When you start a business, you have the opportunity to create a sole proprietorship, LLC, or corporation. Each option has advantages and disadvantages, but many people choose to register as an LLC, or limited liability company, to get similar legal protections offered to corporations while still operating as a small business.
What Is an LLC?
An LLC is similar to a corporation in that the owner has personal protection from the company’s liabilities. Any debts owed, as well as any liens, lawsuits or other claims on the business, are limited to the assets of the business. As such, anyone holding a lien against the business can’t go after the owner’s personal assets in most circumstances. However, the limited liability protection can be lost in the event of negligence or illegal acts by the owner.
Tax Considerations of an LLC
For tax purposes, an LLC isn’t considered a distinct entity on its own, so no tax return is filed for it. The owner of the LLC reports profits and losses on his or her personal tax return. This tax treatment is called pass-through treatment because taxes pass through the business and become the direct responsibility of the owner. This is unlike a corporation, which is taxed as its own entity. Some types of corporations are double taxed; the IRS requires taxes to be paid on the corporation’s net income, then again on income distributed to the owner through his or her salary. This can be avoided altogether with an LLC.
Setting up an LLC
Setting up an LLC doesn’t require the work of a legal advisor, but seeking the assistance of an attorney who is well-versed in business law with the ability to help with entity formation can make the process much easier and give you piece of mind, knowing it all has been done correctly. There are several steps to setting up an LLC, and the first is choosing a name that isn’t already in use in the same state. The next step is to file Articles of Organization, which, in New York, involves filling out a standard form containing the company name, county of registration, and contact information for the owner. Next, any required fees will be paid, and business owners in New York are required to publish an announcement of their LLC formation several times in local newspapers designated by the County Clerk.
Finally, the business must create an LLC Operating Agreement. The agreement lists the rights and responsibilities of each owner, similar to corporate bylaws, as a way to deal with conflicts between owners or the transfer of ownership of the company. Especially when there are multiple owners, a well drafted Operating Agreement can prevent expensive and time-consuming disputes and litigation in the future.
Jacobowitz & Gubits, LLP has helped hundreds of New York business owners set up their LLCs. This year marks our 50th anniversary of providing experienced legal services to individuals, business owners, and municipalities throughout Hudson Valley. We can advise you throughout the process of setting up your business so that you attain personal legal protection and tax benefits for your small business. To speak with one of our attorneys, contact our firm at (845) 778-2121 to schedule a consultation at one of our offices in Walden or Monticello.