Business Owner's Manual

Structuring a Business

There are four basic forms of business organizations in New York: sole proprietorships, partnerships, corporations, and limited liability companies — the form you choose will affect your ability to control and profit from the business, your liability for lawsuits and the debts of the business, and the taxes you pay. The "right answer" for your business depends on your business goals and your personal style. This section gives you some issues to consider, but it's also important that you review your situation with an attorney or a financial advisor.

Note: The New York City Bar Association provides free attorney referrals. Call 212-626-7373 (English) or 212-626-7374 (Spanish)

Unincorporated Business Tax: New York City currently imposes a special tax on all unincorporated businesses — sole proprietorships, partnerships, and limited liability companies (described in this chapter). Like the corporate tax, this is a tax once on the business entity and once on the individual (also see the chapter on Tax planning).

SOLE PROPRIETORSHIP

This is the simplest form of business structure for a business owned by one person. It offers absolute authority to the owner. On the other hand, there's no one else to share the responsibilities and the potential liabilities with you.

Advantages:

Easiest type of business to start and the least expensive to establish.

Most flexible form of business because sole proprietor has absolute authority.

No need to file a separate business tax return — business losses and gains are combined with personal tax items, and losses and business expenses are deductible, but all business expenses must be tracked and substantiated.

Disadvantages:

Owner assumes unlimited personal liability for debts and lawsuits.

Owner's death or illness can endanger the stability of the business.

The ability to raise capital is limited.

If you are not operating the business under your own name, you must file a notarized "Certificate of Conducting Business under an Assumed Name" Form X 201 at the County Clerk's office in the borough where your business is located. You can purchase the necessary forms at a commercial business stationery store such as Airline Stationery in Midtown Manhattan.

You will need 3 original forms: one for the county clerk, one for the bank where you will set up an account, and one to post at your place of business. As a sole proprietor, you cannot use words or abbreviations in your name that indicate a corporation (such as: limited, ltd., corporation, corp.) or words that indicate more than one owner (such as: associates, group, partners).

For more information about business formation in New York visit the NY City Business Solutions website.

PARTNERSHIP

In a partnership, two or more persons agree to share ownership, management responsibilities, and liability for a business. In a general partnership, all partners have unlimited personal liability for all partnership debt. In a limited partnership, the general partners are personally liable for the partnership debt, while the limited partner has no such liability beyond his or her personal investment.

Advantages:

Having partners means additional sources of capital and the ability to share ideas, skills, and responsibilities. Each general partner can act on behalf of the business.

The partnership files an "informational return" but doesn't pay taxes — each partner reports his or her share of income or loss on quarterly tax returns, and losses are tax deductible.

A general partnership is relatively easy to organize. (A limited partnership is more complex. It requires filing with the New York State Department of State and should not be formed without professional advice.)

Disadvantages:

General partners have unlimited personal liability. Creditors can go after personal assets.

Partnership ends on death of a general partner and a new agreement is required each time a partner joins or leaves the business.

It is often difficult to disengage from an uncooperative partner.

Partnerships (like sole proprietorships and limited liability companies) are subject to New York City's unincorporated business tax.

A partnership must file a notarized Certificate of Doing Business as a Partnership at the County Clerk's office. The procedure is the same as for filing a DBA. See additional comments under sole proprietorship.

To protect against future disputes, prepare a formal written partnership agreement setting out how much capital each partner will contribute, how the business will be managed, how responsibility and authority will be shared, and how the profits will be divided. You may also decide to get business life insurance to ensure the continuity of the business if a partner dies. For more information see Financing your business. You should consult an attorney for advice on a partnership agreement.

CORPORATION

This is the most complex and expensive way to structure a business, but it also offers important protections for the owners. A corporation is a legal entity distinct from its owners. This ensures continuity and protects the assets of the owners (i.e. the shareholders) from the liabilities and debts of the corporation.

Advantages:

Except where shareholders are professionals who are always responsible for their own negligence, the liability of corporate shareholders is limited to the amount of their investment.

A corporation has advantages in raising capital because of greater access to investors.

Ownership is transferable and inheritable — the corporation doesn't fold if its owners change or die.

Disadvantages:

Corporations are difficult and expensive to set up and dismantle.

There are stricter legal rules than for other business structures. Power is limited by the articles of incorporation and bylaws, and a vote of the shareholders may be required for various decisions.

As a separate legal entity, a corporation must maintain its own set of accounting records and file its own income tax returns.

Special Tax Considerations:

Corporate shareholders are subject to a form of double taxation. The corporation pays a corporate tax on earnings and each owner/shareholder pays personal income tax on any profits distributed to them. This is a special problem for small corporations controlled by their owners.

