In New York State, a Limited Liability Company (“LLC”) is formed by filing articles of organization with the Department of State, division of corporations, state records and UCC. LLCs can conduct a broad range of business activities.
Two features make the LCC one of the most popular business forms: the limited liability it offers its owners, referred to as members, and its pass-through income tax treatment.
Limited Liabilities of its Members
An LLC can be made up of one or more members, individuals or legal entities or both. Members are typically not liable for the LLC’s debts or other obligations. Their personal assets are not at risk when investing in an LLC. Their liability is limited to their capital contribution, i.e. their contribution to the business.
Pass-through Income Tax Treatment
LLCs are pass-through entities for tax purposes. They do not pay any federal income tax. Members declare income and losses on their personal tax returns.
I. Formation
The LLC is formed at the time of the filing of the articles of organization, by an organizer. The organizer can be an individual or a legal entity. He or she does not have to be a member of the LLC in formation.
Name, Filing of Articles of Organization & Publication of LLC Formation
The business name must contain the words “Limited Liability Company” or the abbreviation “LLC” or “L.L.C.”.
The organizer prepares and files the articles of organization with the Department of State. Organizers may use the form prepared by the Department of State, available on its website, or draft their own form.
In New York State, a copy of the articles of organization or a notice related to the formation of the LLC has to be published within 120 days of the entity formation, in two newspapers for six successive weeks. One newspaper to be printed weekly and one newspaper to be printed daily. The newspapers must be designated by the county clerk of the county in which the office of the LLC is located. The publisher of each newspaper must provide an affidavit of publication. A certificate of publication, along with the affidavits of publication of the newspapers, must be submitted to the Department of State. If the articles of organization are not published within the required timeline, and/or the certificate of publication is not filed with the Department of State, the LLC’s authority to carry on, conduct or transact business may be suspended.
II. Practical considerations
Application for an Employer Identification Number (“EIN”)
A newly formed LLC must apply for an EIN, which is the Federal tax identification number used to identify a business entity. The EIN will also be needed to set up a bank account for the business. Applications for an EIN are made directly to the IRS. The process is rather straightforward and can be done online, through the Internal Revenue Service website, to get the EIN within a few minutes.
Registration with State Administrations
An LLC that plans to hire employees in New York State must register with the Department of Labor, and will be required to withhold and pay employee income taxes to the Department of Taxation and
Finance, as well as unemployment insurance taxes, if applicable. Some LLCs are required to register as sales tax vendors with the Department of Finance and Taxation, and receive a sales tax certificate of authority.
III. Operating Agreement
New York LLCs, even single-member ones, must have an operating agreement in place. The operating agreement is the contract between the members, and the company with its managers, if any. It spells out how the business will be run, financed, and managed. It should address all operational, governance and inter-relational issues relevant to the business. If the operating agreement is silent on any matter, applicable provisions of the New York State limited liability company statute would be applicable.
The provisions of the operating agreement should reflect the characteristics of the business of the LLC. Some of the key provisions to be included pertain to:
Ownership
The operating agreement should spell out each member contribution to the LLC, and determine what share of the business each member owns. It should outline how profits, losses, and assets are divided among its members.
Members’ rights and responsibilities
The operating agreement should outline the role of each member within the business. It should spell out the skills each of them brings in the business, set forth the decision-making process, organize the division of labor, or provide specific benchmarks on the way each member will carry out its job, if any, within the company.
Management
An LLC can be run by all or one of its members, or by a non-member manager. The operating agreement shall state whether management responsibilities are vested in one or more members or a class of members only. If a professional manager is hired to run the business, the LLC members are mere investors of the company.
Joining and leaving the LLC
The operating agreement should set forth procedures for adding new members and departures from the business. Some of the important issues to be laid out include: buyout provisions, valuation of membership interests of exiting members, right of first refusal of the remaining members, death of a member, non-compete clause, etc.
Amendments
The operating agreement should include a provision setting forth the conditions and procedure for its amendment.
Dissolution
The operating agreement should set forth the terms and procedure for the dissolution of the entity, such as division of remaining assets, once the all debts have been settled, surviving non-compete provisions, if applicable, etc.
The characteristics of the LLC, described in this article, make it one of the most popular business forms, despite its relatively high formation cost -- mainly because of publication costs, which can go as high as $1,500 approximately.
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