Characteristics of New York
Business Structures

By

Leonard W. Krouner

Introduction

Choice of business structure (form, entity) is an important decision facing the new business or an established business.  A business structure decision should be  made with the assistance of an accountant and/or attorney familiar with the business or the business plan.

The primary considerations in business structure selection are limited liability, and  favorable tax treatment.  Secondary considerations include cost of creation and upkeep, life span, flexibility in structuring ownership, management, financing, and transfer of ownership.

This publication summarizes characteristics of the most commonly recognized business structures in New York , and is intended as a starting point for the business owner(s) and professionals advising them in determining which structure is best suited to the particular enterprise.

A bibliography of professional articles on choice of New York business structure  used as sources for this publication is included in Appendix A .  A  list of sources for further information and assistance is included  in Appendix B. Further information  on specific topics can be obtained from legal, tax, and other publications.

Business structures providing the most limited liability protection (corporations and limited liability companies) are also the most formalistic requiring careful structuring and adherence to legal formalities to maintain that protection.  Updating and checking the information provided in this publication is necessary since the laws and regulations are subject to frequent change.

SP -1

New York

Business Form: Sole Proprietorship

Overview: Simplest form of business. Suitable for a start up or a one person business where there is a low risk of liability.

Authorizing Legislation:  None

Creation: No formation document required for filing with the New York Department of State.

If operating under a name other than the proprietor’s, file an Assumed Name Certificate with the Clerk of the counties in which business is conducted.

Limitation of Liability: Sole proprietor is personally responsible for all debts from  the business including those from torts (civil wrongs) and contracts. Adequate insurance should be obtained to limit the sole proprietor’s risk.

Life Span:  Death or retirement of sole proprietor ends the business, unless other arrangements are made by the sole proprietor prior to his death.

Taxation: Profit or loss from business is reported directly on the sole proprietor’s personal tax return.

Management Flexibility: 

Financing Flexibility:

Transferability of Ownership:  Sale by sole proprietor.

Suitability: 

• for personal finance of business
•  using limited personal assets  as collateral
• business should have low risk of tort, contract, or other liability
• simple, low cost, structure to maintain
• may have difficulty getting adequate financing

 

SP-2

Licenses or permits:

• New York State -

• Local -
  • County Clerk
  • Municipal Clerk
• Other Agencies to Contact -
  • United States Internal Revenue Service for:
    • Federal employer identification number (EIN)
    • Subchapter S status information and qualification
    • Witholding under Federal Insurance Contributions Act (FICA)
  • New York State Department of Labor for:
    • Unemployment tax
    • Minimum wage and hour law
    • New York State Workers’ Compensation Board
    • Workers’ compensation insurance
  • U.S. Immigration & Naturalization Service:
    • Verify employment eligibility of new employees
  • New York State Department of Taxation & Finance
    • Collection of sales and use  taxes
    • Employer withholding taxes
    • Miscellaneous business taxes

SP-3           

Other Agencies to Contact (Continued)

See Appendix A  University at Albany Small Business Development Center  “Steps in Getting Started” (December 3, 2002) for eleven items to be considered when starting a new business including a listing of the agencies to contact.

P-1

New York

Business form: Partnership or General Partnership

Overview:   To expand sole proprietorship to bring in new investor(s) or other person(s) to share all or part of liability and responsibility for business operation. Person(s) can include individuals, groups of individuals, companies, corporations, partnerships.

Authorizing Legislation: New York Partnership Law.  Rules governing operation are expressed in contract between partners (partnership agreement).

Creation: No formation document required for filing with New York Department of State.

Formal partnership agreement is recommended to identify rights and obligations  of partners on items such as task performance, approval of partners on major decisions, entitlement to profits, responsibility for expenses, dissolution of partnership, termination of partnership.

File an Assumed Name Certificate as provided for in partnership agreement with the Clerk of the counties in which the business is located.

Limitation of Liability: Partners are jointly and individually liable for the legal obligations of the enterprise including contracts and torts.

Life  Span: For a designated period stipulated in the partnership agreement or until a dissolution event occurs.

Tax rules require automatic dissolution of general partnerships to receive favorable  tax treatment. However, the tax law permits the parties to create procedures to reconstitute the entity by agreement, so this tax factor is usually not a problem.

