Some people seem to suggest that it is always better to form a multi member LLC (more than one owner), rather than a single member LLC.  These people base their opinion on the fact that the so called charging order protection may not be available in a single member LLC.   

What is a Charging Order?

3 people form an LLC and run a catering business through the LLC.  Each of the 3 people are thus members of the LLC.  

One member, let's call him A, defaults big time on his home mortgage and pretty much all other obligations with his numerous creditors.

A's creditors are now trying to get their hands on A's membership interest in the Catering LLC. They took his house, so why shouldn't they take his business interest.  The other members (B and C) are afraid that they will have to deal with A's creditors on a day to day basis, because A's creditors might take over A's entire membership interest in the LLC, voting, management rights and all. 

B and C don't have to be afraid.  Section 607 of the New York Limited Liability Company Law comes to their rescue.  This law basically provides that A's creditors can only sit tight and put their hands on the economic rights attached to A's membership interest by way of a "charging order".  They can't participate in management, reach specific property of the LLC or do anything of that sort.  Only when the LLC distributes profit to the members, can they collect and satisfy A's debt from those moneys.

Does the Charging Order protection apply to single member LLCs?

Some courts have said no (see discussion here and here), mainly because there are no OTHER members to protect from bossy creditors in a single member LLC.  To the best of my knowledge, New York courts have not yet directly addressed this issue.

As a small business start up, should I form a  multi member LLC rather than a single member LLC because of the above? 

 This is a little bit like asking whether you should or shouldn't get married because of the marriage tax penalty. 

In most cases, you should not be influenced by this.  However, if your main interest in forming and maintaining an LLC is not running a business, but protection of an asset within the LLC, this is something to discuss with your attorney.

…do not make a match formed in heaven.  New York City does not recognize s-corporations and makes all s corporations liable for its General Corporation Tax to the tune of 8.85%.  Thus, in NYC, an LLC is often the better and more tax friendly alternative for new business owners.  If it weren’t for the costly publication requirement, NYC could finally participate in the national LLC boom.  Lend your support to get rid of the publication requirement!

 

Nonprofits are businesses that made it their mission to give away all of their profits to a particular cause, rather than enrich the owners of the business. 

Starting a nonprofit organization is in many ways like starting any other small business in New York.  But there are additional steps required in order to get the desired status of "tax exempt" from the IRS, which means that the organization does not have to pay taxes on any of its income.

Here are some good links to get your started:

The Things you Gotta do to Start a Nonprofit Organization, by the Nonprofit Coordinating Commitee of New York;

Exemption Requirements by the IRS; and

Stay Exempt – An IRS Micro Site.

Having all the right kind of contracts in place at the beginning of a business venture manages expectations and prevents conflicts with your business partners, customers, vendors, landlords…you get the idea.

Thus, I present you with a list of the most commonly needed agreements for any business startup:

Read more

I am a big believer in bootstrapping and DIY, especially when it comes to starting a business. One, you don't have much money to waste, and two, knowledge is power.  Thus, before you pay some incorporation service to essentially operate a fax machine for you, you may as well do it yourself all the way and learn a lot by doing it.  While you could hire a lawyer to do it for a ridiculous amount of money, it really isn't brain surgery, at least not when you are a one man/woman business just starting out.

Searching the internet for good resources to do so, I came across the Do-it-yourself Kits offered by Stephen L. Nelson, a CPA in Redmond, WA.  I reviewed the "New York S Corporation Kit" and the "Setting S Corporation Salaries" ebook.  I found both publications extremely informative and helpful.  They have everything you need to know to get your New York s corporation on the road.  He charges a modest amount for these publications, but also offers tons of helpful free information on his website. 

Nelson is also the author of the bestselling book series, Quickbooks for Dummies.  Another startup resource that I highly recommend.  A working knowledge of bookkeeping and accounting principles is a must for every new or aspiring business owner.   My favorite title is "QuickBooks 2010 All-in-One For Dummies."

By the way, I don't personally know Stephen L. Nelson or have any incentive in endorsing his products.  

An online business is no different from any other business when it comes to licenses and permits.  Depending on the type of business you conduct, online or offline, you may need certain permits and licenses from three different authorities: the Federal Government, your State Government or your local authorities.

Federal Government permits and licenses are rarely necessary, except for certain types of rather dangerous activities, like drug manufacturing, selling of alcohol and firearms and so forth.

On the state level, as a New York business, you can find out what kind of licenses and permits are required by going to New York Business Express.

On the local level, as a New York City business, you can find information about permits and licenses here.  As far as I can see, they do not require any particular license for the sale of new goods on the internet.

With respect to using your home as a home office in New York City, I wouldn’t worry about any permit or license, as long as your business doesn’t disturb your neighbors.  But if in doubt, you should consult the New York City Zoning Code, or your town’s zoning code, if you don’t life in NYC.

By the way, don’t hesitate to call all State and City agencies and ask your way through to somebody who seems knowledgeable and get all the information you need.  While there is no guarantee that people give you correct information (is there ever?), these government employees are being paid to help you (for free) and are often very helpful.

Then there is other paperwork that a new business may need to file, even though I wouldn’t call that a permit or a license.

For example, corporations and multi-member LLCs must apply for a federal identification number.

In addition, any business that conducts its business under a name other than the name of the individual owner, must apply for a “fictitious name certificate” or “business certificate.”  In other words, Daphne Danzig selling widgets as Daphne Danzig does not have to get a business certificate.  But Daphne Danzig selling widgets under the name “Ace Widgets” needs to apply for a certificate.  If Daphne Danzig is in New York City, she can get her certificate at the county clerk, 60 Centre Street, for more info see here.  For an entire post on business certificates, see my earlier post on “doing business as”.

