By Claudia Pollak, Esq., Updated October 19, 2020
The limited liability company (LLC) is a type of business structure that offers business owners both the liability protection of a corporation as well as the tax benefits of a partnership or sole proprietorship. A limited liability company consists of one or more owners (called “members”), who often actively manage the company’s business affairs. LLCs are relatively simple to establish and operate, and offer flexibility and other advantages to its owners.
The best form of the business structure depends on many factors and should be determined according to your particular business and overall goals. LLCs offer some of the following advantages:
- LLC members enjoy limited liability, similar to that of a shareholder in a corporation. In general, your risk is limited to the amount of your investment in the limited liability company.
- LLC members share in the profits and in the tax deductions of the limited liability company while limiting the potential financial risks.
- LLCs offer a relatively flexible management structure. The business may be managed either by members or by managers. Thus, depending on the needs or desires of the members, the limited liability company can be a hands-on, owner-managed company, or a relatively hands-off operation for its members where hired managers actually operate the company.
- Because the IRS treats the limited liability company as a pass-through entity, the profits and losses of the company pass directly to each member and are taxed only at the individual level.
- Members of an LLC have flexibility in dividing the profits and losses. In a corporation or partnership, profits must be divided according to the percentage of ownership. However, with an LLC, special allocations are permitted, so long as they have a “substantial economic effect” (e.g. they must be based upon legitimate economic circumstances, and may not be used to simply reduce one member’s tax liability).
- Limited liability companies are, generally, a more complex form of business operation than either the sole proprietorship or the general partnership. They are subject to more paperwork requirements than a simple partnership but less than a corporation. Government filings typically include a biennial statement that must be filed with the New York Secretary of State every two years, informational returns to the IRS, and the filing of a state tax return.
- In New York, an LLC is prohibited from rendering “professional services” which can include companies providing services that require a license, registration, or certification. Such professionals typically have to establish a Professional LLC, which does not offer the protection of limited liability for professional malpractice.
In order to form an LLC in New York, you must file the Articles of Organization with the New York Secretary of State. Within 120 days of the filing date of your new LLC, you must advertise the existence of your LLC in two newspapers designated by the county clerk of the county where your office is located. The LLC is required to file a Certificate of Publication with the New York Secretary of State once it has met the publication requirement. Once the company is formed, you must obtain an Employer Identification Number with the Internal Revenue Service (IRS). In addition, the LLC must adopt an Operating Agreement, which is an agreement among the members regarding the operation of the company. This agreement should be carefully drafted to reflect the arrangements that have been agreed upon by the members.
Call attorney Claudia Pollak at 914-908-6220 to help you decide whether an LLC is the right legal form for you and if so, to advise you on how best to structure the organization for future growth and success.