Limited Liability Companies

New York Limited Liability Companies are Complex Business Entities

Despite their popularity, New York LLCs are complex business entities that can overwhelm small business owners. Search for “New York LLC” or “New York LLC Operating Agreement” on google and most links point you to templates or DYI LLC services. As a result, many businesses end up with incorrectly set up limited liability companies and without a proper operating agreement. If there is a dispute between the LLC owners, this will very often become a problem.

Limited Liability Companies are one of the most formed business entities in New York despite being a relatively young business entity. New York enacted a law allowing for Limited Liability Companies in 1994 after 40 other states had already done so. 

The Laws that apply to Limited Liability Companies

The law governing limited liability companies in New York consists of the New York Limited Liability Company Law and case law interpreting that law.  Some legal scholars say that New York rushed the creation of Limited Liability Companies, after 40 other states had already done so, and thus the laws on the books today have numerous gaps and ambiguities.  Over the years, the courts have come up with some groundbreaking decisions that shaped LLC Law in New York but I am certain they are not done yet.  This makes it a challenging situation for small business owners and the countless LLC owners who did it all on their own, most likely unaware of the trouble they may encounter in the future. 

Operating Agreements

It is possible to protect yourself from the many uncertainties and gaps in the LLC law by engaging a lawyer early and adopting a proper operating agreement.  When you form an LLC you are required to adopt an operating agreement.  This agreement sets forth how the LLC is managed, how profits are distributed, and many more rights and obligations of the owners.  The possibilities are endless.  But drafting such agreements requires expertise in all the scenarios that are imperfectly, or not at all, dealt with in the LLC law.  A template from online DIY services will not do if there is more than one member.  The most vulnerable person is the minority owner.  Without proper protections in an operating agreement, a minority owner’s situation is dire.

Why are LLCs so popular?

LLCs avoid double taxation as a “flow-through” entity.  The LLC doesn’t pay tax, all profits and losses flow through to the members.  If you are more than one owner, you still have to prepare a partnership tax return though and the members receive K-1s.   Sole members of LLCs most likely report LLC income and losses on Schedule C of their personal tax return.

LLCs provide the shield of limited liability if all formalities are complied with, and the owners don’t co-mingle personal and business finances.   

LLCs require less paperwork.  No annual meetings and no payroll is required when you pay yourself as an owner.

There is no restriction on the type of LLC members.  S-corporations can’t be formed by foreigners as shareholders for example.

LLCs are very flexible. You have a lot of freedom to shape the LLC in any way you want with respect to the distribution of profits and losses and management.