- 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 New York 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. While LLCs do offer limited liability, it is not a shield from personal wrongdoing.
Limited liability companies are one of the most created business entities in New York.
Who can form an LLC?
Any individual (including a non-resident alien, i.e. a foreigner), a corporation, a partnership, or another 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 2 04 NY LLC.
2. File Articles of Organization
You have to file so-called “articles of organization” with the New York Department of State division of corporations (Sections 203 & 209 NY LLC). The Department of State now offers online filing and a step-by-step guide.
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.
Pro tip: Don’t do the newspaper publication on your own, use a service that specializes in doing them and gets special rates from newspapers, such as Interstate Filings.
Many starting LLC businesses used to forgo the required newspaper publication due to its high cost (about $1200 in New York County, 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. Still this not as dire as it sounds, see consequences of failure to publish here.
4. Adopt Operating Agreement
Finally, at the latest within 90 days of the 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 love of god or anybody you believe in, if your LLC has more than one member (i.e. you), get yourself to a lawyer and have a proper operating agreement drafted. There is no penalty for failure to have one, but it can come to hurt you later, especially if you are a minority member.
While many one-member LLCs neglect to adopt an operating agreement, it is highly advisable to adopt a well-prepared operating agreement in cases where there is more than one member.
How much does it cost to form an LLC?
Filing fee for the articles of organization: $200;
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 to newspapers for publishing notices (for a New York County LLC): about $1299 in New York County, i.e. Manhattan
What 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. But you can also take care of the biennial filing online.
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.
Similarly, an LLC normally does not pay New York State income taxes, rather the members pay taxes on their allocated share of LLC profits.
Is an LLC a good choice for my new business?
It might well be. However, the choice of entity is a complicated issue that 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.