many of the same rights as that of an individual. It can enter into legal contracts, loan money, borrow money, hire workers, own property, pay taxes, and file lawsuits. Corporations in many ways are treated as legal people, and are granted rights as well as expectations.
Depending on the type of corporation, either the business will have to pay taxes based on net income, or the costs will pass-through directly to the shareholders. The amount is determined by IRS Form 1120. A Limited Liability Company (LLC) is a different type of business entity entirely, with different benefits.
How Does a Corporation Work?
A corporation operates like most businesses do. It serves as a protective barrier by functioning as an independent entity, responsible for its own assets. After you go through the process of incorporating, you’ll have to set up a governing body of directors and write corporate bylaws. Establishing these bylaws sets the policy and mission goals for the company.
The board of directors oversee the actions of a corporation and ensure that it acts in accordance with the bylaws and complies with regulations imposed by the government. Shareholders and members of the board of directors aren’t inherently the same thing.
When a corporation is first formed, and during annual general meetings, each shareholder will vote to establish the working board of directors, as well as who will serve as corporate executives. A shareholder doesn’t initially operate as any of these individuals, but they can be elected to do so.
Corporate executives are employees who work directly under the board of directors. They are the enforcers of the desires of the shareholders, elected to act in the best interest of the company. If they fail to work in the corporation’s best interest, they can be voted out and replaced.
How Do I Start a Corporation
There is a step-by-step process involved with starting any business, and a corporation is no different. The legal documents and costs are different from those required when forming an LLC. Here is the basic process for forming a corporation in New York:
Decide Your Corporation’s Name
Each business has a unique name to identify it. If you form a corporation, that name must include words like “Incorporation,” “Incorporated,” “Limited,” or some kind of abbreviation for those words, in order to let the public understand what kind of business entity they are dealing with. In order to minimize confusion, your name must be unique. You can inquire about the availability of a name by searching the New York Department of State Division of Corporations database. If you have a name that’s available and you want to ensure nobody else claims it, you can reserve it for 60 days by filing an Application for Reservation of Name.
Choose a Registered Agent
Most states require any business to have an agent for service of process available to accept legal documents in the event of a lawsuit. New York has a built-in system to designate one for your business. By default, the New York Secretary of State is your registered agent. You are allowed to designate your own, and it’s recommended. Choosing a registered agent service that specializes in handling these documents provides you with more time in the event of a lawsuit.
File Your Certificate of Incorporation
The formation of your corporation is solidified when you submit your Certificate of Incorporation. This form is either filed online or by mail and comes with a $125 filing fee. It must include the name of the corporation, as well as the purpose or the company, the county in New York its main office is located in, how stock is issued, who the designated registered agent is, and the address to mail legal documents.
Prepare Your Corporation Bylaws
Corporate bylaws are the basic ground rules set by the shareholders and the board of directors. This internal document establishes legitimacy and provides your company with base operating rules. These generally aren’t filed with the state and are instead stored within the company in a formal binder within the corporation’s main office along with meeting minutes and other important documents.
Appoint Directors and Hold Introductory Board Meeting
Whoever is responsible for filing the Certificate of Incorporation must also designate who will serve as the initial board of directors, until the first board meeting is held. This is done in the “Incorporator’s Statement” which includes the names and addresses of the initial directors. A copy of this statement should be stored in the main office with all other important legal documents.
During the first board meeting, shareholders can elect the official board of directors and appoint corporate officers. They can then select a corporate bank, authorize the issuance of shares of stock, set the fiscal year, and adopt stock certificates. All these choices should be recorded in corporate minutes and stored along with other official documents.
Issue Stock to Shareholders
Each shareholder is issued stock based on their share of cash, property, or service contributions. A small company might use paper stocks to have a physical representation of what each shareholder owns.
File Biennial Statement
Instead of an annual report, businesses in New York file a statement every other year, due on the same day the original Certificate of Incorporation was filed. This form is typically filed online on the Department of State website.
Comply with Tax and Regulation Requirements
You can apply for an Employer Identification Number (EIN) for free on the IRS website. In New York, state law requires corporations to pay franchise taxes annually and to file reports to the government, even if it has a net loss on profits or does no business. These are due on the date the Certificate of Incorporation is filed, and continue until the corporation is dissolved legally.
