Corporation vs. LLC in New York State

By Ari Mushell, J.D.

Corporation vs. LLC in New York State

By Ari Mushell, J.D.

As you gear up to start a business in the Empire State, you are still deciding between a limited liability company (LLC) and a corporation. While the LLC is the more popular choice, you should choose the model best suited for your particular business.

New York City skyline

Under New York state law, you can incorporate your business as either a C corporation or an S corporation. If you operate a professional service business, you can only form a professional corporation.

This article provides an overview of the LLC and corporate models and how they compare with one another.

Limited Liability Company

The New York Consolidated Limited Liability Companies Law governs LLCs. Under the law, one or more people, called members, form an LLC by filing articles of organization with the New York Department of State. In addition, the LLC must draft an operating agreement that details the company's operations and other pertinent information. Under New York state law, an LLC is an unincorporated business.

Ease of Formation

In contrast to corporations, forming an LLC is simple. Once an LLC files articles of organization, drafts an operating agreement, and pays the required fee, the LLC has formed. The LLC must file a statement every two years that provides:

  • The address of the LLC
  • The names and addresses of its members
  • The name of its registered agent

Limited Liability

An LLC, as its name suggests, provides members with limited liability. This means that members' personal assets are legally separate from those of the LLC. If a creditor collects from an LLC but still has a balance remaining, the creditor cannot collect from the members' assets.

Favorable Taxation

An LLC is a pass-through entity, which is a tax benefit. As a general rule, corporations can be subject to double taxation: first at the corporate level and then of the shareholders' profits at the individual level. An LLC, on the other hand, is not taxed at the business level at all. Instead, the business's profits pass through to its members, who then pay taxes on those profits on their individual tax returns.

In New York City, an LLC may be subject to the equivalent of double taxation. As an unincorporated business, an LLC is subject to New York City unincorporated business tax (UBT) at the entity level. As of 2018, the UBT is a four-percent tax against an LLC. However, taxpayers who pay UBT are subject to a tax credit based on how much they pay and their incomes.

Corporations

Under New York state law, a new corporation is a C corporation unless the corporation files to be an S corporation by filing Election by a Small Business Corporation (Form 2553) with the U.S. Internal Revenue Service.

Requirements

Under New York Law, both C and S corporations must:

  • Issue stock
  • Adopt corporate bylaws
  • Maintain shareholder records
  • Conduct regular board meetings
  • Produce minutes of those board meetings

It is important to follow all state-mandated requirements for corporate matters.

Taxation

Similar to LLCs, S corporations are pass-through entities with respect to taxes, thereby avoiding double taxation under New York state and federal laws. Corporations, as incorporated entities, are not subject to the UBT in New York City. However, under New York City law, S corporations are subject to double taxation. This is a significant concern for S corporations operating in New York City, from both taxation and accounting perspectives.

Tax implications of an LLC or corporation are complicated in New York. While an LLC has fewer formalities and may have favorable tax treatment, NYC-based LLCs can lose some or all of those tax benefits. Similarly, while S corporations enjoy pass-through taxation under New York state law, S corporations are not pass-through entities under New York City tax law.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.