Creating an Entity
When forming a business, choosing the right entity can have a direct impact on the personal liabilities of the owners or partners, as well as the success of the business itself.
To create a business entity, one must follow the rules of the state, and business owners have the option to choose limited liability companies or corporations.
Depending on the entity you choose, it will have different benefits and drawbacks in terms of business debts, creation costs, accounting requirements, tax liabilities, etc. Before choosing the type of entity for your business, you need to take into account all of these factors.
An experienced business or corporate attorney can assist you with these types of matters. At Mekhtiyev Law, we offer the services of a highly qualified attorney who can help you select the right entity and help you achieve your business goals.
Limited Liability Companies (LLC)
Business owners often prefer Limited Liability Companies (LLC) due to a host of reasons, including but not limited to:
- Involve limited personal liability
- Are easy to form
- Offer flexibility
Hence, they are perhaps the most common form of business entity selected.
LLCs can have a single member or multiple members and can protect their members from liability due to any debts in the business. Its main benefit is the flexibility of its structure. For example, in terms of governance, LLCs may include a board of directors, a manager, or management (if all members agree). Unlike other corporations, these entities do not have too many formalities like keeping a record of the minutes of annual meetings, etc.
When it comes to taxes, LLCs are typically considered pass-through entities. This means the entity itself does not pay any taxes on business income. However, its members pay taxes on the profits they receive from the LLC. The member can also elect to be taxed as either a partnership or a corporation. If the LLC has a single member, the founder can also elect to pay taxes as an individual or a corporation.
One drawback of LLCs in New York is their costly publication requirement. This involves posting a summary of the entity’s Articles of Organization or Qualification in two different newspapers for six weeks in the county where the principal place of business where the LLC is located. The cost of this can run into thousands of dollars.
Another complication in LLCs is the structuring of equity compensation, which is similar to a stock option plan. However, it is not impossible to do so.
Corporations
Corporations are the most widely recognized and traditional way to set up a business. A corporation will exist independently of its shareholders and protect its shareholders from the liabilities and debts of the entity if certain legal conditions are met.
In addition, if you expect your business to need venture capital financing, you should choose to consider choosing a corporation since many VC funds may not be able to invest in an LLC because of their status as a tax flow-through entity.
To create a corporation, you need to file the Certificate of Incorporation with the Department of State. The entity does not offer as much flexibility as an LLC since it must be managed by a board of directors. However, members can give certain shareholders more representation on the board and have the right to veto are approve certain corporate actions.
Additionally, corporations require members to follow organizational formalities, including recording annual meetings and their minutes. The entity must also keep impeccable records of the contact information of all the shareholders, the class and number of shares they hold, and the dates when they become owners of the shares. Therefore, it is important that an experienced corporate attorney advises on these types of intricacies.
Unlike LLCs, corporations do not have an expensive publication requirement. They are also treated differently when it comes to tax, depending on whether it is a C-corporation that imposes two levels of taxes or an S-corporation that is considered a pass-through entity, just like an LLC.
Sole Proprietorship
A sole proprietorship is the simplest kind of business entity that is free from the complications of corporations and LLCs and does not require document submission with the government. The business is owned and run by a single individual who has unlimited personal liability and is not shielded from the debt and obligations of a business.
Even though sole proprietorship is a simple form of business, you can still benefit from the expertise of a qualified attorney, who can answer all of your questions, discuss the tax laws pertaining to the entity in the state, and can help you figure out if a sole proprietorship is the right kind of business for you.
If that is not the case, a corporate attorney can advise you on the type of entity that would be more suitable for your type of business. In addition, an experienced attorney can help you prepare and file your official documents and set up the business.
General Partnership
A general partnership is established in association with two or more people or entities looking to earn profits from a business. All the partners have high personal liabilities for the debts and obligations of the business, including a shared liability for any wrongful act committed in bad faith by a co-partner.
General partnerships are not the most preferred form of business if you are looking to raise funds. Moreover, most investors like to invest in entities that offer limited personal liability.
Limited Liability Partnership
A limited liability partnership is a form of partnership that involves both limited partners and general partners. A limited partner’s liability is only limited to their investments; however, a general partner has unlimited liability.
This form of business is preferred because it allows investors to become limited partners in the company but not be subjected to the unlimited personal liability of controlling the business. However, limited partners cannot run or control the company.
Setting Up Your Business for Success
A business attorney can help you understand and make key decisions when setting up your business, which can help contribute to its long-term success. The right entity and a concrete governing agreement are crucial when forming a business.
A business attorney can advise you on the benefits and drawbacks of different entities and help you understand the various factors affecting limited liability companies, corporations, sole proprietorships, or partnerships.
The selection of a business entity depends on the nature of your business, how much liability you can take on, your goals for the enterprise, tax concerns, investment needs, formation and operational expenses, and other factors. A corporate attorney will work with your tax professional if necessary in order to help you choose the entity that is most suited for your business needs.
Settling Partnership Dispute
A business lawyer can help clients negotiate a partnership, shareholder and operating agreements to ensure that all parties know their respective roles and responsibilities. A clear and comprehensive understanding can reduce the risk of conflicts between partners and owners and prevent the escalation of an adversarial relationship.
At Mekhtiyev Law, our attorneys can guide you in several situations:
Requesting an Accounting: Many times, conflicts arise due to misunderstandings about the use of business resources. An accounting request will ensure that all partners are in agreement.
Mediation: An attorney can resolve disputes by explaining relevant legal concepts and encouraging productive conversation between owners and partners, which can lead to negotiation or compromise.
Dissolution: In some cases, it may be less damaging to dissolve the business in order to protect it and its owners from further harm. A lawyer can help the owners understand these consequences and help them make the right choice.
Legal Representation: If there is no recourse except a lawsuit, a business lawyer will represent your interests in court or refer you to a litigation specialist who would handle the case.
Why Consult Mekhtiyev Law When Setting Up a Business
Our experienced business attorneys can offer you clear and concise legal counsel on your day-to-day business activities. At Mekhtiyev Law, we can help you prepare legal documentation, including partnership, shareholder, and employment agreements. We also help family-owned businesses continue to successfully operate even through a change in ownership.
Our attorneys can offer advice in case of disputes between partners, shareholders, employees, customers, and vendors, resolve tax issues, and represent the company in case of a lawsuit. In addition, they can also help a business in case of mergers and acquisitions, sales purchases, leases, and other business transactions.
If you are thinking of setting up a business call (212)203-6974 to schedule a consultation with us.
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