I'm trying to organize a business as a freelance engineer / consultant for media & broadcasting. I will be working outside of NY state probably at least half the time. I don't need to raise capital, won't have employees but I need the liability protection of either LLC or S Corp, so which is the best way to go? Should I just do the LLC to start with to get up and running and the look at an S Corp later on. Both options have pros & cons - LLC has Newspaper publication expense ($1300), but I understand I can deduct that anyway? Is there a significant long term Tax benefit either way, I understand NY doesn't recognize S corp tax status so it seems there is no real benefit to the extra ongoing complication of the S corp? Filing out of state won't help correct? Am leaning LLC. Thanks
These are difficult questions to answer "in general" because of the specific circumstances each new business owner faces. For instance, you mention you are an engineer who might be providing freelance consulting services out-of-state. Without knowing more about the sorts of services you are thinking of providing as well as the jurisdictions in which you might be providing such services, I can't really tell what type of entity is appropriate or even required. I can tell you, however, that in some jurisdictions, professional services can only be rendered through a Professional Corporation (which may be an S-Corp) or a Professional Limited Liability Company (PLLC), while other jurisdictions don't even have these types of entities and therefore will give you headaches if you need to get authorization to do business there.
Generally speaking, an S corporation costs less to form than an LLC, though there are some ways to reduce the publication expenses, but an S corporation will in fact incur more in the way of state and local taxes than an LLC. Speaking extremely generally, a profitable single-member company is better off as a single-member LLC rather than as an S-corp for this reason, but this is such a generalization that I really hesitate to tell you that it makes sense for you.
There are some other problems here too. You will need to register to do business out of state anyway, so you may as well look at organizing your company out of state as well, especially since NY does not provide particularly good protection against creditors of an LLC or its single member. You also have indicated that you intend to work out of NYS at least 50% of the time, so you should speak with a CPA familiar with the state and local rules of each of the jurisdictions in which you intend to work to get a sense of what the best entity is for you from a purely tax-and-accounting perspective.
The bottom line is that entity formation is an extremely important choice, and one that cannot be reversed easily or cheaply. Switching from an LLC to a corporation later on could end up costing you many thousands of dollars, particularly if it turns out you really need to do business as a corporation for some reason and you already have the business up and running as an LLC with real value. Even though your situation is not as complex because you don't intend to have employees or investors, you still need to make this choice carefully.
I recommend consulting with and retaining a business attorney and CPA to help you make the right entity formation choice for your situation, after weighing the licensing, tax, accounting, and pragmatic benefits and drawbacks of each choice potentially applicable to your situation. It should not cost a lot of money unless you want an opinion about doing business in all 50 states or around the world. Also, a good business attorney (as well as a good CPA) can also give you practical advice about starting your business and avoiding many of the pitfalls that frequently cause new businesses to fail. Best of luck in starting your new company!
Mr Reiff offers sound advice. One thing to add. An S corporation has the potential for saving on social security tax. All income from the LLC is automatically subject to such taxes. In an S context, a reasonable salary can be paid and that is subject to social security tax, while the rest of the profit reflected on the K-1 to you would be free of such tax. So you have to weigh this possible benefit against the costs incurred under NY law that Mr. Reiff mentions. Get with a tax attorney to get first hand advice before doing anything.
For more on the Choice Of Legal Entity For Your Business go to http://www.sjfpc.com/choice_of_legal_entity.html. For the non-tax implications read Choice of Business Entity: Legal, Financial and Other Non-Tax Concerns at http://www.sjfpc.com/choice_business_entity_legal_financial_non-tax_concerns.html. Be sure to hit the like button after these articles if you found them helpful.
Hope this helps.
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The conclusion to form a business entity should not be an automatic one. It is not necessary for everyone.
The prior attorneys given you excellent information concerning what steps to follow to determine what type of entity you should form and suggestions about how to do it.
While, I am, like many business attorneys in the field of forming entities for clients, there are some situations where the time and expense of forming an entity does not make sense. You yourself list several reasons why it may not be necessary. You won't be raising money, you won't have employees.
However you provide us with the conclusion that you need the liability protection of an entity without really describing why. Not every business requires an entity. Often, if there is little exposure to risk there may be no reason to form an entity. I, of course, do not recommend that you function without insurance, because that could be a big mistake.
You should make the first part of any conversation with a professional a discussion of the relative risks of the work you do to become a claim and, if so, potentially how large a claim. Once you have examined that and determined that an entity is needed I would refer back to the good recommendations of prior counsel's comments.
The information contained in this response should not be construed as legal advice on any specific facts or circumstances. Readers should not act upon the information contained in this response without professional counsel. The contents are intended for general information purposes only and the information contained in this is not intended to create or constitute an attorney-client relationship.
You should contact a New York attorney who sets up businesses and this can be done 1, 2, 3.
You are working on a lot of misconceptions.
Either corporation or LLC will give you the protection you need.
If you're on a limited budget you should do corporation, because LLC in NY requires an additional $1250 to $1500 in publication costs.
My office can set up corporation or LLC for you.
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