Many people dream of starting their own company in New York City. It’s a city like no other, with a business atmosphere and a startup scene few other cities come close to. Young companies – especially in the tech and media industries – are increasingly finding NYC one of the most inviting places to do business. But if you’re founding a business there are many questions that need to be answered. One of the most basic is: What type of business is best for you? Decisions about how to register at the beginning of your company’s life can have a tremendous effect down the line.
This is the simplest and easiest form of business to own and operate. The clue is in the name – sole proprietorships are businesses that operate under your own support and are legally indistinguishable from you. There’s very little involved in establishing a business under your own name or a trading name (though even with a trading name, the business will be legally and officially under your name), and once local licenses are sorted, you’re set. Personal and business funds and property can be freely mingled, but this means that you, the owner, are responsible for all debts and must pay business costs from your own finances. This also means that any lawsuits regarding your company are brought against you personally. On the plus side, the formalities of corporations – voting, required meetings, registered bank accounts – can all be forgotten, as checks are written to and from your name.When it comes to taxes, sole proprietorships are nice and straightforward. Income earned by the company is income earned by its owner, you. This can be filed as business taxes and then the bottom line amount transferred to your personal tax return. Business losses can also be offset by income earned elsewhere – sometimes a real benefit for a startup company still building its market share.Speaking of money, remember that if your business is a sole proprietorship, you can’t sell any interest in the business to raise funds. Since the business is so tied to you, there’s little value in it should you pass away or be incapacitated in some way. Still, it’s the simplest of all business formats; by conducting business as the only owner you’re automatically acting as a sole proprietorship. There are no forms to file and the status is de facto activated once your business is running.The downsides of sole proprietorship? When applying for official contracts, such as those offered by the city, being an incorporated company is often a pre-requisite, meaning you won’t be able to compete for potentially lucrative business.
Limited Liability Company (LLC)
A Limited Liability Company offers legal protection of the owner’s assets, as a corporation would, without the fees, large amounts of paperwork, and sometimes annoying formalities. This protects you as a young company from losing your own assets should the company run into legal or financial difficulty. Registering as an LLC also gives you access to pass-through taxation, that is, the process whereby profits and losses pass through the business to the owner(s) themselves for reporting on the owners’ own tax report. This generally leads to lower tax payments since you avoid the double hit of a business and personal payment on profits. You won’t, however, be responsible for the company’s debts and liabilities – another bonus.LLCs can have more than one owner – usually up to three before it becomes more complicated – and if you’re a small startup it’s the best of both worlds: the benefits of liability protection without bureaucracy or too many legal requirements. If you register an LLC with multiple owners, consent is needed for any name change, and the LLC is technically dissolved should any one member die. An LLC can have any number of shareholders, though, as a way of raising capital, and also allows “special allocation” of income earned – that is, members can divide and enjoy profit disproportionate to their percentage of ownership, should they wish.It’s a relatively simple procedure to become an LLC; you must file “articles of organization” with the secretary of state’s office. In New York State, this is the Division of Corporations. You can find the forms and application instructions on their website. In New York, the filing fee is $200 and the forms go to:Department of StateDivision of CorporationsOne Commerce Plaza99 Washington AvenueAlbany, NY 12231The downsides to an LLC? If you’re an owner of an LLC, you can’t be paid wages. The company’s profits are shared among you (or, if you’re the sole owner, the profits are yours as in a sole proprietorship ) but the managing members’ profits are classed as earned income and so you must pay self-employment tax. You’ll also have to pay tax on every member’s pro-rata portion of taxable income, even if the share is not actually distributed to them.Note: LLCs can’t be formed for certain professions, including banking, insurance, doctors, lawyers, or accountants.As an LLC grows, you can transfer the assets and ownership to a newly created corporation. LLCs are designed to last no more than 30 or 40 years.
Corporation
A corporation is considered a legally constructed body, able to sue, be sued, commit crimes, be taxed, and to buy and sell property separate from the individuals – the incorporators – who work within it. It offers the same protection from liability than an LLC does – LLCs were created specifically to offer the benefits of a corporation to small businesses – along with a lot more freedom to act. With that, though, comes administration and formalities only suited to larger businesses.Becoming a corporation ensures that shareholders are protected from legal action if the corporation has a claim filed against it, but it also ensures the company has, in theory, an unlimited existence. In a partnership or proprietorship, the death of an individual can end the company: a corporation exists on its own. One of the major draws of a corporation is the fact that you can transfer shares in their entirety; your right of ownership is represented in the share, and you buy, sell, or pass over the shares as you wish, without any administrative delay or cost. This, in turn, leads to another bonus: it’s often easier to attract investors and to raise capital.The downsides of incorporating a business are mostly to do with administration; annual meetings have to be held and owners and directors have certain formalities that have to be observed. You also have to file annually and pay fees to remain incorporated.Becoming a corporation can be complicated, and many choose to hire a lawyer. You can save money by filing yourself, but it may well take longer – and if something small skips your notice, the whole process may be delayed. To form a corporation, you must again file with the Department of State with a Certificate of Incorporation. You can find all the information and forms on their website. The filing fee is $125 plus any applicable tax on shares.
Partnership
A partnership can be informal – partnerships are the only type of business that can be founded by an oral agreement – or in accordance with a formal partnership agreement signed by both parties. Running a business with a friend or colleague (most partnerships evolve from pre-existing relationships) can be a great way to work, providing there are clear business boundaries and an understanding of how profits will be split. General partnerships are owner managements with no appointed owners. Instead the business will follow the majority decision of the shareholders, however you decided to split it.Partnerships don’t require annual meetings, and the minimum taxes that apply to LLCs often do not apply to partnerships. However, the owners are subject to personal liability for all debts and losses unless you found an LLP – a Limited Liability Partnership which often requires expensive insurance or even cash reserves to be held. Another potential hazard in a legal partnership is that the business as a whole – both partners – can be held responsible for the actions of just one. If you do enter a partnership, even with someone you know and trust, make sure you have clear work parameters and a previously agreed upon division of profits and work expectations.Partnerships can avoid some of the minimal taxes that LLCs and corporations have to pay, and so for small businesses there are good reasons to form a partnership if the liability coverage offered by the former aren’t enough to tempt you.Whatever business type is best for you, remember to make sure you understand the responsibilities you take on. Good luck to you!