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STARTING AND OPERATING A BUSINESS IN NEW YORK Copyright © 2004, Michael D. Jenkins
CONTENTS OF THIS SECTION:
I. INTRODUCTION I. INTRODUCTION New York has a huge and vibrant economy, and New York City is a place where many businesses feel they have to have a presence. For a small business, however, the tax and regulatory environment in New York, and especially in New York City, can be a daunting challenge, as the legal and tax complexities of doing business in the City exceed those of any other part of America. Fortunately, both the state and the City have recently adopted a number of reforms and simplifications that are making it somewhat less difficult to start or operate a business. Like most states, New York imposes an income tax, a franchise tax on corporations, a sales and use tax, various excise taxes, with property taxes imposed at the local level. The state has also adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses operating in New York in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. (However, New York City imposes a special tax on the income of unincorporated businesses.) At present, the state's economy is somewhat less than vibrant, in terms of the level of unemployment and other economic measures, as it slowly recovers from the aftermath of 9/11. In June, 2004, the state's unemployment rate was 6.2%, just slightly lower than the 6.3% rate a year earlier. This compares somewhat unfavorably to a national unemployment rate of 5.6% for the same month. To view the latest federal Bureau of Labor Statistics unemployment rate data for New York or any other state, visit the BLS website. New York has a very high cost of living, compared to national averages. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in New York can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity (although a small tax burden is also imposed on an S corporation at the corporate level by the state of New York). New York also provides for limited liability partnerships, in which no partner is liable for debts of the partnership, in general, as in the case of a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships in New York can be formed with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. No separate tax form filing is required, generally, for a sole proprietorship, under the New York (state) income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. If you live in or have a business in New York City, you will also be subject to City income tax, and to the New York City Unincorporated Business Tax on your business income. However, depending on your income level, from 15% to 65% of any Unincorporated Business Tax may be claimed as a tax credit against your City income tax. See Section IV(c) for information on the New York state and City income tax and filing requirements for individuals. (c) Partnerships. As a rule, general partnerships in New York can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under New York law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the secretary of state, together with a filing fee of $200. In addition, you must publish a notice that you have formed a limited partnership in two local newspapers in the area where your partnership will do business and file Affidavits of Publication with the New York Secretary of State. Foreign limited partnerships must also register before being allowed to do business in New York, and must also pay a registration fee of $200. For information on limited partnership filing
requirements, see the contact information for the
offices of the New York Secretary of State, listed in
Section VI(a) of this chapter.
New York state law now provides for creation of Registered Limited Liability Partnerships (LLPs). These are general partnerships that provide professional services (such as law, medical, or accountancy firms), and which elect to register as LLPs and thereby obtain some degree of limited liability. However, as with a professional corporation or a professional LLC, an LLP will not protect a professional practitioner against malpractice claims against him or her, or wrongful acts that are committed by someone acting under his or her direct supervision or control while rendering professional services for the LLP. To form an LLP in New York, a domestic partnership must register and pay a filing fee of $200 to the secretary of state. Foreign LLPs, those created under the laws of another state, must register with the secretary of state and pay a fee of $250. Both New York and foreign LLPs must, as in the case of limited partnerships, file Affidavits of Publication with the New York Department of State within 120 days after formation, in the case of a New York LLP, or 120 days after filing a notice of intention to do business in New York as an LLP, in the case of a foreign LLP. The affidavits must be from two local newspapers in which the LLP has published notices of its intention to operate as an LLP. Note that only professional general partnerships may form LLPs in New York, unlike most other states (except California), which generally allow any type of business to operate as a limited liability partnership. Every LLP doing business in New York, including both domestic and foreign LLPs, must file a report every five years and pay the applicable fee of $20 for a domestic LLP or $50 for a foreign LLP. All LLPs must also pay an annual fee of $50 per partner, with a minimum fee of $325 and a maximum of $10,000. (For the years 2003 and 2004 only, the annual fee was increased to $100 per partner, with a minimum fee of $500 and a maximum of $25,000.) File Form IT-204-LL with the New York State Department of Taxation and Finance within 30 days after the year-end for the preceding year, to pay this fee. LLPs doing business in New York City are also generally subject to the New York City unincorporated business tax. The above fees and the city taxes tend to detract somewhat from the federal and state income tax benefits of operating as a non-corporate entity. For more information on LLP registration and reporting requirements, see the contact information for the offices of the New York secretary of state, listed in Section VI(a). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
