A variety of issues can arise when entrepreneurs start up a business in New York. From liability concerns to taking the right steps to properly protect intellectual property, a business start-up can be a difficult task.
One task that should not be taken lightly is the classification of the business. This step can have a variety of tax implications. A common option for business classification is the limited liability company. Limited liability companies, or LLCs, offer a variety of benefits. The U.S. Small Business Administration notes that this legal structure has many of the liability features of a corporation while offering "tax efficiencies and operational flexibility of a partnership." Although these structures are tax efficient, taxes still need to be addressed.
Federal taxes and the LLC
The federal government does not view an LLC as a separate entity. Instead, tax liability falls on the owners, referred to as members. The LLC's members generally cover the business's tax liability within their personal income taxes.
Next, the LLC may elect to be treated as a sole proprietorship, partnership, or corporation. In most cases, LLCs with only one member are classified as sole proprietorships. This classification generally requires completion of a 1040 income tax return and a Schedule C Profit or Loss from a Business form should be included.
If there is more than one member of an LLC, the federal government treats it as a partnership. A special election must be made if the members would prefer the business be treated as a corporation. Partnerships must file a U.S. Partnership Return of Income From 1065 along with a Schedule K-1.
New York state taxes and the LLC
In addition to paying the IRS, business owners may also owe state taxes. In New York, personal income tax and corporate franchise taxes generally conform to federal classifications. As a result, a business treated as a corporation by the IRS will be treated as a corporation by New York and a business treated as a partnership by the feds will be treated the same way by the state.
LLCs that are classified as partnerships may need to file a Partnership Return or Form IT-204.
Legal counsel can help
These are just a few of the tax issues that can arise with a business, and tax issues are only one of many potential concerns to address before moving forward with classifying a business. If you are an entrepreneur considering classifying a business, it is wise to contact an experienced New York City business formation attorney.