Elise Schwarz

Creating a Business Entity

Creating a Business Entity Can Protect Yourself Personally

If you are in business, but you do not create a business entity, you may become personally liable for your business debts. Incorporation can also alleviate tax liability in certain circumstances too.

Creating a business entity (incorporation) creates a separate entity. This entity can do most things an individual can: enter into contracts, sue or be sued, buy real estate etc etc. Perhaps most importantly from the owner’s viewpoint, it can shield the owner from personal liability and company debt.

Corporations do not die with their owners. They continue until dissolved. They can be dissolved voluntarily, by the shareholders, and with consent from the State Tax Commission (New York State Department of Taxation and Finance).

At inception, the corporate bylaws are drawn up. These set the rules for the company. Aside from these rules, the corporation must also hold a yearly Directors and Shareholders meeting, keep written minutes of major company decisions, and ensure the bylaws are complied with.

Creating a Business Entity: DBA (Doing Business As)

This is a sole proprietorship (if there is more than one owner, it’s known as a “General Partnership”). It is also known as a “Fictitious Name” entity.

1. 1. This is not separate from the owner, it’s just a way for the owner to do business under another name.
   2. The owner does not get any protection, and is personally liable for the company and all its debt.
   3. The owner is also personally liable for all taxes.

Creating a Business Entity: Regular Corporation (C-Corporation)

1. 1. This provides personal liability protection. This entity can deduct expenses like health insurance, travel, and entertainment. Shareholders own the stock (and get issued certificates to show what they own). They elect the board of directors, who in turn appoint the officers (President, Secretary, Treasurer, etc), who then run the company

Creating a Business Entity: S Corporation

If you elect “S-Corporation Status” (which can only be done after incorporation, and requires a filing with the Internal Revenue Service) you maintain protection against personal liability, while enjoying a tax benefit. The corporate tax liability is passed through to the shareholders, which avoids double taxation: where taxes are paid on the profits, as well as on the income given back to the shareholders as dividends. However, an S-Corporation cannot deduct certain expenses, like health insurance, travel, and entertainment.

S-Corporations are still regular corporations, and must keep the corporate formalities of a regular corporation (board meetings, minutes, resolutions, etc). But there are certain restrictions to an S-Corporation. They can only have a maximum of 100 shareholders, all of whom must be United States Citizens, and they cannot own or be owned by other business entities.

Creating a Business Entity: Limited Liability Company

Limited Liability Companies are becoming increasingly popular. They do not require the issuance of stock (they have “members”, not “shareholders”), and have fewer formalities than regular corporations. They require an operating agreement, which sets the rules for operating the company. Other than what is contained in the operating agreement, the only formalities are the holding of an annual meeting, and member approval of any changes to the operating agreement. Their owners are taxed personally, but are not personally liable for their debts.

For Assistance in Choosing The Right Corporate Entity for You, Contact the Law Offices of Elise Schwarz, (212) 566 5500

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Piercing of the Corporate Veil allows a party to go after the personal assets of the individuals behind a corporation. When a court allows the piercing of the corporate veil, corporate protection will NOT protect you from liability:

The Corporation provides its owners with a “veil” behind which they can hide to protect against personal liability. But this veil is not fool-proof. In certain circumstances personal liability can arise regardless of whether an individual has incorporated.

In order to win the piercing of the corporate veil, and allow liability to be placed at the feet of the individual defendant, rather than the corporation, plaintiffs must show that the defendant exercised complete domination and control with respect to the transaction attacked, and that such domination was used to commit a fraud or wrong against it. Teachers Ins. Annuity Ass’n of America v. Cohen’s Fashion Optical of 485 Lexington Ave. Inc.  45 A.D.3d 317, 318, 847 N.Y.S.2d 2, 3 (N.Y.A.D. 1 Dept.,2007). The domination must be such that the corporate entity had no separate will of its own. Chase Manhattan Bank (Nat. Ass’n) v. 264 Water Street Associates,  174 A.D.2d 504, 505, 571 N.Y.S.2d 281, 282 (N.Y.A.D. 1 Dept.,1991).

Piercing of the corporate veil may also be allowed where there has been overlap in ownership and directorship, or common use of office space and equipment Forum Ins. Co. v. Texarkoma Transp. Co.  229 A.D.2d 341, 342, 645 N.Y.S.2d 786, 787 – 788 (N.Y.A.D. 1 Dept.,1996), citing Wm. Passalacqua Bldrs. v. Resnick Developers South, 933 F.2d 131, 139 [2nd Cir.] ).

Therefore, merely having a corporation may not be enough to protect an individual from personal liability.

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