The entrepreneurial spirit is alive and well in New York, and many New Yorkers will decide to go into business for themselves. When doing so, they will have to choose a business structure. It is important to understand that different business structures offer different types of liability protections.
Partnerships are a common business structure when two or more people want to start a business together. There are two different types of partnerships. One is a limited partnership (LP). Under an LP one general partner has unlimited liability, and the remaining partners have limited liability and limited control over the business. Business profits are passed through to the partner’s income tax returns and the person who is the general partner is also responsible for paying self-employment taxes.
The other type of partnership is a limited liability partnership (LLP). In an LLP, all partners have limited liability and are protected from the debts against the business and the actions of the other partners.
Limited liability companies
A limited liability company (LLC) protects the business owners from being personally liable if the business files for bankruptcy or is sued. Business profits and loses are passed through the business owners’ personal income and are not subject to corporate taxation. However, owners of an LLC are considered self-employed and thus must pay self-employment taxes.
Corporations, often referred to as “C corps” are complete separate legal entities from its owners. This means that the owners of the C corp are not personally liable for the actions and debts of the C corp. C corps can make a profit, face taxation and can be held liable in court. One way that C corps are different from partnerships and LLC is that they pay income taxes on any profits made, both when the profit is made and again when dividends are paid to stockholders.
Choose your business structure carefully
These are only three common types of business structures; there are others not covered in this post. This post is for informational purposes only and does not offer legal advice. Business law attorneys in New York may be a good source of information for those looking to form a business.