Corporations & Limited Liability Companies

A corporation or limited liability company (LLC) can be more expensive and complicated to set up than a sole proprietorship or general partnership, but a corporation or LLC has several benefits that sole proprietorships or general partnerships do not have. The main benefit of an LLC or a corporation is that the owners’ personal responsibility for business debts and court judgments against the business is limited. This means that, in general, if you are an owner or shareholder you will not and cannot be required to pay damages to anyone for mistakes the business makes or accidents it causes.

What sets corporations apart from all other businesses structures is that a corporation is an independent legal and tax entity. A corporation is separate from the people who own, control, and manage it. Because of this separate status, the owners of a corporation do not use their personal tax returns to pay taxes owed on corporate profits – the corporation itself pays these taxes. Owners pay personal income tax only on money they draw from the corporation in the form of salaries, bonuses, and other compensation.

Like corporations, LLCs provide limited personal liability for business debts and claims. But when it comes to taxes, LLCs are more like partnerships: LLC owners pay taxes on their shares of the business income on their personal tax returns. Small corporations that elect “Subchapter S” status under the Internal Revenue Code are also taxed like partnerships.

Corporations and LLCs make sense for business owners when either (1) the business operations have some risk of being sued or of having a lot of debts, or (2) the business owners have personal assets they want to protect from possible lawsuits by creditors owed money by the business.

In order to form a corporation, you would need to do the following:

• Choose an available business name that complies with New York law;
• Appoint the initial board of directors of your corporation;
• File formal paperwork, usually called “articles of incorporation,” and pay a filing fee;
• Create corporate “bylaws,” which lay out the operating rules for your corporation;
• Hold the first meeting of the board of directors;
• Issue stock certificates to the initial owners or shareholders of the corporation; and
• Obtain any licenses and permits required for your business.

Legal Editor: Steven M. Lester, November 2014 (updated February, 2016)