The decision-making process of whether to choose an LLC versus a Corporation can be tricky to navigate, as each business structure comes with its own set of pros and cons. For those looking to establish a business in New York, or those looking for counsel who understand local regulations, this guide will walk you through the five most important factors to consider when making this significant decision. This overview will also provide some context on the differences between the two entities and when and why each might be the right fit.

What is a Corporation?

A corporation is a legal entity that is created to conduct business, separate of any owners or shareholders. Corporations are typically formed by filing paperwork with the state in which the entity will operate. Generally, a corporation is taxed and managed as its own entity, meaning it's not owned by any individual person and it is liable for its own debts. A “C” corporation is the most popular type of corporation, in which income is taxed separately from its owners.

What is an LLC?

A limited liability company (LLC) is a business structure that combines the features of both a corporation and a partnership or sole proprietorship. In an LLC, the owners are not personally liable for business debts and other obligations. This means that, in the event of a lawsuit or other financial issues, creditors cannot seize personal assets such as bank accounts, cars, or homes. However, the owners can be held personally liable for any debts or other legal issues that result from their own negligence or intentional wrongs.

1. Liability Protection

The primary benefit of both the Corporation and LLC is that the owners of the business will not be held personally liable for any of the debts or obligations that the business takes on or accumulates. In other words, an individual, or shareholders of a Corporation, will not be legally responsible for any of the money or assets of the business. This makes both of these business entities attractive for ambitious entrepreneurs looking to lessen their personal liability.

2. Taxes

When it comes to taxes, LLCs and Corporations offer two different tax treatments. A C-corporation is complex, often requiring multiple entities, and is subject to “double taxation.” Here, the Corporation pays taxes on its income and the shareholders are also taxed on the portion of income that they distribute to themselves (such as wages and dividends). An LLC pays “pass-through” taxation, where the profits and losses are passed-through to the owner’s personal tax returns, which are then taxed at their individual income tax rate.

3. Owners and Shares

Corporations can have multiple owners and shareholders, while an LLC may have just one owner or multiple owners. Companies that are planning to seek outside investment may benefit more from forming a Corporation, as the entity’s structure will yield the ability to issue shares to potential investors. This makes it easier for them to raise capital from outside sources, but it also complicates the tax situation for the owners of the business. On the other hand, LLCs are more flexible and can have members who or either non-voting or voting parties.

4. Cost and Time

The filing process for both Corporations and LLCs can be time consuming and expensive. For both entities, you will need to file the Articles of Incorporation with the Secretary of State, as well as pay the associated fees. Here, some states require ongoing maintenance of corporate documents, which can add to the cost. Generally, LLCs are more expensive and time consuming to set up than corporations, however they require less paperwork and are less expensive to upkeep.

5. State Regulation

For business owners located in New York, or those looking for counsel who understand local regulations, there are certain regulations that may impact the decision to choose an LLC or Corporation. In the State of New York, LLCs are subject to annual filing and maintenance requirements, as well as the payment of fees to the Department of State. Corporations are also subject to these requirements, as well as the filing of an Annual Report and the payment of franchise taxes.

Conclusion

For business owners, the decision of selecting a corporate or LLC structure is an important one. Ultimately, the structure that you choose should be dictated by the type of business that you are hoping to operate, but it is important to be aware of the various factors, including liability protection, taxes, owners and shares, cost and time, and state regulations, when making the decision. With the help of local counsel, business owners can feel confident in their choice and understand the laws and regulations that will come into play in the State of New York.

Topics:

LLC vs Corporation,

New York Regulations,

Legal Entity