New York residents thinking about opening their own business are often eager to get started right away, but some of their most important decisions will be made in the early stages and should be considered carefully. Choosing the appropriate business entity can have significant liability, tax and estate planning consequences, and a mistake made here can cast a long shadow.
While setting up a sole proprietorship is fast and inexpensive, it offers no personal asset protection and little in the way of estate planning advantages. Partnerships and limited liability companies have a number of advantages, and LLCs can now be formed with only a single member. Entrepreneurs sometimes shy away from forming a corporation due to concerns about the complexity of the process and the costs involved, but online platforms have made incorporating in states like New York much simpler in recent years. Corporations offer comprehensive asset protection and a number of tax benefits, and electing to be taxed as an S corporation provides these advantages while avoiding the double taxation of a C corporation.
Another advantage of electing to be taxed as an S corporation is being able to separate business income into salary and dividends. This allows an entrepreneur to pay themselves a salary while taking the bulk of their business income in the form of distributions. Salaries are taxed according to income tax rates, but lower capital gains tax rates are paid on dividends. Distributions are also not subject to payroll taxes.
Attorneys with business law and estate planning experience could provide advice to entrepreneurs in New York about the various types of business entities and the advantages and disadvantages of each. An attorney could also point out the importance of limiting liability and protecting personal assets from business-related litigation as well as the estate planning implications of the different forms of business entity.