New York offers several different types of business structures,such as partnerships, corporations, and limited liability corporations. LLC is one of the most popular forms of business in the state of New York due to several reasons. An LLC offers the dual advantages of the limited liability protection provided by corporations and pass-through tax status commonly associated with partnerships.
LLCs are not only ideal for running a business but can also be used for other purposes such as asset protection, holding real estate, offering professional services, or for holding stocks of other companies.
An LLC is quite easy to setup and maintain, not to mention the low cost of annual maintenance. These factors make an LLC the preferred choice for most businesspeople and professionals who try to avoid the stricter requirements of corporations by forming LLCs. In this article, we will explain the process of forming an LLC in New York in plain English using a step by step approach.
Considerations Before LLC Formation
Different types of corporations
New York, like most other states, offers several different types of corporations and legal entities, each of which has its own set of advantages and disadvantages. New York State Law permits the following types of businesses:
- Limited Liability Company
- Sole Proprietorship
- Limited Partnership
- General Partnership
- Business Corporation
- Not-for-Profit Corporation
Each of these entities are treated separately in terms of taxation and may also differ radically from each other in terms of structure, the number of members permitted, life span, liability, etc. LLCs are ideal for most businesses and are quite favorable vehicles for tax efficiency.
Choosing a name
Choosing a name is the first step of the LLC formation process and is not as easy as it sounds due to several legal restrictions on the types of names that a business can use. An LLC name must end with the phrase “limited liability company” or any of its variations such as LLC or L.L.C.
The name of an LLC must be unique and distinguishable from other business names on file with the New York Department of State, which is responsible for forming corporations and LLCs in New York.
Under New York state laws, the name of your LLC cannot include any restricted word or phrase. Naming restrictions are based on consumer protection laws and are designed to prevent unauthorized use of names, which may deceive the customers. An LLC can use a restricted word or phrase only once it has met the appropriate licensing or regulatory requirements for the restricted word or phrase in question.
Here are some examples of restricted words:
- Board of Trade
- Olympiad or Olympic
- United Nations
- Urban Development
You can find the full list of restricted words and phrases at the New York Department of State as the above list is not a comprehensive one. Some names are classified as restricted and can be used after getting the required license or consent by appropriate authority, while others are prohibited and can’t be used under any circumstances.
Many professionals use their LLCs for practicing their profession, and in such case additional naming restrictions may apply. Doctors who want to organize a Professional Limited Liability Company or PLLC for their medical practicemust get permission from the New York Office of the Professions.
Here are some more tips for naming your LLC:
- Name of your LLC must not contain restricted terms
- You must also not use words such as Corporation, Inc Incorporated, or corp. which may imply that your LLC is a corporation
- The name can’t imply that your LLC is a government entity
- It needs to be distinguishable from any existing LLC or corporation
- Conduct a trademark search to ensure that your name doesn’t infringe on the trademark of any party
Once you’ve decided the name for your LLC, you can search the New York Department of State, Division of Corporations, State Records & UCCdatabase to ensure that the name chosen by you is available. Division of Corporation is required by statute to reject any name that is not “distinguishable” from existing names, and searching the online database is the only way to know if the name chosen by you is available or not.
LLC Formation and Document Creation
A New York LLC is required by statute to have a “registered agent” who is responsible for receiving mail and other official documents on behalf of your LLC. A registered agent is like a contact point for your LLC, and in New York, Secretary of State acts as registered agent for service of process for most LLCs by default.
You have the choice of appointing someone else as the registered agent if you don’t want to use Secretary of State as your registered agent. You can also nominate yourself or anyone from your company as the registered agent for your LLC.
A registered agent must have a physical address in New York state and must be available to receive mail during business hours. You must also keep in mind that the address of an LLC’s registered agent is publicly available and must also be published in a newspaper upon formation. So, if you are starting an LLC at your home, then your home address will also be publicized.
There is a statutory requirement for LLCs formed in the state of New York to publish a notice of formation in local newspapers. If you are using an address in New York City as your LLCs principal address, then be ready to spend upwards of $1,500 as publication costs. You can dramatically reduce publication costs by using a registered agent service, which will provide you with an address outside New York City.
Articles of Organization
You need to file articles of organization with the New York Department of State and pay the state filing fee of $200 to form your LLC. New York Department of State has prepared a complete set of instructions to help people who want to form an LLC in New York.
You can file the articles of organization either online or via mail using the DOS-1336-f form. Most people nowadays prefer to file articles of organization online as the online process is much simpler and takes less time. You can initiate the process of forming your LLC online here.
Notice of LLC formation
All LLCs formed in New York are required to publish a copy of their articles of organization or a notice related to the formation of the LLC in two local newspapers (one daily and one weekly) within 120 days of the formation of the LLC.
The newspapers have to be approvedby the local county clerk of the county,which you designate as the principal place of business of the LLC in the articles of organization. The publisher or printer of the newspaper will then provide you with a certificate of publication which you need to submit to the New York Department of State, Division of Corporations, One Commerce Plaza, 99 Washington Avenue, Albany, NY 12231 along with a certificate of publication fees of $50.