Management flexibility:

Financing flexibility:

Transferability of ownership:  To comply with Internal Revenue Code restrictions the free transferability of interests in partnerships must be restricted.

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P-2

Suitablility:

• Allows personal finance by two or more people with limited assets
• Simple, low cost, business form for low risk business
• Profit or loss from business is reported on general partner’s tax return

License or permits:

• New York State –
  • See Governor’s Office of Regulatory Reform under “Sole Proprietorship”
• Local –
  • County or municipal clerk in counties where partnership is doing business

Other Agencies to Contact:

• See five agencies listed under  the Sole Proprietorship  discussion in this document, and eleven items in Appendix B  to this document.

LP -1

New York

Business Form: Limited Partnership

Overview: Where risks of business are high and partners seek to limit liability. Unlike sole proprietorship or partnership this business form makes it easier to raise capital from passive investors seeking economic returns. Operation is controlled by statute. Formation and operation can be costly and technical depending upon arrangements of the parties. Partners may not participate in management of the business with some exceptions.

Authorizing Legislation: New York Revised Limited Partnership Act (New York Partnership Law  Article 8 A.)

Creation: A Certificate of Limited Partnership as provided for in the partnership agreement must be filed with the New York Department of State  pursuant to New York Limited Partnership Act § 121-201.  Notice of formation of a Limited Partnership must be published in two newspapers designated by the County Clerk in the counties where the limited partnership is formed, and affidavits of  publication provided by the newspapers must be filed with a $25 fee for recording each affidavit with the New York Department of State as provided in the New York Revised Limited Partnership Act § 121-201.

If a name other than the name used in the Certificate of Limited Partnership is used to transact business in New York, then file an Assumed Name Certificate with the New York  Department of  State as required by General Business Law §130.

Limitation of Liability:  A limited partnership must have at least one general partner who is responsible for obligations of the partnership, and at least one limited partner whose liability for limited  partnership obligations does not exceed the extent of their capital contribution to the limited partnership.

Limited liability of limited partners can be lost if they participate in the management of  the limited partnership.

Life Span: 

• Is for a designated period specified in the limited partnership agreement.
• Limited partnership automatically dissolves upon the death, bankruptcy, or withdrawal of a partner, unless continued by vote of the remaining partners
• Tax rules require automatic dissolution

LP-2

Taxation: Parties may create classes of capital with varying characteristics and  specify complicated provisions for allocation of profit and loss.

Tax considerations can be complicated requiring proper structure and monitoring.

Limited partnership is not treated as a separate taxable entity.

Business income is taxed through each partner’s personal tax return.

Management  Flexibility: Management of a limited partnership by a limited partner or distributions to a limited partner may result in personal liability for limited partnership obligations.

Financing Flexibility:  Various states’ insurance laws do not allow insurance companies to purchase notes or debentures from entities other than corporations.

Transferability of Ownership:  To comply with Internal Revenue Code restrictions the free transferability of interests in partnerships must be restricted.

Suitability:  Where risks of doing business are high and partners seek to limit their liability.

License or Permits:   See New York State and  Local listings under Sole Proprietorship discussion in this document.

Other Agencies to Contact:  See five agencies listed under sole proprietorship discussion in this document.

C-1

New York

Business  Form: Corporation

Overview: Owners (shareholders) liability for corporate obligations is limited to their original investment unless an exception occurs and the corporate veil is pierced.   Corporation has separate existence from shareholders and perpetual duration. Operation is controlled by statute and is highly formalized.

Authorizing Legislation: New York Business Corporation Law.  If  Internal Revenue Code Subchapter S status is sought, then Subchapter S election must comply with procedures and form in Internal  Revenue Code.

Creation:

• A Certificate of Incorporation signed by at least one incorporator who is at least  18 years old must be filed with the New York Department of State as required by Business Corporation Law  §401 and §402.
• If a name other than the name used in the Certificate of Incorporation is used to transact business in New York, then file an Assumed Name Certificate with the New York Department of State as required by New York General Business Law  §130.
•   New York Department State Division of Corporations  (518  473-2492) publications on corporation formation include  “Forming A Corporation  in New York State”,  and “Legal Memorandum C002 Formation of Business Entities” available at the  New York Department  of State website:  http://www.dos.state.ny.us/corp/corpwww.html.