Why Start a Corporation?
When it comes to New York, there are many perks to choosing a corporation over other business entity types. Initial filing fees are less expensive and they don’t have the same publication costs.
If you want your business to come across as legitimate, being a corporation is as good as it gets. Most people can understand that a corporation is a big deal. An LLC can often be mistaken for a corporation to those that don’t know the difference.
Having any kind of business entity is beneficial for protecting your personal assets. Since you and your corporation are separate tax entities, the assets of a corporation are the only assets at risk in case of a lawsuit or loaners recollecting investments.
Corporations benefit from the Tax Cuts and Jobs Act, which puts the tax rate for corporations at a flat 21%. Aside from that, there aren’t many huge benefits that outweigh the annual fees involved with operating in New York.
What Different Types of Corporations Are There?
A corporation comes in three different forms: C corp, S corp, and Nonprofit. Each provides a benefit not covered by the others. They are all considered a business entity, providing limited liability protection to their owner(s), and each has a different tax structure. An LLC can be taxed as any of these structures, but is subject to LLC publishing requirements in New York. Here are some of the differences between each type:
When you think of a corporation today, chances are it’s a C corporation. This is the default format for this type of business entity. It is owned by shareholders, and operated by an elected board of directors, executive officers, and employees. There are tax laws in place that are directly beneficial to C corporations. However, a C corp is subject to double taxation. The corporation owes taxes based on its net income, and the profits earned by the shareholders are also taxed for each individual taxpayer.
A nonprofit, or a 501(c)(3) organization, is generally formed for a scientific, religious, literary, charity, or educational purpose. Nonprofits benefit from state and federal tax exemptions. They use a different Certificate of Incorporation intended specifically for Not-For-Profit organizations.
The other kind of corporation is an S Corporation. The main difference between C corp and S corp is that the latter takes advantage of pass-through entity taxing. Instead of the corporation itself being taxed on its earnings, all of those earnings “pass through” to the shareholders, who are instead responsible for individual earnings. The basic form of an LLC works the same way. A corporation must file Form 2553 with the IRS in order to be taxed as an S corp.
Limited Liability Company
LLCs provide many of the benefits that corporations do. They don’t usually obtain the same corporate tax benefits, and instead have their own set of LLC benefits. Depending on the type of business you’re looking to form, New York might not be the best state to establish your business. You might find more benefits in states like Wyoming.
Advantages of a Corporation
- Separate Legal Entity - A corporation serves as an entity separate from its owners. It can conduct business, enter contracts, own assets and real estate, and borrow money as a legal entity. It’s also expected to pay taxes and is subject to lawsuits independent of its owners.
- Simple Life Extension - A corporation’s existence is represented by its stocks. Since it isn’t tied to a specific owner, a corporation can exist as long as anyone owns the stock associated with it. That means transferring stock from one shareholder to another can allow a corporation to exist indefinitely.
- Limited Liability Protection - As an individual entity, a corporation is only liable for the assets owned by the corporation. Personal assets of the shareholders are protected from lawsuits or from creditors and investors seeking restitution, in the event of a lawsuit or if the corporation goes bankrupt.
- Federal Work Opportunity Tax Credit (WOTC) - New York offers a federal tax credit to companies in New York. This credit is extended to businesses who hire individuals who experience difficulties finding employment.This includes veterans, those who collect food stamps, and more.
- Tax Benefits - New York isn’t the most tax-friendly location. It does have a program of note that benefits businesses that form in certain areas. This is known as the START-UP NY program.
Disadvantages of a Corporation
- Incorporation Costs - The up front costs are lower, but corporations are subject to more tax laws than an LLC. You might end up paying more for no extra benefit.
- Double Taxation - The corporation is taxed on earnings and the dividends paid to shareholders are taxed on the individual level. The same income gets taxed twice.
- Documentation - Corporations have a lot of paperwork to track. There are meeting notes, annual reports, tax returns, bylaws, licenses and accounting records to take care of.
Should You Start a Corporation?
New York does make it financially easier to incorporate than most states do, compared to forming an LLC in the same state. Before committing to a corporation, we recommend seeing if you can get all the same benefits with an LLC. If you are doing business in other states, you might be able to form an anonymous LLC in states like Wyoming. If you’re not sure, contact us today and we can go over the pros and cons in more detail.