**This post is for informational purposes only and does not constitute legal advice**

As you may know, there are naming rules (Section 204 NY limited liability company law) when it comes to choosing a name for your LLC.  Most  names are o.k. if not already taken by somebody else, but some terms are tricky and require special dispensation.

For example, try filing articles of organization for this LLC:  "Life Exchange, LLC".  You will get a nice letter from the Department of State informing you that they are unable to file this name, because it is not allowed to use "exchange" in the name of an LLC without the approval of the Attorney General.  And they are right; it says here in Section 204(h) NY limited liability company law:

"The name of each limited liability company as set forth in its articles of organization [……] shall not, unless the approval of the attorney general is attached to the articles organization […….] contain the word "exchange" or any abbreviation or derivative thereof.  Such approval shall not be granted by the Attorney General if in his or her opinion the use of the word "exchange" in the limited liability company’s proposed name would falsely imply that the limited liability company conducts its business at a place where trade is carried on in securities or commodities by brokers, dealers or merchants."

Is that the end of your name?  No, you can go ahead, write a letter to the Attorney General and describe the business you are planning to conduct under the name "Life Exchange, LLC".  I am assuming it’s some kind of life coaching, re-birthing center type of activity.  If you explain it right, there should be no doubt that you are not trying to establish a New York stock exchange in your backyard and they will happily give you the approval.

Many people have successfully done it already, as you can find out by searching the New York State corporate database with the term "exchange."  There are plenty of businesses using the term "exchange" that have nothing to do with trading stocks or commodities.

**This post is for informational purposes only and does not constitute legal advice**

A professional cannot form a regular corporation or limited liability company to sell his or her professional services.  This is well known about lawyers and doctors, but it is also true for nurses, psychologists, and any other profession designated in Title 8 of the education law.

These professions have to form a special kind of corporation or LLC, a so called professional corporation or a professional limited liability company.

A professional LLC or corporation is not that different from a regular LLC or corporation when it comes to the structure and tax treatment.    There are just some special rules with respect to the formation, the purpose and the shareholders of a professional LLC:  Look here for professional LLCs and here for professional corporations.

When a professional forms a professional corporation to sell his or her services, the sole purpose of that corporation must be the rendering of professional services.  All his or her fellow shareholders must be authorized to practice in the same profession. 

Now, many people think that when they form a professional entity, they are protected from their own malpractice.  Wrong.  The New York limited liability company law specifically states in Section 1205:

"Each member,manager, employee or agent of a professional service  limited  liability company  shall  be  personally  and fully liable and accountable for any negligent or wrongful act or misconduct committed by him or  her  or  by any  person  under  his  or  her  direct  supervision  and control while rendering professional services on  behalf  of  such  limited  liability company."

What’s the point of forming an entity then in the first place?  Well, you can still shield yourself from liability of the other members of the professional LLC or anybody who was not under your direct supervision.  Plus, your house and car won’t be on the line, if something happens that is unrelated to your professional liability, such as a visitor falling on the shiny floor in your lobby.

**This post is for informational purposes only and does not constitute legal advice**

A reader of my blog had the following questions which I am happy to address in a legal information kind of way.  (Disclaimer: This is not legal advice, nor is there an attorney-client relationship between me and the reader or anybody else reading this.)

“I have a degree in art. I am unable to find a full-time job, so I am thinking of doing freelance work to pay my bills.”

Good idea.  Being an entrepreneur can be rewarding and a way out of unemployment.  By the way, did you know that you may be able receive unemployment payments and start a business at the same time?  Check out the so called self-employment program

“How do I distinguish what is considered freelance, and what is considered "being a business"?”

There is no meaningful distinction.  If you sell things or services for your own profit, you are considered operating a business, no matter what you call it, freelancing, a profitable hobby, moonlighting, independent contractor, doing gigs on the side…..This is true, even if you have a day job and a regular paycheck from an employer.

“When would I have to register myself as a business?”

"Registering" can mean different things in this context.  If you start a business under your own name, there is no need to register that business.  You are automatically a sole proprietor.  If you operate a business under a name different from your own name, you need to register that name and the business by filing for a "business certificate" with the county clerk in the county where your business is located.

Then, of course, if you have income from your business, you need to pay taxes to the local and federal tax authorities.  As a sole proprietor, you would file your income from your business on Schedule C of your federal tax return.  Then you also have to pay self-employment tax, the equivalent of social security and Medicare taxes for the self-employed.

“If I wanted to operate under something like "Arty, the artsy Artist," is that what I would register as a name?”

If that suits your fancy, go for it.  As mentioned above, if you want to operate a business under a name different from your individual name, you must obtain a business certificate from the county in which your business is located.

“I believe I would be considered a sole proprietorship, because I would not have any employees, or business partners.”

Only partly true.  You can have employees, even though you are a sole proprietorship.  If you operate your business with another person, you would automatically be considered a partnership.  Only one person can operate as a sole proprietor.

“Everything is so confusing…because what if I make no commissions, or find no clients?”

Can’t help you there.  That is the risky side of being in business.  Potential huge rewards are the other side.

"I don’t know where I fit in as an artist who wants to explore several avenues to see which is the right route for me."

Even though artists are special in so many ways, when it comes to business, there are just like any other business man or woman.