The entity is chosen once, early, usually in a hurry, and then lived with for years. It decides who bears the losses, how the profits are taxed, who may decide what, and how easily someone new can be brought in. Very little else a founder signs in the first month does as much work.
A founder forming a company faces a decision that looks administrative and is not. Selecting a form of entity is not a filing preference; it is a set of answers to four questions that will govern the business for as long as it exists. Who is exposed if the venture fails. How is income taxed, and taxed again. Who has authority, and how is a disagreement resolved. And what has to change before an investor, a partner, or a buyer can come in. A form chosen without asking those questions may still be the right one, but it will have been chosen by accident.
This article sets out the choices as they present themselves in New York, which for most closely held businesses means a limited liability company or a corporation, with the further question of whether a corporation should elect to be taxed under subchapter S. It is written for the founder, owner, or family deciding at the beginning, and for the owner who has been operating under a form chosen years ago and wants to understand what it is doing. The firm's article on special purpose vehicles takes up the related question of when a separate entity should be formed for a single project or deal.
It is general information, not legal advice, and it is not tax advice. The consequences of an entity choice depend on the specific facts, the number and residency of the owners, the nature of the business, the state and city in which it operates, the way profits will be taken out, and the plans for outside capital, and they are governed by New York law and by federal and state tax law. Elections have deadlines, and a form that fits at formation may not fit three years later. Statutes, thresholds, and elections are described in general terms as the landscape stands in 2026 and change. The choice should be made with counsel and a tax adviser working together from the actual facts. Reading or relying on this article does not create an attorney-client relationship.
The four questions an entity choice answers
The first question is liability. A properly formed and properly maintained entity is a separate legal person, and the general rule is that its debts and obligations are its own rather than its owners'. That separation is the principal reason to form anything at all, and it is the reason a business that has been operating as a sole proprietorship or a general partnership is operating without the protection its owners probably believe they have. The shield is not absolute, it does not cover an owner's own wrongful acts, and it can be lost through neglect, but as a starting proposition it is what an entity buys.
The second question is tax, and it is where entity choice most often turns. The forms differ in whether the business itself pays income tax or passes its income through to its owners to report; in whether earnings distributed to owners are taxed a second time at the owner level; and in how those earnings are characterized for employment-tax purposes. There is no generally correct answer. A business that will distribute most of its earnings to a small group of active owners is in a different position from one that will retain earnings to fund growth and expects to raise institutional capital, and the same structure serves one badly and the other well.
The third and fourth questions are governance and capital. Governance is who decides: whether authority sits with a board elected by owners or with the owners themselves, what requires a vote, what happens when owners disagree, and how an owner exits or dies. Capital is what a new participant must be given and how easily: whether interests can be issued in classes with different rights, whether options can be granted to employees on familiar terms, and whether an outside investor will recognize the instrument being offered. An entity that answers the first two questions well and the last two poorly will be reorganized later, at cost.
An entity that answers liability and tax well but governance and capital poorly will be reorganized later, at cost.
The New York limited liability company
The limited liability company is the default choice for a great many New York businesses, and for good reason. It offers its members a liability shield comparable to a corporation's while imposing far less internal machinery: there is no required board, no officers by statute, no annual meeting ritual, and no share certificates. Ownership is expressed as membership interests, management may rest with the members or be delegated to managers, and nearly all of the internal rules are set by agreement rather than dictated by statute. For an owner-operated business, a family holding, or a venture among a few principals, that flexibility is the point.
Its tax treatment is flexible in the same way. By default, a single-member limited liability company is disregarded for federal income-tax purposes and its activity is reported by its owner, while a multi-member company is treated as a partnership, with income passing through to the members and no entity-level federal income tax. A limited liability company may also elect to be taxed as a corporation, and to make the subchapter S election discussed below, which means the choice of entity and the choice of tax treatment are not the same decision. What treatment is advantageous depends on the facts and belongs with a tax adviser rather than with a general rule.
New York attaches two obligations that surprise founders who have formed companies elsewhere. The first is the publication requirement, which obliges a newly formed limited liability company to publish notice in two newspapers designated by the county clerk and then to file a certificate of publication with the Department of State, on a timetable that begins at formation. The second is that New York requires the members to adopt a written operating agreement. Both are treated in detail in the firm's article on forming a New York limited liability company; what matters here is that they are conditions of the form, not optional refinements.
The corporation, and the S election
A corporation is the older and more formal instrument. It is formed by filing a certificate of incorporation, it issues shares, and its internal life is structured by statute and bylaws: shareholders elect a board, the board appoints officers and decides matters reserved to it, and the record of that activity, minutes, consents, resolutions, is part of what keeps the entity respected as separate. That machinery is a cost for a two-person business and an advantage for a company that will have investors, employees holding equity, and decisions that need a documented chain of authority. Shares are also a familiar and transferable unit, which matters when interests will change hands.
By default a corporation is a taxpayer in its own right. It pays income tax on its earnings, and amounts distributed to shareholders as dividends are taxed again at the shareholder level, the arrangement usually described as double taxation. Subchapter S of the federal tax code offers an alternative for corporations that qualify: with a timely election, the corporation's income passes through to its shareholders and is generally not taxed at the corporate level, while the corporate form and its governance are retained. Owners who are active in the business commonly find the treatment of compensation and distributions under an S election significant, and that treatment is a matter for a tax adviser.