Limitation of Liability: Shareholders liability is  limited to amount of initial investment unless the corporate veil is pierced for failure to maintain the corporate form, or where shareholders co-mingle personal and corporate funds or fail to pay employee withholding or sales tax.

Life Span:  Is perpetual unless limited by Certificate of Incorporation or formal dissolution of corporation.

C-2

Taxation:  Unless an Internal Revenue Code Subchapter S election is made corporate profits are taxed once when made by the corporation, and a second time when they are distributed to the shareholders (‘double taxation”).

Corporations are denominated  “C” or “S” according to which subchapter of the Internal Revenue Code they are organized under.  A Subchapter “S” corporation receives “pass through” tax treatment so that there is no federal income tax at the corporate level.  A Subchapter “C” corporation is the “garden variety” corporation under New York law with profits subject to “double taxation.”

Profits and losses are calculated in proportion to capital invested.

New York State franchise taxes are paid by corporations in addition to income taxes. The New York State franchise tax can be a significant annual cost of doing business.

Management  Flexibility: New York Business Corporation Law provides for owners (shareholders)  and managers (officers and directors)  but does not prohibit a shareholder from also being an officer or director of the corporation and thereby take a management role.

Financing  Flexibility: “S” corporations can have only one class of stock which limits the option to provide different  shareholders with different rates of return . Since profits must be allocated ratably to owners of a class of corporate stock any preference or priority must be accomplished by creating a class of corporate stock with the necessary characteristics .  Creating different classes of corporate stock requires publicly disclosed amendments to the corporate charter or charter related documents, and can be limited by Internal Revenue requirements that certain types of corporations (i.e., S corporations) can only have one class of stock.

Ownership Flexibility:  Statutes and regulations should be checked to determine if there are limitations on the number and status of shareholders in a specific corporate structure. Shareholders in an “S” corporation cannot number more than 75 and all must be U.S. citizens.

Transferability of Ownership:  Subject to securities laws and contractual restrictions corporate stock  evidencing corporate ownership is freely transferable.

C-3

Suitability:  

• Corporate  structure has the greatest acceptability in dealing with other parties. There is a procedure for qualifying a corporation to do business in every state within the United States and in most foreign jurisdictions.
• Centralized management is a primary characteristic of corporations with shareholders retaining reserved powers to vote on transactions such as mergers, dissolution, etc.
• Operation is highly formalized .
• Corporations can be inexpensive to form if involved documents such as custom shareholders’ agreements are not required.
• Corporations are subject to an annual New York State franchise tax which can be a significant expense.
• Periodic maintenance of corporate records is required to maintain structure and limited liability
• Properly formed and maintained a corporation affords the shareholders limited liability, perpetual life,  transferability of ownership, options to avoid double taxation of profits, and ability to obtain financing.

Licenses or Permits:  See New York State and Local listings under Sole Proprietorship discussion in this document.

Other agencies to contact:  See the five agencies listed under the Sole Proprietorship discussion in this document.

LLC-1

New York

Business Form:   Limited Liability Company (“LLC”)

Overview:

•   Provides limited liability for all owners (‘members”) regardless of whether they participate in management.
• Provides “pass through” tax treatment if properly managed and organized
• Provides greater flexibility for ownership, tax planning, and management than other business structures and specifically Subchapter S corporations     

Authorizing Legislation:  New York Limited Liability Company Law

Creation: Articles of Organization signed by one or more organizers of the limited liability company must be filed with the New York State Department of State (Limited Liability Company Law Article 2 and §203).

If a name other than the name used in the Articles of Organization is used to transact business in New York, then file an Assumed Name Certificate signed by a member or manager with the New York Department of State as required by New York General Business Law §130.

Limited Liability:  LLC members do not have personal liability for the debts of, or claims against their business.  Exceptions to limited liability for members can occur if limited liability is  waived in the Articles of Organization, or if the “veil of protection” of the LLC is pierced.

Life Span:  Articles of Organization can establish a designated period, or LLC can continue until a dissolution event occurs and no action is taken to continue the LLC’s existence.

