Many of our New York law firm clients considering establishing a business entity in New York, often, are conflicted whether they should choose to establish a New York S Corporation (“S Corp”) or a New York limited liability company (“LLC”). Choosing whether to establish as a New York S Corporation or an LLC is, often, an important decision for a New York company and its shareholders/members, thus, don’t take this choice for granted and consider the pros and cons with New York business-savvy attorney.
The following may help initiate the conversation with your New York attorney. If you are doing a deal with a non-American company or individual make sure to hire an international lawyer with experience working on transnational deals. Additionally, these corporate forms are, generally, not available for professional corporations (i.e. law firms).
NY S Corporation Basics
- An NY S Corporation is a Pass-Through Entity meaning that each individual shareholder will claim all shares in income and losses on their personal income tax returns, thus, no federal tax is owed by the corporation (exceptions exist for New York State and City tax). An S Corporation can elect to abandon its S Corporation status and continue business via another corporate or partnership entity.
- NY S Corporations may, only, be formed by U.S. Residents or Citizens, thus, foreign nationals and companies are, typically, unable to form S Corporations.
- New York S Corporations, in most cases, may have up to 100 shareholders and the shareholders need to be individuals – not corporations.
- No publication requirements exist for forming an S Corporation in New York.
- Shareholders in New York S Corps are shielded from personal liability if corporate formalities are maintained.
- S Corporations in New York must have an annual director and shareholder meeting. All major decisions should be resolved via shareholder/director resolutions evidenced by minutes.
- S Corporations in New York have no right to issue any special share allocation with special benefits. A 10% shareholder may, only, receive 10% percent of the benefits.
- It is essential for all S Corporations with more than one shareholder to have a detailed Shareholder Agreement drafted by an experienced and business-savvy attorney. Do not just buy a form packet – we handle too many litigation because of going about this the cheap way.
NY Limited Liability Basics
- A New York LLC is taxed as a business entity and distributions are taxed by the individual members of the LLC.
- New York LLCs can be formed by individuals and/or business entities whether or not they are U.S. residents or citizens.
- New York LLCs are more expensive to form than S Corporations, mainly, because of the publication requirement.
- New York LLCs may have an unlimited number of members.
- Members in New York LLCs are shielded from personal liability if corporate formalities are maintained.
- Typically, LLCs require less yearly formalities than S Corporations. However, at least, the LLC must hold an annual shareholder meeting.
- LLC can share in profit and losses that is not equal to their shareholdings. Thus, LLC in New York have the right to allow special allocations of profits and losses.
- It is essential for all LLCs with more than one member to have a detailed Operating Agreement drafted by an experienced and business-savvy attorney. Do not just buy a form packet – we handle too many litigation because of going about this the cheap way.
- New York Small Business Taxes
- Liability of New York Shareholders for Unpaid Debt of a New York Company
- Understanding New York’s Business Judgment Rule
- Filing a DBA Name In New York
- Factors to Consider When Forming a Corporation in New York
- New York Shareholder, Member and Partnership Business Disputes In NY: New York Business Disputes & Litigation Basics