LLC or Corporation? Choosing the Right Entity for a New York Small Business

“Just form an LLC. It’s simplest and saves the most tax.” It is one of the most common pieces of advice new business owners hear, and one that deserves a second look, especially in New York.

Getting the terms straight

An LLC has no shares and no board of directors, only “members” and an “operating agreement.” It works much like a partnership wrapped in limited liability. A corporation has shares, shareholders and a board, with a more rigid governance structure. “C corp” and “S corp” are not two kinds of companies; they are two tax treatments of the same corporation. Choosing an entity and choosing a tax treatment are separate decisions. For clients familiar with Chinese company law, the U.S. LLC is not the same as a Chinese “limited liability company.”

Factors specific to New York

1. The LLC publication requirement. New York is one of the few states that still requires new LLCs to publish notice of formation in two designated newspapers for six consecutive weeks, within 120 days of formation. The cost varies by county and can reach thousands of dollars in Manhattan. An LLC that fails to comply cannot bring a lawsuit in New York courts until it does, and may run into problems with loans, leases and transactions. Corporations have no such requirement.

2. New York City taxes. If your business is in the five boroughs, this may outweigh everything else. New York City does not recognize S corporation status, so an S corp still pays the city’s corporate tax, while LLCs are generally subject to the city’s roughly 4% Unincorporated Business Tax. The assumption that an LLC always saves tax does not hold in New York City. It depends on your profit level and self-employment taxes, and needs to be calculated.

3. The owners’ citizenship. An S corporation cannot have a nonresident alien shareholder. If a partner holds a Chinese passport and is not a U.S. tax resident, the S corp option is closed, and getting this wrong can terminate the election automatically. Foreign-owned corporations and LLCs also carry extra reporting duties, such as Form 5472, where penalties start at $25,000.

4. Fundraising and exit. If you plan to raise venture capital, grant employee equity or eventually sell, investors almost always expect a Delaware C corporation, and only C corporation stock can qualify for the Qualified Small Business Stock (QSBS) capital gains exclusion.

5. Rules that are easy to miss. New York requires an LLC to adopt a written operating agreement within 90 days of formation, and licensed professionals such as doctors, accountants and architects must use a PLLC or PC. As for liability protection, LLCs and corporations are essentially equal. What really protects you is good corporate housekeeping, keeping personal and business funds separate, and proper insurance.

Attorney’s perspective: how I approach this decision

I don’t make this choice for clients from a comparison chart. I start with four questions: Where will the business operate? Who are the owners, and what is their immigration and tax status? What profit do you expect? How do you plan to exit in five years? With those answers side by side, the realistic options usually narrow to one or two.

I then run the numbers together with the client’s accountant. Tax modeling is the accountant’s expertise, and legal structure is mine, and when the two are done separately they often point in opposite directions. Forming the entity is also only the start: the owners’ rights and obligations need to be written into an operating or shareholders’ agreement to prevent disputes later.

Talk to me

If you are about to start a business in New York, or you have already formed an entity and are not sure it is the right one, call +1 718-218-5805 or schedule a consultation. An hour spent getting the structure right can be one of the best investments you make in your business.

This article is for general information only and is not legal advice. Reading it does not create an attorney-client relationship. For advice about your situation, please contact us.

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