While an LLC is not a partnership or corporation, establishing an LLC in New York allows a business to enjoy the flexibility of a partnership while enjoying the same protections of a corporation.
An LLC is not a corporation; therefore, LLCs are not required to keep formal minutes or hold meetings. Instead, an LLC runs more like a partnership— with pass-through taxation and management flexibility.
LLCs can avoid double taxation (that is paying corporate tax and individual tax). With an LLC, the company chooses whether it will be taxed at the company level and then to individual members or it can choose to be taxed as a partnership with no tax at the LLC level (excluding franchise fee).
LLCs also enjoy flexibility at the management level. An LLC can have many members or as little as one member. LLCs should have an operating agreement that sets forth ownership, profit sharing, responsibilities and how the company is to be managed.
The most attractive aspect to forming a New York LLC is that the LLC shields owners and members from personal liability. An LLC is a separate entity, similar to a corporation, which means LLC members are personally protected from any liability of the LLC and judgments against the LLC.
Limitation of Liability
Owners of an LLC (called members) are not personally liable for the debts of the business, including debts resulting from most lawsuits against the company. This means that a creditor of the business cannot go after the personal assets (home, car, bank accounts, etc.) of an LLC member.
A corporation and a limited liability partnership (LLP) also afford limited liability, but the LLC has other advantages that will be discussed below. A limited partnership (LP) gives limited liability to the limited partners, but not to the general partners, who are the ones who create and run the business. There is no limitation of liability for a sole proprietor or a partner in a general partnership.
For federal tax purposes, an LLC has the most flexibility as to how it will be taxed. An LLC with one member (called a single-member LLC) has the choice of being taxed as a sole proprietorship, an S corporation, or a C corporation. An LLC with two or more members (called a multiple-member LLC) can choose to be taxed as a partnership, an S corporation, or a C corporation. The choice will depend upon various factors and is best made in consultation with a tax expert.
Unless the LLC elects to be taxed as a C corporation, all of the LLC’s profits are passed through to the members. The members will need to pay federal and state income tax, and federal self-employment tax, on their share of the profits, even if they do not actually receive a share of those profits. LLCs that have elected to be taxed as a corporation are also subject to the New York business franchise tax.
There are no restrictions on the number of members of an LLC, whereas an S corporation cannot have more than 100 members. A C corporation can have more members but will be subject to double taxation and more regulation regarding its operations.