Both the IRS and New York State allow corporations with under 35 shareholders to elect to be a Subchapter S Corporation, treated as a partnership for tax purposes. This avoids the double taxation by the state and federal governments. Whether or not to make a Subchapter S election is a matter to be discussed with a tax advisor. If you want to go ahead, use IRS Form 2553 and New York State Form CT-6. Note, however, that New York City treats "S" Corporations as true corporations, subject to corporate tax.

It is a good idea to consult an attorney for help in setting up a corporation. It's possible, but risky, to do it yourself.

A corporation must obtain approval from the Secretary of State to do business under a fictitious name. The name must be unique and, ordinarily, must contain the terms "ltd.," "corporation," "corp." or "inc." You should think of at least three name options, in case your first choice is taken.

Forms, detailed instructions, and additional information on forming a corporation are available from the NYS Department of State Web site. Or call the DOS at 518-473-2492.

Alternatively, you might contact an incorporation service listed in the Business to Business Yellow Pages under "Incorporating Companies." The service will check the name you have selected, file a certificate of incorporation, and provide you with a corporate "kit" — forms for articles of incorporation, bylaws, stock certificates, etc.

LIMITED LIABILITY COMPANY

A limited liability company (LLC) offers "members" (essentially the same as shareholders) both the protections of a corporation and the tax advantages of a partnership.

You should discuss with an attorney or tax advisor whether you should structure your business as a corporation with a subchapter S election or an LLC.

To form and register an LLC, call the Department of State at 518-473-2492 and ask for the LLC information packet. You can find more information about required forms from the Department of State's Frequently Asked Questions list.

Here is some information on important changes to the process of filing as a Limited Liability Company. These changes could cause LLCs (both existing and new) to spend significant amounts of money in advertising in order to maintain their legal status in New York State. The link below offers some comprehensive information about - and the text below the link is a summary of - the new law's requirements.

http://www.dos.state.ny.us/corp/newlegislation2006.html

RE: Important New Requirements for Limited Liability Companies

If you operate your business as a Limited Liability Company (LLC) in New York State, you must publish newspaper notice of the existence of that business.

A new New York State Law provides for suspension of your LLC if you fail to publish newspaper notice.

This new law is effective on June 1, 2006.

LLC’s that already exist but have never published newspaper notice have until December 31, 2007 to publish. Failure to publish will result in suspension of the LLC.

Background. New York has always had a law requiring publication of notice of creation of an LLC. However, under the old law, there were no serious consequences to not publishing. As a result, about 40% of the LLCs created did not publish newspaper notice. Last year, the newspaper lobby convinced the State Legislature and the Governor to adopt a tougher law, which takes effect June 1, 2006. Failure to publish, will result in “suspension” of the LLC. As a result, the LLC might be treated as if it does not exist. This is very dangerous for owners and employees of an LLC because any of those people could become personally liable for the debts and liabilities of the LLC. Newly created LLCs have 120 days after effectiveness of their articles of organization to publish.

Old LLCs. If you created your LLC prior to June 1, 2006 but never published newspaper notice, you must do so by December 31, 2007. If you do not, your LLC will be suspended.

Limited Partnerships. The new publication applies to limited partnerships. If you are doing business in a limited partnership, you must meet the same requirements as LLCs.

What to do. First, you should find out whether you have published. You can call the Corporate Division of the New York Department of the State at 1-900-835-2677 or email them at info@dos.state.ny.us to see if you have. If you have published, there is nothing more you need to do. Further, while not necessary, you may request a certified copy showing that you have published. For a $10 fee, you can request this certification including the name of your LLC and writing to: Department of State; 41 State Street, Albany NY, 12231

ADDITIONAL LIBRARY RESOURCES

The resources listed below are available at the Science, Industry, and Business Library (SIBL). Some items can be borrowed from the first floor circulating collection. Others can be found in the reference collection on the library's lower level. Check the online catalogs (LEO for circulating items, CATNYP for reference) to find the call numbers and locations of suggested print resources. Your local library may also own similar titles.

Print Resources

The Compete Small Business Sourcebook

How to Form Your Own New York Corporation

How to Start a Business in New York

Incorporate Your Business

Legal Forms For Starting & Running a Small Business

The Partnership Book: How to Write a Partnership Agreement

Form a Partnership: the Complete Legal Guide

Electronic Resources

Search for articles on how to structure a business by using one of the electronic periodicals databases in SIBL's Electronic Information Center. These online databases provide access to newspaper and magazine indexes. Full-text articles are also sometimes available online for a variety of business-related topics.