Starting a new business is exciting, challenging, and rewarding.
You have come a long way in turning your concept and idea into a reality. And whether you are selling a product or service, it is important to ask yourself that basic fundamental question: "what legal structure is right for me and my business?"
Well, it depends...
While we will not be reviewing every legal structure in New York (e.g. sole proprietorship, general partnership, limited partnership, joint venture, corporation, limited liability company, limited liability partnership), we will be giving you an overview of one of the most common legal structures in NY...yes, the limited liability company ("LLC").
Namely, we will give an overview of the LLC and its historical context, how to set one up, and general practice tips. Lets get started.
Overview & Historical Context. The first LLC structure was created in 1977 in the State of Wyoming (Fact: Delaware did not come up with their own LLC law until 1991). The original purpose of the LLC was to create a new entity structure that maintained characteristics such as: (1) limited liability, (2) partnership taxation, and (3) operational flexibility. However, due to most people not knowing how the Federal Government would "actually" tax the new LLC structure (be it a partnership or corporation), the number of LLCs created were few and far between. In fact, in 1980, the IRS published a private letter ruling that denied the "partnership" tax status to any entity which no owner had personal liability for the debts of the entity. The IRS went on to list out characteristics of "pass-through" entities versus an "association."
To make a long story short...Wyoming and other states began passing what is called "Bulletproof" and/or "Flexible" default statutes to ensure their LLC's were getting their preferred Tax structure...And then, finally, a push in 1996, and codified in 1997 through IRC s. 7701, the IRS eliminated the entity classification regulations in favor of a "Check the Box" procedure, which no longer considers the LLC to possess corporate characteristics for tax purposes...Yay!
OK, all that is interesting...but what is the LLC?
A Limited Liability Company has characteristics of a Corporation (e.g. limited liability in certain instances and operational flexibility) and characteristics of a Partnership (or sole proprietorship) for tax purposes.
Controlling Law. In New York, your LLC is governed by the New York Limited Liability Company Laws (NY LLCL). And for those of you who may be familiar with the Delaware Limited Liability Company Laws (DLLCL), please note there are MAJOR distinctions between the two jurisdictions, including, but not limited to differences in: filing fees, protections of ownership rights, operational flexibility, and fiduciary standards and duties. Please reach out to an experienced Attorney to further clarify these distinctions.
Formation. Creating an LLC in New York, like many States, is pretty straightforward. An LLC can be created for any lawful business purpose. To start, one or more persons known as the "organizer(s)" will file its Articles of Organization (please note a "Professional Limited Liability Company" (PLLC) has different Articles that are filed) with the Department of State. Under NY Law, at the time of filing, there need to be at least one (1) member of the LLC. A "member" can be an individual or entity that has an ownership interest in the LLC (please note there are differences to who can "own" part of the LLC if it is being filed as a PLLC).
Naming Your LLC. One exciting step in the process is getting to name your business. There are certain naming limitations depending on your profession and industry (e.g. Attorney Ethical Regulations for naming their law firm). To start, you should check out the New York Corporate Search Database to see if there is an existing business with the name you want. Please note there may be other legal issues with choosing your business name as it relates to trademarks and copyrights that you should ask your attorney before filing. In NY, you will need to include "Limited Liability Company" or an abbreviation (i.e. LLC. or L.L.C. after the business name). Same is true for PLLCs.
Articles of Organization. As mentioned, to form your new business you will need to file the Articles of Organization with your Department of State. When you download your form (please see links above), you will notice the following sections:
Name of the LLC
County in which office of LLC is located
Duration of LLC, if not perpetual
Designation of the Secretary of State as an agent for service and process - unless you decide to choose your own registered agent
Name and address of registered agent, if any
If all or specified members are to be liable in their capacity as members of the LLC
Employer Identification Number (EIN). Right around the time you file your Articles you will want to apply for an EIN with the Federal Government. This process takes 5-10 minutes and is pretty painless. Following your application, you will receive a PDF form stating your new EIN number for tax reporting.
Consider Your Tax Status. Some LLCs, depending on the number of members involved, may consider filing a separate tax election to be treated as an "S-Corp" for tax purposes by Federal and State Governments. In order to do so, you will need to file two (2) forms if you are a New York LLC...first, you will need to file a Form 2553 which is the Federal Election. Next you will need to file a CT-6 Form which is the equivalent form for NY State. Please consult with your accountant or tax advisor for more information regarding this specific type of election.
Operating Agreement. Once you file your Articles with the State and your LLC becomes recognized, you will have 90 days to adopt an Operating Agreement. Similar to corporate bylaws or a shareholder agreement, the Operating Agreement governs: (1) rights, duties, obligations, and ownership interests of its members, (2) methods of entity formation, operation, and termination, (3) the nature of the business, and (4) the relationships between the parties involved. For free samples of Operating Agreements, check out the New York Bar Associations website.
Certificate of Publication. Once you file your LLC, you will have 120 days after the effective date to publish a copy of the Articles or a notice containing the substance thereof with two newspapers located in the county which the LLC is located. The publication must occur once a week for six consecutive weeks. Failing to abide by this certificate of publication can result in the suspension of authority of the LLC to continue operating as a recognized LLC in the State (exceptions, however, will not invalidate existing contractual agreements made by and between the LLC and its members or if they need to defend any action).
Notice to Licensing Authority (PLLCs). If you operate as a "Professional" LLC (defined here), you will most likely need to file your Articles with your licensing authority within the State. You will have 30 days after the effective date to file.
Other Issues to Consider. As mentioned, we cannot go into every area of LLCs but we did want to list out several other key issues to raise with your attorney before filing, including but not limited to:
Membership Interests. How can future individuals and entities become members? What ways can membership interests be assigned? Are there restrictions on business transactions between the LLC and an interested party?
Dissolution. Is there a set time for the LLC or is it perpetual? If you decide to dissolve, how will you go about "winding up" the business?
Merger & Consolidation. Are you planning on merging or consolidating with another LLC? Does your Operating Agreement describe how you would go about merging and consolidating?
Foreign Filers. NY defines what it means to be a foreign filer of an LLC. You should review the rules and regulations around operating your business as a foreign filer to make sure you are in compliance with all NY State laws.
Miscellaneous. Other provisions to consider include whether the LLC will own real estate, make political contributions, transact business outside of the State, Maintenance and Records requirements under NY LLCL s. 1102(a) etc.
If you have any questions around forming a legal entity or even making updates to your existing legal entity, please contact Snider Law, PLLC for a FREE 30 Minute Consultation.