STEP 1: Choose the type of business structure for your New York- based business
You’ve got the business idea, developed a business plan and are ready to hit the launch button. But what kind of business structure is best suited for your business? This is an important consideration in any entrepreneur’s journey. Choose the wrong type of business entity and you could stunt the growth of your business; choose the right kind and you could give your business the ability to scale in the future.
Side Note: If you haven’t fully honed your business idea yet, or are looking for a little more inspiration, we’ve got just a resource just for you. Check out our 300 business ideas to help you develop that killer business idea.
Below, we unpack the four types of business structures you can open in New York, and the pros of cons of each, so you can decide which is best your type of business.
Type of business entities
1. Sole Proprietorship
What is a sole proprietorship?
This is your most common and simplest type of business structure. If you want to be your boss, run a business from home or not have physical premises like a storefront then this type of business structure allows you complete autonomy of your business. Usually, a sole proprietorship is also operated under the name of the owner.
Why open a sole proprietorship in New York?
You can start a sole proprietorship In New York without having to file any legal documents with the New York State government, making it a quick and easy business structure to choose if you’re looking for a type to get up and running in no time. But as with anything, there are both pros and cons to consider before you make the decision.
The Pros
- Quick set-up: Because you don’t have to register your business as a sole proprietor, getting set up is quick and easy because of its informal structure.
- Complete managerial control: Without any formal director or shareholder structures to worry about, a sole proprietorship gives you complete control over your business.
- No licence application needed: In New York, you won’t have to apply for a licence, however there will be state licencing requirements that you may need to comply with, depending on your business speciality, such as state agencies license professionals in banking, legal and insurance industries.
The Cons
- Personal liability: One of the disadvantages of a sole proprietorship is that the buck stops with you. Should there be any debts and liabilities accrued in the business, you will be held personally liable as there are no legal distinctions between your own personal debts and that of the business.
- Limited business life: One of the limitations of a sole proprietorship business structure is that the life of your business will be limited to the length of your own life. You’ll also be unable to transfer your business ownership.
- Access to business loans: As an informal infrastructure, getting a business loan becomes tricky as lenders may only allow you access to personal loans. Also, should you default, lenders can go after your personal assets.
- Stigma: People often equate a sole proprietorship with highly informal and an often-unprofessional setup. This may not be a problem if you really are running a side-hustle from your garage, but when you’re trying to score some big customers, it may be to your disadvantage.
2. Partnership
There are different types of partnerships that can be formed in New York.
What is a partnership?
There are various kinds of partnerships that you can choose from, which include:
General partnerships: This is the simplest partnership structure. Two or more individuals or businesses partners come together to commence a business for profit and share full liability. In general partnerships, a separate business entity exists, however creditors can still go after the partners’ personal assets to settle debts.
Limited partnerships: In a limited partnership the partners don’t have the obligations or duties of general partners. There are one or more general partners and one or more limited partners in the partnership and partners can be individuals, partnerships, corporations, or any other type of legal entity. In limited partnerships, the partners accounts for the profits and losses separately on their own income taxes, based on their share.
Limited liability partnerships: This type of partnership is more rigorously regulated. It provides liability protection to the partners from any debts or liabilities that the other partners may have created. In the state of New York, limited liability partnerships (LLPs) can choose to either be taxed as a partnership or as a corporation. But how you elect to be taxed federally will apply in the state of New York.
Note: There are more options in New York than any other state on how a partnership can be taxed. For example, a partnership that must file a federal partnership income return may also need to file a New York partnership income tax return.
Why register a partnership?
The Pros
- Leverage combined skills and capital: Although starting a business on your own may seem like an attractive option, it can also be a lonely one. Finding the right partners could assist you in both leveraging the skills that they bring, as well as give an additional capital injection you’re your start-up.
- Easy to open: Contrary to what some may think, starting a partnership isn’t too complicated. There is no special paperwork to be filed with the federal government and you should have only minimal local paperwork.
- Simple record-keeping: Unlike corporations, there are no requirements for record-keeping in a partnership.
The Cons
- You can’t make decisions on your own: Unlike a sole proprietorship, in partnerships you will need to work with your partners to run the business and make operational and strategic decisions together.
- Personal liability: As a partner, you will be legally and financially responsible for the business. Generally, each partner is personally liable for the debts of the partnership, and each partner can also be personally liable for the actions of the other partners within the business, dependent on the type of partnership structure you have chosen.
3. LLC (Limited Liability Company)
What is an LLC?
A Limited Liability Company or ‘LLC’ is an unincorporated business entity that shares the characteristic of both a corporation and partnership, but with greater flexibility than the more traditional business entities. It is made up of either one or more persons who are called members instead of partners or shareholders.
To form an LLC in New York, you need to be a New York State resident or a business entity located in New York State.
Why register an LLC in New York?
The Pros
- Limiting your personal liability: An LLC allows you to separate your personal liability from the business, so you won’t be held liable for the debts of the business.
- Simple filing and administration: The state of New York has made filing, management and administration of your New York LLC quick and simple.
- Tax treatment is flexible: If there is only one member in your LLC, you will be taxed as a sole proprietorship. With two or more members, you will be taxed as a partnership.
- Unlimited membership: With an LLC, you can have as many members as you would like.
The Cons
- There is a registration cost: Registration is not free, and you should prepare yourself to pay approximately USD 200.
- Registered agent: LLCs require that you appoint a registered agent to assist with the registration and handling of official documents on your behalf.
- Access to loans: Getting business loans with an LLC could also prove a little more complex as enders may favour a corporation over an LLC business entity. The members may have to personally guarantee the loan in order to be eligible.
- Annual filing fee: New York imposes an annual filing fee on LLCs for filing of income tax returns. The amount will vary according to your annual gross income ad can range from anything between USD25 and USD4 500.