Why Should You Form a Corporate Entity When Starting a New Business? TLF Attorney Shalini Natesan Shares Some Insight

NEWS | The Towne Law Firm, P.C. | Albany, NY | July 15, 2021
TLF Business Law Blog Header ImageReady

What are the Benefits of Forming a Corporate Entity?

There are many benefits of forming a corporate entity when starting a new business. First and foremost is protection from liability. If set up correctly, forming a business entity such as a corporation or limited liability company (LLC) will protect you and your fellow members or shareholders, if any, from liability, subject to some exceptions. Further, if rules of corporate governance are followed, future disputes may be avoided. There may even be some tax benefits.

What are the most popular types of business entities?

The most popular types of business entities are the corporation, limited liability company (LLC), limited liability partnership (LLP) and partnership. We will focus on corporations and LLCs here.

Corporations and LLCs: Personal Liability Protection

Corporations and LLCs generally offer personal liability protection. Meaning, any liabilities incurred by the business would usually be limited to the assets of the business, and would not subject members of the LLC or shareholders of the corporation to personal liability. This is subject to exceptions where the members or shareholders engage in misconduct, intentional bad acts or other negligent acts.

Corporations generally provide protection for their shareholders’ personal assets. Corporations often incorporate in the State of Delaware, as Delaware corporation laws are more favorable to the shareholders of the corporation. In New York,  there are two types of corporations – S-corporations and C-corporations. S-corporations, or, small business corporations, are more common for small businesses. This entity eliminates the double taxation to which C-corporations are subject. Profits pass through to shareholders instead of being taxed at the corporate and shareholder level, thereby eliminating double taxation, and shareholders retain asset protection as they are not personally liable for the S-Corporation’s liabilities. Limitations of the S-Corporation include only being able to offer one class of stock and having a maximum number of 100 shareholders.

On the other hand, C-corporations are more common for larger businesses.  While also providing personal asset protection for its shareholders, a C-corporation allows unlimited shareholders and allows the public to buy shares of the corporation via an initial public offering, with more than one type of stock. However, a major drawback of C-corporations is the double taxation that occurs when the C-corporation pays corporate tax on profits and shareholders are also taxed on dividends. Setting up a corporation in New York is slightly more cumbersome than forming an LLC. The corporation must file a certificate of incorporation with the Department of State, appoint a registered agent, prepare corporate bylaws, appoint directors, hold an annual board meeting, keep meeting minutes, file a biennial statement and ensure all corporate taxes are paid in a timely manner.

LLCs are ideal for small to medium-sized businesses and are relatively easy to form as compared to corporations. LLCs offer liability protection with more flexibility in running the business, as LLCs are not required to form a board of directors, can be member-managed or manager-managed, and are allowed an unlimited number of owners. Members of the LLC can opt to have the LLC taxed as a pass-through entity, whereby the earnings of the LLC are passed to the owner(s) without paying tax first.  LLCs are also relatively easy to establish. The applicant files Articles of Organization for the LLC with the NYS Department of State along with the filing fee and can then file for an EIN and open a bank account. There is a publication requirement for LLCs in New York, and once met, the LLC will receive proof of publication and affidavit of publication which is then sent to the NYS Department of State. The LLC creates an operating agreement that details the members, their ownership percentages, how the LLC is to be managed as well as other rules that the LLC must follow. The LLC should be cognizant of the requirements as listed its operating agreement and follow them closely so there is no appearance of impropriety.

Both corporations and LLCs should follow corporate formalities and ensure separation is maintained between the company and its owners. When there is no separation and it can be shown that the owners are actually operating the company as if there is no corporation or LLC, a court could find that company is really an “alter ego” of its owners and “pierce the corporate veil.” When this occurs, courts can decide that there is no liability protection and impose personal liability on the owners.

Written By: TLF Business Attorney, Shalini Natesan, Senior Associate at TLF

Headshot of Shalini Natesan Albany Business Lawyer Attorney

The Towne Law Firm is ready to help you with all of your business needs. Contact us if you are interested in forming a business entity. TLF covers a multitude of business-related legal issues and matters, including but not limited to:

  • Drafting the necessary documents for all business and corporate transactions
  • Remaining in compliance with all applicable Federal and State laws necessary to enjoy the benefits and protections of the particular type of business organization you have chosen
  • Creating subsidiary companies to handle specific areas of your business
  • Protecting your investments in research and development, technology and human capital by drafting enforceable employment agreements, confidentiality agreements and covenants not to compete
  • Learn more about how TLF’s attorneys can represent your business.