LLC vs. Corporation in New York

One of the most important decisions you will make when starting a business in New York is choosing the right legal entity. The two most popular options—limited liability companies (LLCs) and corporations—each offer distinct advantages and drawbacks depending on your business goals, tax situation, and growth plans. This guide compares them side by side.

Understanding LLCs in New York

A Limited Liability Company (LLC) is a flexible business structure that combines the liability protection of a corporation with the tax benefits and operational simplicity of a partnership. LLCs have become the most popular entity choice for small businesses in New York due to their flexibility and relatively straightforward compliance requirements.

In New York, forming an LLC requires filing Articles of Organization with the Department of State and—uniquely—publishing a notice of formation in two newspapers for six consecutive weeks in the county where the LLC is located. This publication requirement typically costs between $300 and $1,500 depending on the county.

Key Advantages of an LLC

• Pass-through taxation: LLC profits and losses pass directly to members' personal tax returns, avoiding double taxation.
• Flexible management: LLCs can be managed by members or by designated managers, without the rigid corporate structure of officers and directors.
• Fewer formalities: No requirement for annual meetings, board resolutions, or detailed corporate minutes.
• Liability protection: Members' personal assets are generally protected from business debts and lawsuits.
• Flexible profit distribution: Profits can be distributed in any manner agreed upon by members, not necessarily proportional to ownership.

Understanding Corporations in New York

A corporation is a separate legal entity owned by shareholders. New York recognizes two main types relevant to small businesses: C-Corporations (standard corporations subject to corporate income tax) and S-Corporations (which elect pass-through taxation with the IRS). Forming a corporation requires filing a Certificate of Incorporation with the Department of State.

Key Advantages of a Corporation

• Attracting investors: Corporations can issue different classes of stock, making them more attractive to venture capitalists and institutional investors.
• Established legal precedent: Centuries of corporate case law provide clear rules governing liability, governance, and disputes.
• Employee benefits: C-Corps can deduct the full cost of employee benefits including health insurance, which is not available in other entity types.
• Perpetual existence: A corporation continues to exist regardless of changes in ownership.
• Credibility: Some industries and business partners view incorporation as a sign of seriousness and permanence.

Side-by-Side Comparison

Taxation

This is often the deciding factor. LLCs default to pass-through taxation—profits are reported on members' personal returns and taxed once. C-Corporations face double taxation: the company pays corporate income tax on profits, and shareholders pay personal income tax on dividends. S-Corporations provide pass-through taxation but with restrictions on the number and type of shareholders.

In New York, LLCs pay an annual filing fee based on New York source gross income, ranging from $25 to $4,500. New York City also imposes an Unincorporated Business Tax of 4% on LLC income for city-based businesses. Corporations pay New York State corporate franchise tax based on business income, capital base, or a fixed minimum.

Liability Protection

Both LLCs and corporations provide personal liability protection for owners. However, this protection can be pierced in either structure if the business fails to maintain proper formalities, comingles personal and business funds, or engages in fraud. Corporations face stricter compliance requirements, but the liability shield is essentially the same.

Formation and Compliance

LLCs are generally simpler to form and maintain. They require fewer ongoing formalities—no mandatory annual meetings, no board of directors, and more flexible operating agreements. Corporations require annual shareholder and director meetings, proper corporate minutes, bylaws, and officer appointments. However, both entities must file biennial statements with New York and maintain proper records.

Raising Capital

If you plan to seek venture capital or eventually go public, a C-Corporation is almost always required. VCs strongly prefer the corporate structure because of its established governance framework, ability to issue preferred stock with specific rights, and compatibility with standard investment documents. LLCs can bring in investors through membership interest transfers, but this is more complex and less familiar to institutional investors.

Which Is Right for Your Business?

Choose an LLC if you are a small business or solo entrepreneur seeking simplicity, you want pass-through taxation to avoid double taxation, you do not plan to seek institutional investment, you want flexibility in management and profit distribution, or you are a real estate investor or professional service provider.

Choose a Corporation if you plan to seek venture capital or angel investment, you want to issue stock options to attract employees, you plan to eventually go public, you need to retain significant earnings in the business at potentially lower corporate tax rates, or you are in an industry where corporate form is expected.

The S-Corporation Election: A Hybrid Approach

Many New York business owners choose an S-Corporation election—either by forming a corporation or having their LLC taxed as an S-Corp. This allows pass-through taxation while enabling the owner-employee to take a reasonable salary (subject to payroll taxes) and receive additional profits as distributions (not subject to self-employment tax). This strategy can result in significant tax savings for profitable businesses, but requires careful compliance with IRS reasonable compensation rules.

How Agarunov Law Firm Can Help

Choosing the right business entity involves balancing tax implications, liability concerns, operational needs, and growth plans. At Agarunov Law Firm, we help entrepreneurs and business owners in New York City navigate entity selection, formation, and ongoing compliance. Our Financial District office serves clients across all five boroughs and beyond.

Frequently Asked Questions