The cost of publication depends on the counties chosen by you during the filing process. Publication costs can vary significantly from $100 to $2000+ in some counties, such as Manhattan. Most LLC owners use registered agent services based in low-cost counties who provide you an address in their county allowing you to save a good amount in publication costs and also protect your address from being publicized.
LLC Operating Agreement
Every LLC in New York is required by law to have an Operating Agreementthat outlines the ownership and operating procedures of the LLC. An operating agreement may be a written agreement ora verbal agreement, but most LLCs prefer written agreement.
An operating agreement is an important document thatneeds to address several issues to ensure that all the owners of the business are on the same page and there are no conflicts how the LLC should work. A comprehensive operating agreement needs to address the following questions:
- Organization:Your LLC’s operating agreement needs to provide information about members of the LLC and ownership structure at the time when the LLC was formed.
- Management & Voting:An operating agreement also needs to set guidelines about how the LLC will be managed and how members will vote on business matters. An LLC can be either managed by the members themselves or can hire an outside manager to perform the managerial functions. Usually, each member has one vote, but you can also give some members more voting power and specify this in the operating agreement.
- Capital Contributions:This part must discuss the amount of money which each member has invested in the business at the time of formation. You should also set up the rules for raising further capital in the future in this section if such a need arises.
- Distributions: This part of the operating agreement explains how the profits of the LLC will be distributed among its members. Distributing profits evenly among the members is the standard practice, although you may distribute the profits in any other way and must mention this in the operating agreement.
- Changes to Membership Structure:This section of the agreement must specify how ownership structure and associated roles would change in the event a member leaves the LLC. Information about the process for buying out and/or replacing a member must also be included in this section.
- Dissolution:You also need to specify how the LLC would be dissolved in case members don’t want to continue the business and decide to dissolve it in the future.
Obtaining an Employer Identification Number
All business entities operating in the US need to have an Employer Identification Number or EIN, which is likea social security number for the company. EIN is issued by IRS and is required for opening a bank account for the company, for paying state and federal taxes, and for hiring employees. IRS issues EIN free of charge, and in some cases a business may not need to obtain an EIN.
Single-member LLCs with no employees and no excise tax liability may not need an EIN, while multi-member partnerships or multi-member LLCs need to obtain an EIN to conduct business.
Foreign LLCs in the context of New York refers to the LLCs formed in other states of the US. If you own an LLC in California, for example, and want to expand your business in New York, then you can register your LLC as a foreign LLC in New York by paying a fee of $250 and start your business in New York without forming a new LLC.
Separate your Personal and Business finances
Separating your personal and business finances is essential if you want to protect yourself from debts or other dues related to your business. Many first-timeentrepreneurs make the mistake of using their bank account for business transactions even after they have formed an LLC.
This can weaken the financial protection provided by the LLC and may effectively remove the limited liability associated with LLCs. In case the business goes bankrupt, creditors may go after your savings and other financial assets. The first step for separating your personal and business finances is to get a business bank account for your newly formed LLC.
Get a Business Bank Account
You need to open a business bank account for your LLC as soon as possible. Almost all large banks offer business bank accounts, and some have special accounts designed with the needs of startups and entrepreneurs in mind. Some banks may also give you a small amount of cash when you open a business bank account with them.
You will need to provide documents about your LLC, such as articles of organization, along with the signature specimen of all members of the LLC to open a business bank account. Requirements vary from bank to bank, and some banks may ask for more documents for the account opening process. A business bank account will allow you to separate your finances from your business expenses and will also make accounting and tax filing a lot easier.
Get a Business Debit (or Credit) Card
As most payment providers ask for a debit or credit card nowadays, so you must get a separate card for your LLC, which can be used for business-related expenses. Using your personal debit or credit card for business expenses is not a good idea as IRS only allows businesses to deduct business-related expenses. If you use a personal credit card, then you may not get tax exemption for business-related expenses and may run in trouble with IRS. In fact, much of the purpose of the LLC, which is to shield personal assets from business risk, can be lost if you use mix personal and business expenses in any way.
New York state laws require each business with employees to have insurance for worker’s compensation coverage. This requirement applies to all companies even if they have one employee. A business can also get general liability insurance and professional liability insurance,which offer protection from lawsuits andclaims of malpractice and other business errors. You may also need commercial automobile insurance if a car or truck is used for business purposes.
Hiring employees for your newly formed LLC is one of the most critical business decisions which will impact the success of your business. There are several rules and laws which regulate the hiring of employees in New York and US which you must keep in mind while hiring new employees for your LLC.
- New York has a minimum wage of $13.50 per hour
- Manual workers must be paid daily, while clerical workers and others must be paid twice a month.
- You need to make sure that the employees are eligible to work in the US. You can verify this by asking newly hired staff to fill out IRS form I-9 immediately after joining and ask them for documents to prove that they are eligible to work in the US. Hiring someone who is not eligible to work in the US is a violation of Immigration law and may lead to severe fines and penalties.
