Business Entity Formation

Business Entity Formation

Business Entity Formation

Several business entities are recognized in the United States, such as the sole proprietorship, general partnership, corporation and limited liability company (LLC). Each form of business entity has its own strengths and weaknesses. In conjunction with your accountant, who can advise you on what form is best suited for your tax and financial situation, we can discuss these issues with you and help you decide which is best for your business. We will then work with the relevant governmental authorities to handle company formation for your business.

Perhaps one of the most important considerations in business entity choice is the limitation of liability. Not all entities limit the liability of its owners. The notorious 1966 case, Walkovszky v. Carlton, best illustrates the significance of limitation of liability to the business owner. Carlton was the principal stockholder of 10 corporations. Each corporation owned two taxis, and each held the minimum liability insurance then mandated by New York law. Walkovszky, a pedestrian, was hit by a taxi owned by one of the corporations. As the corporation had little assets of its own, Walkovszky sued Carlton directly. New York’s highest court, recognizing that the very purpose of incorporation was to limit the personal liability of its stockholders, concluded that Carlton could not be held personally liable. As Walkovszky did not state an adequate reason for the courts to disregard the corporate form, he could only reach the minimal assets of the one corporation.

Even though you may not be running a New York taxi business, liability protection is important. It can protect your personal assets from business deals gone wrong or the passerby that slips and falls in front of your store.

A business entity is usually held to laws of its state of formation, with respect to its internal affairs. Thus, a Delaware corporation operating in New York will mostly be subject to the Delaware General Corporation Law rather than the New York Business Corporation Law. However, in order for a Delaware company to do business in New York, it must also apply to New York’s Department of State for authority to do so. On the other hand, this is an additional compliance cost. This incurs an additional compliance cost that must be weighed against the benefits of forming an entity in another state. We can advise you as to the pros and cons of doing one over the other so you can make an informed decision as to the specific needs of your business.

If you are thinking of starting a business, or if you have already have a business and want to elevate it to the next level by forming a business entity, please contact us today. We will be glad to help.

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