Entity Choice & Formation

Choosing the proper legal entity for your business is one of the most important initial decisions. As an owner, your personal liability, legal rights and obligations and tax responsibilities are affected by the business entity you select. Making an informed choice at the outset can impact the long-term success of your business.

Yet, understanding the differences between entity types can be confusing and time consuming. You may find that two or more formation options seem to equally satisfy your needs. Making the final choice in haste, based on price, or on what seems most common in the marketplace is not advisable.

Business formation options include establishing a:

• Sole Proprietorship: A sole proprietorship is not a separate legal entity and, therefore, offers no liability protection to its owner.  It is owned and operated by one person. No documents need to be filed with any government entity. The owner may elect to file a fictitious name or “DBA” certificate if it is doing business under a name other than itself. A DBA, however, is not required.
  
  
• General Partnership: A General Partnership is an association of two or more individuals, or entities, engaged in business for profit.  Partners are jointly and severally liable for all debts or liabilities of the partnership and for all wrongful acts of any co-partner acting in the ordinary course of partnership business. As a result, partnerships may not be the optimal choice for startups looking to fundraise. Investors do not want to be subject to unlimited liability as a member of a General Partnership and prefer to invest in entities that limit personal liability.
  
  
• Limited liability Company (LLC): LLCs are formed at the state level. In New York, a business entity search online on the Department of State’s website will reveal whether your intended business name is already in use. LLCs (and Corporations) can be organized online. After organizing, the founder(s) must satisfy the statutory publication requirement. This involves publishing a summary of your business’ Articles of Organization or Qualification in two newspapers for six consecutive weeks. Use of a registered agent for service and publication in Albany County can save you hundreds if not a thousand dollars or more on fees.
  LLCs are not corporations. They do not involve many of the formalities that are required when managing a corporation. For example, LLCs do not issue stock, are not required to hold annual board meetings, or keep written minutes of those meetings. Moreover, the LLC can be converted into a Corporation upon election. From a tax perspective, LLC Members (i.e. the owners) can elect to be taxed as a Partnership or as a Corporation. In a single member LLC, the founder can elect to be taxed as an individual or a Corporation.
  
  
• Limited Liability Partnership: In a Limited Partnership, there are both General Partners and Limited Partners. The General Partner’s liability is unlimited, as in the General Partnership, however, the Limited Partner’s liability is limited to the amount of his or her investment. Thus, the Limited Partnership is a preferred vehicle for raising capital as investors can become Limited Partners, not subject to the liability of those controlling the business. Limited Partners may not participate in the control of the company.
  
  
• Corporation: Similarly to LLCs, Corporations are formed at the state level. Again, a business entity search online on the Department of State’s website will reveal whether your intended business name is already in use. Unlike LLCs, Corporations are not subject to the publication requirement under New York law.

  After formation, a corporation may elect to be treated as a “small business” or “S” corporation, under §1362 of the Internal Revenue Code. This election will allow shareholders to be employees of the business and draw salaries as employees, as well as receive dividends from the corporation, and other distributions that are tax-free to the extent of their investment in the corporation.

  The filing of the Certificate of Incorporation with the Department of State is the birth of the Corporation. An organization meeting of the incorporator or incorporators must be held for the purpose of adopting by-laws, electing directors and transacting any other business thereafter. Correct and complete books and records of account and minutes of the proceedings of the shareholders, board, and executive committee, if any, must be maintained. The corporation must also keep a record containing the names and addresses of all shareholders, the number and class of shares held by each and the dates when they respectively became the owners of record thereof. It is recommended that a qualified attorney oversee the management of your corporate documents. Of course, it is also imperative that any new business seek the advice of an accountant or tax professional prior to making important business decisions, including entity formation.

In forming a business entity, our attorneys will consult with the founders to draft a business’s governing documents and critical agreements, including:

• Buy-Sell Agreements
• Corporate By-Laws
• Employee Handbooks
• Articles of Organization
• Operating Agreements for LLCs
• Partnership Agreements
• Shareholder Agreements for Corporations
• Voting Trusts

If you have questions about which entity is right for your business, or would like to schedule an initial consultation regarding your business formation, please contact us through our website or by phone: (212) 835-6768 in New York City or (609) 480-3080 in Princeton, New Jersey.