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You want to start a business, but what type of entity should you choose? There are several different forms of businesses available in New York State, each with their own liability and tax implications.  This article will provide an overview of the formation requirements, liability implications and tax implications of several business forms.

Sole Proprietorships

A sole proprietorship is a business that is owned by a single person and operated without taking the necessary steps to form any of the business entities described below.   If a sole proprietor conducts or transacts business in New York State under any name other than his or her legal name, he or she is required to file an assumed name certificate (“DBA”) in each county where he or she transacts or conducts business. 

Benefits:

• Filing a DBA is the only formal requirement to begin operating. 
• No additional tax filings are necessary to operate a sole proprietorship. 
• All income derived from the business is reported on the sole proprietor’s individual tax return.  

Disadvantages:

• Sole proprietors are personally liable for all debts and obligations of the business so the sole proprietor’s personal assets may be used to satisfy the debts and obligations of the business.

General Partnerships

When two or more individuals own and conduct a business without taking the necessary steps to form any of the business entities described below, this is a partnership.  A partnership must file a DBA in each county where it transacts or conducts business.  No other formalities are necessary to form a general partnership.  However, we strongly recommend that partnerships have a written agreement regarding the operation of the partnership. 

Benefits:

• Filing a DBA is the only formal requirement to begin operating.
• Partnerships provide “pass through” taxation treatment.  This means that items of income, deduction and credit are passed through to the partners and partners treat such items as personal items on their individual tax returns.  If the partnership is producing losses, deductions or credits, such tax benefits can be used by the partners to offset income from other sources.

Disadvantages:

• Each partner is personally liable for the debts and obligations of the partnership. 

Corporations

A corporation is a legal entity separate and distinct from its owners.  The owners of a corporation are called shareholders.  A board of directors and its officers manage a corporation. 

Corporations are taxed under Subchapter C of the Internal Revenue Code (a “C corporation”) or under Subchapter S of the Internal Revenue Code (an “S corporation”). The biggest disadvantage of operating a business as a C corporation is that the corporation’s income is taxed twice: once at the corporate level and again on dividend distributions at the shareholder level. An S corporation does not pay taxes at the entity level; tax treatment is similar to that of a partnership. In order to be an S corporation, a corporation must make a formal election with the Internal Revenue Service.  However, corporations must meet the following requirements in order to be eligible to elect to be an S corporation:

• It must have only one class of stock  
• It must have no more than 100 shareholders
• Shareholders must be individuals, estates, certain exempt organizations or certain trusts
• It must have no nonresident alien shareholders

One of the biggest benefits of operating a business as a corporation is the limited personal liability protection it provides to its shareholders.  In general, a shareholder’s liability  for the acts, omissions, debts or other obligations of a corporation is limited to his or her capital contribution.  Nevertheless, a corporation must be properly formed and operated in order to maintain this limited liability protection.

Limited Liability Companies

Owners of a limited liability company are called members.  Unlike an S corporation, limited liability companies do not have any restrictions as to ownership.   A limited liability company is managed by its members or by managers.  The governance of a limited liability company is very flexible.  This makes limited liability companies favorable for estate planning purposes.

Benefits:

• Provides the limited liability protection of a corporation and the “pass through” taxation treatment of a partnership.  However, a limited liability company must be properly formed and operated in order to maintain this limited liability protection.

Disadvantages:

• Forming a limited liability company is more technical and costly than forming a corporation.  New York requires a limited liability company to publish notice of its formation once each week for six successive weeks in two newspapers.  There is no publication requirement related to the formation of a corporation. 

Professional Service Businesses

Licensed professionals such as doctors, lawyers and accountants may conduct their business as either a sole proprietor, a general partnership,  a professional service limited liability company (“PLLC”), a registered limited liability partnership (“LLP”) or a professional services corporation (“PC”).  The advantages and disadvantages of conducting business as a sole proprietor or a general partnership are set forth above.   A PLLC receives  tax treatment similar to that of a limited liability company, a PC receives tax treatment similar to that of a corporation and the tax treatment of an LLP is similar to that of a partnership.    All three types of entities offer limited liability protection to the owners with regard to the debts and obligations of the business, but owners still remain personally liable for their own malpractice and for the malpractice of persons who practice their profession under their direct supervision and control.

Choosing an entity for a particular business requires a case-by-case analysis and may involve a number of factors that may not be present in all cases. This article is intended only as a general summary of some of the relevant factors to consider when selecting a business form, and any decisions made in connection with these issues should only be made after consultation with counsel. 

If you have questions regarding any of these business forms or you would like to start a business, contact our business attorneys, Michael F. McConville at mmcconville@mccmlaw.com or 585-512-3520, or Letty Laskowski at llaskowski@mccmlaw.com or 585-512-3538.

This publication is intended as an information source for clients, prospective clients, and colleagues and constitutes attorney advertising. The content should not be considered legal advice and readers should not act upon information in this publication without individualized professional counsel.

About MCCM

McConville Considine Cooman & Morin, P.C. is a full-service law firm based in Rochester, New York, providing high-quality legal services to businesses and individuals since 1979.  With over a dozen attorneys and a full paralegal support staff, the firm is well-positioned to right-size services tailored to each client. We are large enough to provide expertise in a broad range of practice areas, yet small enough to devote prompt, personal attention to our clients.

We represent a diverse range of clients located throughout New York State and New England.  They include individuals, numerous manufacturing and service industry businesses, local governments, and health care professionals, provider groups, facilities and associations. We also serve as local counsel to out-of-state clients and their attorneys who have litigation pending in Western New York courts.  For more information, please contact us at 585.546.2500.