If you are running a business anywhere in the United States and you have not incorporated or filed as a limited liability company, by default you are a sole proprietorship (for one owner) or a general partnership (for more than one owner). Neither of these business entities protect you from personal liability, and in the case of a general partnership, you will be liable for the actions of your partners too.

Protection from personal liability is one of the main reasons why businesses incorporate or form LLCs (tax benefits is the other major reason). In New York City, tax issues must be an integral part of the consideration in selecting the right business entity. This is an area of law best left for a tax lawyer or certified public accountant.

There are numerous factors to consider in selecting your business entity.

Let’s discuss one: Two owners. Owner A is contributing 30% of the financing and services of operating the company. Owner B is contributing 70% of the financing and will offer business advice but not run the company day-to-day. Owner B wants to receive 100% of the profits until recouped of the initial investment.

These owners, in my mind, have one of two choices. Either incorporate or form a limited liability company. They would clearly want S Corp status or be treated as a partnership/disregarded entity under the limited liability company. Under an LLC, the owners (known as members) can structure distributions disproportionately to their respective ownership interests while retaining partnership/disregarded entity  status. This structure can also be achieved in the corporate structure, BUT to qualify for S Corp status under IRS regulations, all stock must be common stock (i.e. no difference in distribution rights). Based on the above example, this company cannot be treated as an S Corp. Unless the tax advantages of being a C Corp is better than that of a limited liability company, the above scenario is best treated as a limited liability company.*

*Note, however, that the up front costs of forming a limited liability company in New York City are significantly greater than for a corporation due to the LLC publication requirement. Fees, in essence another tax, is an important factor to consider in the initial formation of a business entity too.