LLC-2

Taxation: 

• Two or more LLC members  can elect  that the LLC   be treated as a partnership for tax purposes thereby avoiding “entity” or “double taxation.”
• One LLC member can elect that the LLC be treated as a sole proprietorship for tax purposes thereby avoiding “entity” or “double taxation.”
• Appreciated property may be transferred to an LLC without immediate recognition of gain
• An LLC member (owner)’s tax basis includes the member’s pro rata share of the LLC’s debt which allows LLC members to receive additional tax free distributions or to take additional flow through losses
• In an LLC income, gains, losses, deductions and credits can be specifically allocated among its members as long as such allocations satisfy certain criteria. This allocation  helps LLC members by providing benefits to those who can use or need them providing the allocations are not made to avoid tax liability.

Management Flexibility:

• An LLC can be managed by members (owners) or managers under New York Limited Liability Company Law §401.
• Classes of managers can be authorized under Limited Liability Company Law §408, and select groups of managers can be made responsible for certain matters.

Financing Flexibility: Since different classes of member interests are permitted in an LLC , there are no limitations on financing.

Ownership Flexibility: No restrictions on the number of members or their citizenship are imposed in a LLC.

Transferability of Ownership:  A member’s interest in profits from the LLC is transferable, but a member’s ownership interest is not transferable unless authorized by the LLC Operating Agreement or by the consent of at least a majority of the members.

                                          Foreign members are allowed in an LLC.

LLC-3

Suitability:

• Most new or closely held or family owned businesses will find the LLC to be the most attractive business structure.
• The LLC’s combination of corporate and partnership characteristics  together with. the IRS “Check-the Box” regulations, offers business owners  more flexibility  for ownership, financing, and management than the other business structures.

Licenses or  Permits: See New York State and Local listings in  the Sole Proprietorship discussion in this publication.

Other Agencies to Contact:  See the five agencies listed in the Sole Proprietorship discussion in this publication.

LLP-1

New York

Business Form:  Limited Liability Partnership (“LLP”).

Overview: LLPs in New York are available only to professional firms, and generally have the characteristics of a partnership.

Authorizing Legislation:  New York Partnership Law , Article 8-B,  Domestic Registered Limited Liability Partnerships §121-1500, §121-1501, §121-1506.

Creation: A general partnership becomes a limited liability partnership by filing a registration statement with the New York Department of State.

Limited Liability:

• Limited liability partners are personally liable  for their own negligent acts and the negligent acts of those persons under their “direct supervision and control.”
• Limited liability partners are not personally liable for the obligations of the partnership or each other

Limited Liability Partnerships have the characteristics of  Partnerships  as previously described  in this publication  under each of  the topics listed here:

Life Span:

Taxation:

Management Flexibility:

Financing Flexibility:

Ownership Flexibility:

Transferability of Ownership:

Suitability:

Licenses or Permits:

Other Agencies to Contact:

APPENDIX A

Bibliography

Boyce, Gerald R. & Hewitt, S.   “Choosing the Appropriate Business Entity”,  217 No. 48  New York Law Journal  p.5, col. 1 ( 3/13/97).

Friedman, Scott E. “The LLC and S Corporation: Choice of Entity Redux”  69 New York State Bar Journal  36 (July/August 1997).

Gold,  Simeon “Choice of Business Entity for Commercial Transactions”  213 No. 50  New York Law Journal p.1 col. 1, ( 3/16/95).

Maizes, Rachel.  “Limited Liability Companies: A Critique”  70  St. John’s Law Review  575  (1996).

Mertens, Richard W.  “Choosing Between A Limited Liability Company and an S Corporation.”  68 New York State Bar Journal  52  (May/June 1996).

New York Department of  State Division of Corporations.  “What Types of Businesses Operate In New York State?”  Website:http://www.dos.state.ny.us/corp/formbus.html

New York Department of State  Counsel’s Office .  “Formation of Business Entities” – Legal Memorandum CO02 

Website: http://www.dos.state.ny.us/cnsl/busents.html

Stack, George F.  “The Limited Liability Company: A New Form of Doing Business In New York.”  66 New York State Bar Journal  30   (November 1994).

University at Albany Small Business Development Center  “What Types of Businesses Operate In New York State?”

APPENDIX B

STARTING A BUSINESS

SOURCES OF ASSISTANCE

(All Sources Provide Assistance at No Charge)