LLCs provide the owners, which are also referred to as members, with the limited liability protection associated with a corporation, while also providing the flexibility and simplicity associated with a partnership. Corporations tend to be more rigid than LLCs, making LLCs more appealing to many potential businesses.

LLCs can distribute profits among the members based on the ownership’s interests. Corporations, on the other hand, share profits based on the shares that are held by the shareholders. The administrative tasks associated with an LLC are less demanding than a corporation because they usually aren’t required to have shareholder meetings or maintain detailed records. The requirements to create an LLC slightly differ between states, so if you want to learn about the pros and cons of starting an LLC in New York, continue reading to find out more.

Pros of Starting an LLC in New York State

There are many benefits to choosing an LLC over a corporation when starting a business in New York State:

• Limited Liability Protection

LLCs have limited liability protection, which is one of its largest benefits. The members of the LLC are the owners, and they have no personal responsibility for the debts and obligations of the business. This means, if there is a financial or legal issue with the business, the owner’s assets, including homes and bank accounts, are typically protected. The LLC is responsible for its obligations, which gives the owners a shield of protection. A creditor can not expect a member of an LLC to use personal assets to pay the debts of the LLC.

• Management (Ownership) Flexibility

LLCs have flexible ownership and management. This allows for an informal management style. The owners can decide how they want to manage the company. They can manage it themselves or have appointed managers. New York State allows an LLC to be member-managed. This is when all members of the LLC make decisions about and manage the company. It can also be a manager-managed LLC. This occurs when there are designated managers that handle the daily operations of the business. It’s much easier to form an LLC with a management structure that meets your needs. In New York State, an LLC can be a single-member LLC or a multi-member LLC.

• Tax Purposes

Pass-through taxation is one of the most significant advantages of an LLC. In New York, LLCs do not have to pay corporate income tax. The members of an LLC have profits and losses passed through to them. The members then report them on their tax returns. This allows for tax savings because there isn’t double taxation at the corporate and individual levels. This also simplifies the tax filing process. If an LLC has one member, which is also a single-member LLC, it can be taxed as a C corporation, S corporation, or sole proprietorship. If it’s a multiple-member LLC, which means it has two or more members, it can be taxed as a C corporation, S corporation, or partnership. The choice should be made based on what’s best for the members. Most of the time, a tax expert should be consulted to help make this decision. If the LLC opts to be taxed as a C corporation, they aren’t allowed to pass through their profits. These LLCs may also be subject to the New York business franchise tax.

• Ease of Maintenance

When you choose to form an LLC in New York, it’s straightforward. The LLC does need to file an Article of Organization with the New York State Division of Corporations. There is also a filing fee. The ongoing requirements of an LLC are also simple. They need to supply annual filings and fees, but it’s much easier than other business structures. Other business structures, especially a C Corporation, are difficult to form and maintain. There are many steps required to remain compliant.

• Credibility

When you have an LLC, your business seems more professional and credible. Once you form an LLC, you can add it to your business name, which shows your customers, partners, and suppliers that you have taken all the steps to establish a business entity formally. This instills trust in your brand, which could provide more opportunities.

Cons of Starting an LLC in New York State

Even though an LLC is the easiest business entity to create, it isn’t always the best one for your company. There are some cons associated with an LLC:

• Costs

While the creation of an LLC is affordable, there are still costs and fees associated with it. New York State requires filing fees for the formation documents. There are also annual fees for maintaining the LLC’s status. The complexity of your business may require you to consult with professionals, such as attorneys or accountants. These consultations come with added expenses.

• Self-Employment Tax

Even though LLCs don’t have to pay corporate taxes, the individual members have to pay self-employment taxes. Those who are self-employed must pay both the employer and employee portions of Medicare and Social Security taxes. This is an additional tax burden and could have a significant financial impact on the members of the LLC.

• Multi-Membership LLC Complexity

If you are planning to create a multi-member LLC, you may find that there is added complexity, especially regarding governance, decision-making, and profit sharing. While this option provides flexibility in some ways, it can also lead to challenges and conflicts, especially when trying to get all the members to agree. When creating a multi-member LLC, it’s important to have clear operating agreements to help avoid potential problems. When there are disagreements among the members, it can prevent the smooth operation of the business.

• New York State-Specific Requirements

New York State has some specific requirements and regulations for LLCs that might be different from other states. It’s important to understand the local laws and compliance obligations. This includes items like tax obligations, annual reporting, and publishing requirements. LLCs in New York State must publish a notice of formation in designated newspapers within 120 days of formation. This also adds to administrative costs and steps. It’s best to work with a professional advisor or an attorney to ensure compliance and avoid any legal problems.

Final Thoughts

When you are considering starting an LLC in New York State, you will find there are advantages. These advantages include pass-through taxation, limited liability protection, flexibility in management, and enhanced credibility. However, there are some other factors to consider, such as self-employment taxes, fees, and the complexity of a multi-member LLC. The additional regulations created by New York State may cause people to think twice about creating an LLC; however, depending on your situation, it could still be the best option.