New York Limited Liability Companies FAQ
What is a New York Limited Liability Company (“LLC”)? Who can form an LLC? How do I form an LLC? How much does it cost to form an LLC? What ongoing requirements are there for maintaining an LLC? How does an LLC pay taxes? Is an LLC a good choice for my new business?
Read on for answers to such common questions about LLCs.
What is a New York Limited Liability Company (LLC)?
An LLC is a business entity created by the New York Limited Liability Company Law (“NY LLC”). Often people say that an LLC is a hybrid between a corporation and a partnership; an LLC offers its owners (called members) protection from business liabilities like a corporation would, but functions more like a partnership: it is not considered a separate corporate entity and its membership interests are not freely transferable.
You can look up the New York Limited Liability Company Law on the website of the New York State Legislature. Go to the last link on the page (“New York Laws”) and then scroll down to “LLC – Limited Liability Company Law.” (Unfortunately, the site doesn’t allow for direct links to specific sections of that law.)
Who can form an
Any individual (including a non-resident alien, i.e. a foreigner), corporation, partnership or other LLC can form an LLC alone or together with other members.
How do I form an LLC?
1. Choose a name. The name must contain the words “Limited Liability Company” or the abbreviation “L.L.C.” or “LLC”. For more name requirements, look up Section 204 NY LLC.
2. File Articles of Organization
You have to file so called “articles of organization” with the New York Department of State (Sections 203 & 209 NY LLC). The Department of State offers a sample form for articles of organizations. You can look up the specific requirements for the articles of organization in Section 203 (e) NY LLC.
3. Publication of LLC Formation
Within 120 days after the articles of organization have been filed, you have to publish the fact of the LLC’s formation “once in each week for six successive weeks, in two newspapers of the county in which the office of the limited liability company is located, one newspaper to be printed weekly and one newspaper to be printed daily” (Section 206 NY LLC). The newspapers are designated by the county clerk. In New York County, you actually have to call the county clerk’s office and a real person will tell you where to publish. After publication, the newspapers will send you an “affidavit of publication” which you will have to file with the Department of State together with your certificate of publication (sample form from the Department of State).
Many starting LLC businesses used to forgo the required newspaper publication due to its high cost (about $1000, see below). Be warned, though; what used to be relatively inconsequential under the law now has serious consequences due to a recent change in the publication law. If you fail to publish the formation of your LLC, your LLC’s authority to “carry on, conduct or transact any business” in New York may be suspended.
4. Adopt Operating Agreement
Finally, at the latest within 90 days of formation of your LLC, you have to adopt an operating agreement for your LLC (Section 417 NY LLC). The operating agreement sets forth the rights and obligations of the members, management of the LLC, distribution of profits and losses, dissolution of the LLC, and so forth. For the questions to ask yourself before drafting an operating agreement, look here.
While many one member LLCs neglect to adopt an operating agreement (and nobody really knows what the consequences of such neglect are), it is highly advisable to adopt a well prepared operating agreement in cases where there are more than one member.
How much does it cost to form an LLC?
Filing fee for the articles of organization: $200;
Fee for processing articles within 24 hours: $25 (there are faster options for more money. If you do not choose expedited handling, the filing of your articles can take weeks!)
Filing fee for certificate of publication: $50
Fee for a certified copy of your filed articles of organization: $10 (you will probably need this to open bank accounts)
Fee for expedited handling of certified copy request (24hours): $25
Fee to newspapers for publishing notices (for a New York County LLC): about $1299
Look up fees for yourself here.
ongoing requirements are there for maintaining an LLC?
LLCs must file a biennial statement every two years with the Department of State setting forth
the address to which the Secretary of State shall mail a copy of any
process accepted on its behalf (Section 301(e) NY LLC). Since your LLC is on record with the Department of State, the Department will automatically send you a form for a biennial statement once the time to file has come.
LLC are not required to hold annual member meetings. However, in order to preserve the limited liability protection of an LLC, it is a good idea to pass written resolutions documenting member meetings and decisions and keep personal and LLC business strictly separate.
How is an LLC taxed?
An LLC normally does not pay federal taxes, instead income received by the LCC is allocated to the members and taxed at their individual rates. (Section 701 Internal Revenue Code).
Similarly, an LLC normally does not pay New York State income taxes, rather the members pay taxes on their allocated share of LLC profits. For an explanation on how New York taxes LLCs look here.
In addition, LLCs generating income in New York must pay an annual filing fee of $100 multiplied by the total number of members in the LLC with a minimum fee of $500 and a maximum fee of $25,000 (single member LLCs have to pay $100 annually).
Is an LLC a good choice for my new business?
It might well be. However, choice of entity is a complicated issue which is highly dependent on your situation. Nonetheless, some benefits of LLCs over other entities are:
1. You only pay one level of tax. If your business were a corporation, the corporation would have to pay corporate tax; in addition, upon distribution of profits to you, you would have to pay another level of tax on the distribution.
2. LLCs are very flexible when it comes to capitalization (the process of funding the LLC). An LLC can issue any type of equity or debt to its members.
3. You can “pass through” losses of the LLC to yourself (and the other members); these losses can be used as a deduction on your (and the other member’s) non LLC related income.
4. You can convert an LLC to a corporation at a later time with relatively minor consequences, whereas a conversion from a corporation to an LLC can raise ugly tax liabilities.
One disadvantage of an LLC: An LLC member is subject to self employment tax on his or her income from the LLC. Many try to avoid self employment tax by forming s corporations and limiting the amount of “salary” that the s corporation pays to its owners. They just have the s corporation pay out profits as “dividends” rather than salary. This tactic has its limits, though, as the tax authorities may re characterize dividends as salary.