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Forms of Business Organizations

There are several forms of business organizations available for New York State businesses. Management and tax implications should be considered in selecting a form for your business. It is advisable to secure legal advice for partnerships, corporations, limited liability companies, etc.

Sole Proprietorship
A sole proprietorship is the simplest business organization. It is the least costly way of starting a business and requires no special filing or legal action. The business has no separate existence apart from the owner. You are required to file a business certificate with the appropriate county official if you will be doing business under a name other than your own. There are fees for registering your business name and for legal assistance in changing zoning restrictions and obtaining necessary licenses.

Partnership
A partnership exists when two or more persons conduct a business for profit as co-owners. That is, a partnership is a legal business relationship in which ownership and management of a business is shared between or among partners. Each partner may have unlimited personal liability for all the partnership's debts and implied authority to legally bind the partnership. Although the law does not require a formal partnership agreement, it is highly advisable to adopt a written agreement.

Often, people choose to go into partnership to compensate for each individual's limited expertise in a particular area of a business. Sharing ownership of a business may also be a way for you to gain more start-up money by sharing responsibility in exchange for a bigger infusion of working capital.

Limited Partnership
Partnerships are defined by how active a role the partners play in the business. In a general partnership, all the partners participate in the operation and management of the business and share full liability for business losses and obligations. In the absence of a formal partnership agreement, general partnerships are dissolved and must be reorganized if one partner dies, withdraws, or goes bankrupt.

A limited partnership, on the other hand, consists of one or more general partners as well as limited partners. The general partner or partners run the business. The limited partners are not legally permitted to participate in the management of the business, and each can be held liable for business losses only to the extent of his or her investment. The limited partnership is a popular method of including investors, because it permits investors with small amounts of capital to participate in large or elaborate projects with minimal personal risk. In a limited partnership, the partnership agreement may provide for the continuation of the organization following the death or withdrawal of one of the partners.

Limited partnerships are often used as a way of raising capital. A general partner can take on limited partners as a means of raising cash without involving outside investors in the management of the business. A limited partnership is more expensive to create, involves extensive paperwork, and is used mainly by companies that invest in real estate or speculative ventures.

Corporation
A corporation comes into existence when a certificate of incorporation, signed by at least one incorporator over 18 years of age, is filed with the Secretary of State. The corporate form of business organization is the most complex and highly regulated of all the various forms of organization. A corporation is a distinct legal entity, separate from the individuals who own it. In legal terms, it is an "artificial person," created under the laws of the state from which it received its charter. A corporation is managed and operated by a board of directors. The charter establishes the corporation's powers, including the limits of its permissible operations and its ability to buy and sell property. Individuals participate, or invest, in a corporation by purchasing stock. Each shareholder's liability for the corporation's losses is usually limited to the amount of his or her investment. As a legal entity, a corporation continues to exist independently of the presence or absence of any individual director. A corporation exists until it is formally dissolved in accordance with the terms of its charter.

While there are many advantages to the corporate form of business, one of the main disadvantages is that profits are subject to double taxation. A corporation must file an income tax return and pay tax on its profits. The remaining profits are passed on to the shareholders as dividends. The investors in turn pay tax on the dividends as individual income.

Limited Liability Company
The Limited Liability Company (LLC) brings together two benefits that can be valuable to many business owners: limited liability and more advantages in taxation. The members of a LLC enjoy the same limits on their personal liability that a corporate shareholder does and, at the same time, the business entity itself pays no federal income tax. Each member of a LLC simply pays tax on his or her share of profits, or uses losses to offset other income. New York State permits single member LLC's; however, it is generally advisable to have more than one person for income tax purposes.

To form a LLC, you file Articles of Organization with the Secretary of State. Typically you will state the name, purpose, and duration of the LLC; name a registered agent and designate a principal office. The company's name will have to include the words "limited liability company" or LLC. The document is a public record and notices must be published.

An operating agreement detailing internal arrangements among the LLC members should be prepared, which might include: how much money each will contribute; when and how distributions will be made; how earnings will be allocated; what happens when a member wants to withdraw; how the LLC will be managed and how interests can be transferred.

"S" Corporation
Corporations are "C" corporations unless a special election is filed by shareholders under the tax law for "S" corporation status. There is a time limit for an "S" election.

An "S" corporation is taxed under subchapter "S" of the Internal Revenue Code, which means that it is taxed similarly to a partnership. Income and expenses of the "S" corporation flow through to investors in proportion to their share holdings, and profits or losses are taxed to shareholders at their individual tax rates.

In contrast, a "C" corporation is a separate, taxable entity that reports its income and expenses on a corporation income tax return, and is taxed at corporate income tax rates. Profits are taxed before dividends are paid. Shareholders pay taxes on dividends by reporting them as income. This results in double taxation of profits paid as dividends. By electing "S" corporation status, this double taxation of corporate profits can be avoided.

Not all corporations qualify for "S" corporation status. An "S" corporation may not have more than 35 shareholders, non-individual shareholders other than estates and certain trusts, nonresident aliens as shareholders or more than one class of stock. In addition, other requirements stated by the New York State Department of Taxation-"S" Corporation may apply.

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