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Choosing the legal structure for a new business

On Behalf of | Aug 10, 2021 | Business Formation |

One of the most important decisions made by entrepreneurs in New York and around the country is choosing the appropriate legal structure for their new commercial ventures. Establishing a sole proprietorship is the easiest and quickest way to get a new business off the ground, but taking this path does not protect the owner’s personal assets and leaves them personally responsible for any debts taken on should the venture fail. This is why most businesses are formed as, or eventually become, C corporations, S corporations, limited liability companies, or limited liability partnerships.

C and S corporations

C and S corporations are named after sections of the Internal Revenue Code, and they both offer limited liability protection. This means that the owner’s personal assets are shielded if the business incurs debts that it cannot pay or are sued in civil court. The main difference between a C and S corporation is the way their profits are taxed. The profits of C corporations are subject to corporate tax and any dividends distributed to the owners are subject to tax as well. This essentially means that they are taxed twice. S corporations are pass-through entities, which means their profits are passed to their owners and are not taxed at the corporate level.

LLCs and LLPs

LLCs and LLPs are business structures that are similar to traditional partnerships but provide the same kind of asset protection as corporations. They are also pass-through entities, which means they offer the same tax advantages as S corporations. Choosing an LLC or LLP instead of an S corporation could be a wise business formation decision if the profits will not be divided equally or one of the owners is not a U.S. citizen or permanent resident.

Incorporating in another state

Some entrepreneurs choose to establish corporations in states with laws favorable to businesses like Delaware or Nevada. While this may offer benefits in some situations, it adds an additional layer of complexity and costs more. In addition to higher formation costs, business owners who choose this option may be required to pay a fee to register their businesses as foreign corporations in their home state.

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