A Limited Liability Company (LLC) is a popular business entity structure for new business creators. If you’re wondering why someone would form an LLC over a corporation, it’s because of the multiple advantages that come with it. An LLC can be simple to form, provide tax flexibilities, while most importantly, protecting your personal assets. You can have the benefits of both a sole proprietorship and a corporation while limiting the downsides of each type.
What Are the Advantages of an LLC?
When you form an LLC in New York, you gain access to all the privileges that come with operating as this business entity. Operating as an individual sole proprietorship is easy to do, since that’s how the IRS views you initially. Unfortunately if you’re providing a service to other individuals, because we have the right to sue anyone for any reason in this country, you don’t have a means to protect your personal assets should the worst happen. With an LLC, all of that changes. You gain all the following advantages:
Limited Personal Liability
The primary reason to form a business of any kind is to provide this protection. Creating an LLC is no exception to providing this security. Should your business build up debts or be subject to a lawsuit, you will be treated separately, and therefore not liable for the financial liabilities incurred by your business. This can help you protect your personal assets from being claimed by debt collectors or investors of your LLC by declaring a clear and distinct line between what is owned by your business and what is not. This includes things like your home, your car, or your bank accounts.
Corporations and Limited Liability Partnerships (LLPs) can provide this as well, but there are other advantages that come with an LLC as well, and without forming a business structure like these, your personal assets are vulnerable.
Forming an LLC provides an incredible amount of choices when it comes to deciding how to be taxed. If it’s a single-member LLC, it can be taxed as a sole proprietorship. If the LLC has multiple members, it can be taxed as a partnership. Whether it has one or more members, it can elect to be taxed as a C corporation, or an S corporation. The best possible choice changes depending on what type of business, how many members or employees are involved, or how much your company earns. It’s recommended to consult a tax expert or a business lawyer to determine what the best option is for you.
The default status for being taxed is that of a sole proprietorship or a partnership. This means that members will need to pay taxes on their share of profits on their personal federal and state income taxes. If you elect to operate as a corporation, you might be subject to double taxation or New York’s business franchise tax. In order to change your tax classification from one structure to another, you must submit an updated Form 8832 to the IRS.
Operating an LLC comes with different levels of flexibility. When it comes to owners, there is a limit to how many entities can own a corporation. An S corporation is capped at 100, and while a C corporation can have more, they can encounter issues like double taxation. Any number of members, or other business entities, can be part-owner of an LLC. Already stated, an LLC can elect to be taxed in whatever form is most advantageous as well.
Corporations can provide you the liability protection you want, and in New York an S corporation can be treated as a pass-through entity and grant a tax benefit, setting up these structures can be quite confusing. It takes a fairly established business to jump straight into the complex mess that is incorporating a business in New York, so if you want something simple and easy to do, an LLC is right for you.
Ability to Raise Capital
A sole proprietorship might find it difficult to find a lender willing to invest in a business idea. That’s because there is barely any credibility. Taking the step to form an LLC demonstrates that you mean business. Instead of just borrowing money, you can pitch an idea as an LLC and be taken more seriously for it. You might even find people willing to invest in your business as a new member, and it’s even possible to add them while maintaining full management of your LLC.
Claiming a Name
As an LLC, you get priority on a name when you claim something that isn’t in use. Working alone can get you into trouble if you aren’t checking to see who is using what name, and to top it off if you aren’t an LLC your personal assets can be at risk. Going through the steps to form will ensure you have a unique name appropriate to your business that nobody else can take, as long as your business remains active.
What are Some Disadvantages?
There are some downsides to forming an LLC that you won’t experience as a sole proprietorship. By far the pros outweigh the cons, but here some disadvantages:
There’s a $200 filing fee in New York that is unavoidable when submitting your Articles of Organization. Every other year you must file a biennial report which is another $9 cost, just to operate as an LLC. If your business is more like a hobby with zero risk to your assets, this might be an unnecessary cost. It is less expensive initially to register as a corporation ($125 cost,) but there are new costs and complications involved with that decision.
Required Registered Agent
This one isn’t too bad. Operating as a general partnership or sole proprietorship doesn’t require this, since the purpose of a New York registered agent is to be a point of contact between you and the state government for legal purposes, and to have a designated person who is contacted in the event of a lawsuit. Having a registered agent can be beneficial, but it’s here because it is a complication you’ll have to consider when forming an LLC.
An LLC is simple when compared to a corporation, but it is more complex than a sole proprietorship. Add on top of that the complexity involved with multiple members, and it can be tricky keeping track of these new legal expectations. You may require some legal assistance to maintain good standing with the New York state government.
If you’re operating a business with large net income that carries money over from year to year, it might be more beneficial to incorporate. Because of pass-through taxation, you are responsible for paying taxes on all profits earned. If you incorporate, you can pay yourself as an employee and hold some profits within the corporation.
New York has laws in place that prevent you from operating a business anonymously. States like Wyoming can be more affordable and provide you this protection. If your business isn’t anchored in New York, it is worth the time to see if there is a better state to form a business.
Who Should Start an LLC?
An LLC is the perfect business structure for someone looking to protect their personal assets, become more credible as a business operator, and gain the best possible tax advantage available. If you purchase a New York LLC company from us, we can make it as simple as possible!
How a Business Lawyer can Help
Forming an LLC is a big step to take, but it’s completely worth it. It can be overwhelming taking that first step, but our business consultants can help you find the best options for your LLC. Take that first step with us and consult with our legal experts today!