Frequently Asked Questions: LLC vs. Inc. in New York
Answering the Questions: LLCs vs Incorporations for Business Formation3 min read
Legally establishing a business is an important and difficult process and many entrepreneurs are often confused about the differences between LLCs and Incorporations. If you are starting a business in New York, it is essential to know the difference between a Limited Liability Company (LLC) and an Incorporation (Inc.). Choosing the right business structure is an important decision that can have significant tax, legal, and operational implications, so seeking professional legal guidance is essential when filing for either structure. This article explores some of the most frequently asked questions (FAQs) regarding LLCs and Incorporations within the state of New York.
What is the Difference Between an LLC and an Incorporation?
The most significant difference between an LLC and an Incorporation is that LLCs are limited liability entities that are owned by one or more individuals, whereas Incorporations are owned by multiple shareholders and are managed by directors appointed by the shareholders. LLCs are pass-through entities, meaning that the business’s profits and losses “pass-through” to the LLC owner(s) and are taken into consideration on personal returns. Incorporations, on the other hand, are taxed differently and are subject to different tax regulations.
Which Entity Type is More Popular in New York?
In New York, LLCs are far more popular than Incorporations. This is likely due to the fact that LLCs allow for members to enjoy personal liability protection and the flexibility to select a pass-through tax status. LLCs also have more flexibility in terms of management structures, whereas Incorporations are subject to strict regulatory frameworks and more stringent filing and disclosure requirements.
What Should I Consider Before Filing in New York?
No matter which entity structure you decide to use, it is important to weigh the personal and business risks associated with the particular business type. Before filing, you should consult a local business lawyer who is knowledgeable in matters relating to limited liability entities and can help you determine the best entity to fit your business needs. You should also consider the potential for future expansion, filing and disclosure requirements, and the complexity of the structure and associated fees. Finally, you should weigh the type of taxation you would prefer and review the tax rules relevant to each entity structure.
What is the Process for Establishing Either Entity Type?
The process for establishing either entity type can be complex, so it is important to seek professional legal guidance to ensure compliance. Generally, the process involves filing the required paperwork with the appropriate state agency, such as the Department of State for the LLC or the Secretary of State for the Incorporation. Additional steps, such as drafting and filing bylaws, issuing shares, and obtaining necessary licenses and permits may also be necessary.
What are the Key Differences in Obtaining Tax ID Numbers for Each Entity Type?
The Internal Revenue Service (IRS) assigns most registered businesses a unique tax identifier number, often referred to as an individual taxpayer identification number (ITIN). For LLCs, the state will assign the entity a single tax ID number while for Incorporations, the IRS will assign both a federal employer identification number (FEIN) and a state identification number.
What Are the Ongoing Requirements for Both Entity Types?
Regardless of which entity type you select, it is important to remain compliant with ongoing legal and filing requirements. To maintain an LLC in New York, you must: renew the LLC registration with the Department of State, submit an annual report, file relevant tax returns, and maintain a registered agent to receive important legal and tax documents. An Incorporation, on the other hand, must appoint a board of directors and keep minutes of all board meetings, obtain another FEIN if the Incorporation operates in another state, file relevant tax returns, distribute dividends to shareholders, and solicit any necessary employment documents.
The core message
While LLCs and Incorporations each offer different advantages and disadvantages, they are the two most commonly used entity structures, especially in New York. Seeking professional legal help is essential when filing for either entity type in order to ensure compliance with the ever-evolving state regulation requirements. To receive the benefits of both liability protection and tax flexibility, it is important to understand the differences between these two entities and the process of forming them.
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