The S election is available only to corporations meeting specific eligibility conditions, and those conditions are the reason it is not universal. In general terms, the corporation must be domestic, must have no more than a limited number of shareholders, must have only individuals and certain trusts and estates as shareholders rather than corporations or partnerships, must not have non-resident alien shareholders, and must have only one class of stock. New York additionally requires its own election for state purposes rather than following the federal one automatically. The one-class-of-stock condition is the one that most often ends the conversation, because it is incompatible with the preferred stock a venture investor will expect.
The single-class-of-stock condition is where the S election most often ends: it cannot coexist with the preferred stock an institutional investor expects to receive.
What outside capital expects
A founder who intends to raise institutional capital is making a narrower choice than the general survey above suggests. Venture investors ordinarily invest in corporations, and commonly in Delaware corporations, because the instruments they use, preferred stock with liquidation preferences, protective provisions, and conversion rights, are corporate instruments, and because the body of Delaware corporate law and the courts that apply it are familiar to the funds and their counsel. A limited liability company can be made to do many of the same things by agreement, but the agreement is bespoke, the tax reporting it produces for institutional investors is often unwelcome, and the negotiation is longer.
Equity compensation points the same way. A company that will grant options to employees generally wants the corporate machinery that stock options assume, and the market's expectations about vesting, exercise, and valuation are built around corporate stock. Equivalent arrangements in a limited liability company are possible, through profits interests and similar instruments, but they are less familiar to employees and advisers and carry their own tax complexity. None of this makes the limited liability company the wrong choice; it makes it the wrong choice for a company on a venture path, and the right one for a great many businesses that are not on that path.
The practical counsel is to choose for the business that is actually being built rather than for the one in the pitch deck. Converting a limited liability company to a corporation later is a well-trodden transaction and is done regularly, but it is not free, and it is least convenient at exactly the moment it is usually needed, when a term sheet is on the table and diligence has started. A business that will be owned by its operators, distribute its earnings, and never sell preferred stock does not need corporate machinery it will never use. A business that will raise a priced round within two years generally does better to form as it intends to continue.
The formalities that keep the shield standing
The liability protection an entity provides is a consequence of the entity being genuinely separate, and courts will disregard the separation where it has been treated as a fiction. New York courts have described the inquiry as requiring both complete domination of the entity by its owner in the transaction at issue and use of that domination to commit a wrong against the party complaining. The facts that support such a finding are recognizable and mundane: personal and business funds mixed in one account, the entity left with no meaningful capital for the obligations it took on, no records or decisions of any kind, contracts signed in an individual name, and assets moved in and out without documentation.
The maintenance that prevents this is ordinary and inexpensive. The entity keeps its own bank account and its own books, and money moves between owner and entity as documented distributions, loans, or compensation rather than by convenience. Contracts, leases, and invoices are made in the entity's name and signed in a representative capacity. The decisions the entity's governing document requires, whatever they are, are actually made and recorded. Required filings are made on time, including New York's periodic statements and, for a limited liability company, the publication and operating-agreement obligations noted above. None of this is difficult. It is simply easy to skip.
Two limits are worth stating plainly, because owners frequently misunderstand them. An entity does not shield a person from liability for their own conduct: a professional's own negligence, an owner's own fraud, and obligations personally guaranteed remain personal regardless of the form. And certain obligations, including specific tax obligations, can attach to responsible individuals by statute. The shield is real and worth maintaining, and it is a shield against the entity's contractual and operational liabilities rather than a general immunity. Which protections apply to a particular business, and what maintenance a particular structure requires, are questions for counsel on the specific facts.
The shield is a consequence of the entity being genuinely separate. Mixed accounts, absent records, and contracts signed in an individual name are how separateness is lost.
Common questions
- Is an LLC or a corporation better for a new business in New York?
- Neither is better in the abstract. A limited liability company offers a comparable liability shield with far less internal machinery and flexible tax treatment, which suits owner-operated businesses, family holdings, and ventures among a few principals. A corporation offers familiar shares, a documented chain of authority, and the instruments institutional investors and option-holding employees expect. The right answer depends on how income will be taken out, who will own the business, and whether outside capital is planned, and should be decided with counsel and a tax adviser on the specific facts.
- Can an LLC elect to be taxed as an S corporation?
- Choosing an entity and choosing how it is taxed are separate decisions. A limited liability company may elect to be treated as a corporation for federal tax purposes and, if it meets the eligibility conditions, may make a subchapter S election as well. Those conditions include limits on the number and type of shareholders and a requirement of only one class of stock. New York also requires its own election for state purposes. Whether any election is advantageous, and by when it must be made, is a question for a qualified tax adviser.
- Does forming an entity protect my personal assets completely?
- No. A properly formed and maintained entity generally keeps its debts and obligations separate from its owners', but the protection is not absolute. It does not cover an owner's own wrongful or negligent conduct, obligations that were personally guaranteed, or certain obligations that statute attaches to responsible individuals. It can also be lost where the entity has not been kept genuinely separate, through mixed funds, absent records, inadequate capitalization, or contracts made in an individual name. What protection applies to a particular business is a question for counsel on the facts.