- You also need to report new employees to the state.
- You will need to register for employee-related taxes, such as employee withholding tax, and unemployment insurance. You can do this easily through the Department of State website.
All businesses in the US need to comply with federal, state, and local laws to operate. Different rules apply to different types of businesses. A restaurant, for example, may need building permits, health permits, signage permits, etc. There are quite stringent fire safety rules for businesses in some industries, while businesses dealing in livestock may need to get licenses from state health department.
You need to ensure that your LLC has all the required licenses and permits from relevant authorities, and your business is compliant with all applicable laws. You can get more information about Federal licenses and permits from the US Small Business Administration (SBA) Guide.
New York’s License Center can provide you more information about the state-level licenses and permits which you need to operate your business in the state of New York. You may also need to get local licenses and permits depending on the county where your business is registered. Contact your local chamber of commerce to know more about local permits and licenses.
New York State LLC Tax Requirement
Income generated through an LLC is not subject to New York State Taxes as the LLC being a passthrough tax structure is not liable for corporate income tax. Profits distributed to shareholders, although are liable to both state and federal income tax. Your tax rate will depend upon the personal tax bracket in which you fall.
If you are selling physical goods, then you need to get a seller’s permit,also known as a Sales Tax Certificate of Authority, which allows a business to collect sales tax on taxable products. New York also has specific taxesthat apply to companies in certain industries.
Federal Tax Requirements
LLCs are liable for federal income taxes, and their taxation depends on several factors. Single-member LLCs are treated as “Disregarded Entities” which essentially means that the IRS would disregard the structure of an LLC and would treat you like it treats any other individual. Most single-member LLCs need to report their income to IRS using Form 1040 Schedule C which is also used for sole proprietorships.
Multi-member LLCs, on the other hand, are treated as partnerships by the IRS. LLCs, in this case, do not pay any taxes to the IRS, and all profits are passed through to the members of the LLC as per the operating agreement. Members of the LLC then pay taxes to the IRS on their individual tax returns by clubbing the income earned through an LLC with their other income. Multi-member LLCs report their income to the IRS using Form 1065 US Return of Partnership Income.
Annual Fees & Biennial Statement
New York, unlike most other states, doesn’t require LLCs to file an annual report, although the LLCs need to pay an annual fee and file biennial statements. The annual filing fee depends on your LLCs grossed income sourced from the state of New York and can range from $25 to $4,500. The fee is payable to Department of Taxation using Form IT-204-LL.
LLCs in New York must file biennial statements every two years which must include the following:
- Name and address of the LLC’s chief executive officer
- Street office address of the principal executive office
- The address to which New York Secretary of State can forward copies of the process accepted on behalf of the LLC.
There is a small fee of $9 for filing biennial statements, and if you fail to file it on time, then New York State Department’s database will reflect your LLC as past due in the filing of its biennial statement. A biennial statement allows you to inform New York Department of State about any change in the address of your LLC.
Dissolving an LLC
You may dissolve an LLC if you don’t wish to continue the business. Dissolving an LLC is a straightforward process that only involves two steps. First, you need to close your business tax accounts and file articles of dissolution.
Close Business Tax Accounts
Almost every active business entity in the US including LLCs has several business tax accounts maintained by various government bodies. Your LLC may have outstanding state taxes, industry-specific taxes, Employee Withholding Taxes, Unemployment Insurance Tax, Sales & Use Tax, Franchise Tax, etc. You need to pay all the due taxes and close these business tax accounts by filing a final return to the appropriate authority.
File Articles of Dissolution
After closing the business tax accounts, you can file Articles of Dissolution with the Department of State, Division of Corporations, State Records and Uniform Commercial Code which will dissolve your LLC. You also need to pay a filing fee of $60 when you file articles of dissolution.
Total Cost of Forming an LLC in New York
You need to consider the following costs to form an LLC in New York. These are typical averages:
- Articles of Organization – $200 filing fee
- Registered Agent -$100 to $500+ (or do it yourself at no cost)
- Publication costs – $100 to $1500+
- Notice of Formation -$50
- Foreign LLCs – $250
- Operating Agreement – varies can cost anywhere from $500 to $1,500 if drafted by a lawyer
- Biennial Statements – $9
- Annual filing fee – $25 to $4,500
Forming an LLC is not a complicated process if you know what to do. With a little bit of effort, you can form a New York LLC without any help from a lawyer, although this will entail a significant amount of time and effort. You may also use services of corporate lawyers and LLC formation companies if you don’t have time to do everything by yourself.
Although, not essentially a low tax state, New York still offers a lot of advantages if you want to form an LLC for conducting your business and being the financial capital of the US, it also hosts a large number of banks, financial companies, along with the ecosystem required to run a business.
This article is just for informational purposes and must not be considered legal advice in any form. You must contact a licensed attorney in case you need legal or tax advice. State and Federal laws can change at anytime without any notice and the information contained in this article is true at the time of publishing, although it may change without any advance notice. Any or all information contained here may or may not apply to you depending on the circumstances.