Partnerships, as entities, are not subject to state income tax in New York. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). However, as with other types of unincorporated businesses that operate in New York City, the income of partnerships is subject to the City's unincorporated business tax. Partners are allowed a partial tax credit, of from 15% to 65% of their share of the partnership's unincorporated business tax, as an offset agains their New York City individual income tax. The credit is computed on Form IT-219. Partnerships are required to file an annual tax information return with the state. For details on New York partnership tax return filing requirements, see Section VI(a). (d) Corporations. To form a corporation in New York, you must file articles of incorporation with the New York State Department of State and pay a filing fee of $125. The new corporation must also pay an organization fee of 0.05% of the face value of any par value shares of stock that the corporation is authorized to issue, plus 5 cents per share for each share of no-par stock, if any. The minimum fee is $10. A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in New York, by filing an application for a certificate of authority and paying a filing fee of $225. A foreign corporation must also pay a license fee, based on the authorized and issued stock employed by the corporation in New York State, computed in a manner similar to the organization tax on domestic corporations. The license fee is sent in along with Form CT-240. For more information on filing articles of incorporation or applying for a certificate of authority to do business in New York, see the contact information for the offices of the Department of State, listed in Section VI(a). In addition, once your corporation is formed, it will be required to file reports and a filing fee of $9 with the Department of State every other year. Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter. Foreign corporations must also pay an annual maintenance fee of $300 to retain their authority to do business in the state. Besides paying federal income taxes on its income, a corporation that does business in New York must also file corporate income (franchise) tax returns with the state. The state corporation franchise tax is a tax that is computed in at least four different ways; the corporation pays the amount of tax that is the highest each year. Corporations that have business operations, own property, or maintain offices in New York City are also subject to the New York City general corporation tax. See Section IV(c) for a discussion of New York state corporate franchise and city income taxes and tax return filing requirements. For tax forms and more information on corporate income (franchise) taxes in New York, see the contact information for offices of the New York State Taxation and Finance Department and the New York City Department of Finance, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. New York recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. However, S corporations are not completely exempted from the corporate franchise tax. They are still subject to either the fixed-dollar minimum tax, or a tax equal to the difference between the corporate rate and the individual income tax rate. See Section IV(c) for more details on the taxation of S corporations by New York. To be taxed as an S corporation for state tax purposes, a corporation must file a separate state election of S corporation status, on Form CT-6. (f) Limited Liability Companies. New York, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in New York may also choose to operate in the form of an LLC. Professional service firms may operate as LLCs, or they may choose to operate as professional corporations or limited liability partnerships (LLPs). In most states, LLCs are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. See Section IV(c) for a discussion of the income tax treatment of LLCs under New York tax laws. To form an LLC under the laws of New York, you must file articles of organization with the Department of State, which must be accompanied by a filing fee of $200. New York state law allows formation of one-owner LLCs. Such LLCs will now qualify for treatment as sole proprietorships for federal tax purposes. New York is one of only a few states that requires a notice to be published that you have formed a limited liability company. Within 120 days after the effectiveness of the initial articles of organization, a copy of the articles or a notice containing the substance of the articles must be published once in each week for six successive weeks, in two newspapers of the county in which the office of the LLC is located, to be designated by the county clerk. One of the newspapers must be a newspaper published in the city or town in which the office is intended to be located, if a newspaper is published in that city or town; or, if no newspaper is published there, the notice must be published in the newspaper nearest to such city or town. Afterwards, proof of publication, in the form of an affidavit of the printer or publisher of each of such newspapers, must be filed with the Department of State of New York, along with a $25 filing fee. LLCs are required to file a biennial statement and pay a $9 filing fee every other year. Foreign LLCs, those formed under the laws of another state, must obtain a certificate of authority to do business in New York, by filing an application for a certificate of authority with the Department of State and paying a filing fee of $250. LLCs that are not treated as corporations are considered to be partnerships, and must pay an annual fee of $100 per member, with a minimum fee of $500 and a maximum of $25,000. File Form IT-204-LL with the New York State Department of Taxation and Finance within 30 days after the end of its taxable year (such as January 30, if on a calendar tax year), to pay this fee, for taxable years 2003 and 2004. (In prior and subsequent years, the fees are $50 per partner, with a minimum of $325 and a maximum of $10,000.) However, a single-member LLC is only required to pay a $100 fee, if it is a "disregarded entity" for federal tax purposes. For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. New York formerly had a bulk sale law with which you had to comply when you purchased assets of an existing business. (Uniform Commercial Code Secs. 6-101, et. seq.). Failure to do so would expose you to liability to any creditors of the seller who failed to get paid off when the sale of the business occurred. However, like a number of other states, New York has repealed its bulk sale law, on July 1, 2001, so this is one less bit of red tape you need to be concerned with, when acquiring assets of an existing business. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business occurs. In New York, you should obtain tax releases for sales and use tax by filing Form AU-196.10 with the State Department of Taxation and Finance, at least 10 days before you take possession of the business assets. The state will notify you of the amount of sales and use tax, if any, to withhold from the proceeds when you make payment to the seller. You should also contact the Liability and Determination Section of the New York State Department of Labor with regard to any unpaid unemployment taxes of the seller. Finally, you should contact the Processing Division, Withholding Tax Unit, of the New York State Department of Taxation and Finance regarding any unpaid payroll or withholding taxes owed by the seller. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. In addition, in the year you acquire part or all of an existing business, you are allowed to take into account wages already paid for the year to the transferring employees, for unemployment tax purposes. Thus, for example, if the selling employer has already paid a worker the maximum wages subject to unemployment tax for the year, you will not be required, as a successor employer, to pay any further unemployment tax on wages paid to that employee for the rest of the year, which can save you a considerable sum. To obtain the seller's favorable experience rating as a successor employer, you should notify the Employer Account Adjustment Section of the New York State Department of Labor, on Form IA 15, Change of Business Information, requesting that you be treated as a successor employer. (e) Withholding Tax on Real Estate Purchases. If you acquire business real estate as part of the purchase of a business or otherwise, and if the seller is a nonresident individual, estate or trust, you need to make sure by or at the time of the closing that the seller pays the estimated New York state income tax on his or her gain on the sale of the property. This tax payment requirement on fee simple sales of real estate went into effect on September 1, 2003. Sellers of real estate who are subject to this estimated tax payment requirement must complete Form IT-2663, Nonresident Real Property Estimated Income Tax Payment Form, to compute the tax to be paid. The amount of the estimated tax payment is computed on the seller's gain at the highest state income tax rate for the current year. The estimated tax payment is made directly to the county recording office, which collects the tax on behalf of the state Department of Taxation and Finance. No estimated tax payment is required if the property you are purchasing was used as the principal residence of the seller. If this or any other exemption applies to the transaction, the nonresident seller must complet Schedule D on Form TP-584. While New York does not, technically, require you (the buyer) to withhold the tax, it is important that you see to it that the nonresident seller pays the tax (or certifies that the tax payment is not required, if the property was his or her principal residence, or if the transaction was otherwise exempt). Otherwise, the county recording office will not register your deed to the property, unless the tax is remitted or the seller certifies on Form TP-584 that the property was a principal residence or was otherwise exempted from withholding. IV. NEW YORK TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
The system of taxation
your small business will face in New York is quite
bewildering. While some of the key tax rates are quite
moderate, there is a great variety of state and local
taxes, particularly in New York City, many of them quite
complex, so that you will not only be subject to a large
number of varied taxes of all kinds, but will need a great
deal of competent assistance from tax professionals to comply
with the wide range of taxes. New York has virtually every
kind of tax you can imagine, and a few you have probably
never imagined. On the other hand, the top individual
income tax rate is only 7.7% for 2004 and 2005 (6.85% after
2005), and no personal property tax is imposed on either
tangible or intangible personal property.
A 2005 study by the Tax Foundation found that
New York, at 12.0%, had the second-highest ratio of state
taxes to per capita income of any state in the nation,
after Maine (13.0%).
(b) State and Local Licensing. Nearly any
business, operated anywhere in the United States, will have to
have at least one government license of some kind. In New York,
contact the county clerk and village, town, or city clerk in the
jurisdiction where your business will be located. Local laws
to consider include zoning, parking, sign regulations and
various occupational licenses, such as for auctioneers,
electricians, and plumbers.
Some businesses will also require specific New York
State permits. The state defines a permit as any license,
registration or similar form of authorization required by
New York State. Examples of businesses that require a
permit are auto repair shops, beauty shops, restaurants,
real estate brokers and child care centers.
In addition, state governments have also traditionally
required special licenses for many kinds of professionals,
such as physicians, dentists, lawyers, and accountants.
Many such state licenses not only require payment of fees,
but are only issued for a given profession or occupation
upon showing that you have completed certain educational
or experience requirements, or passed certain tests, or
some combination of the foregoing.
For information on state licensing and business
registration requirements in New York, or to obtain the
state publication, "Starting a Business," see the contact
information for the Governor's Office of Regulatory
Reform, listed in Section VI(a).
(c) Income and Franchise Taxes. New
York has both an individual income tax and a franchise tax
on corporations, which is often based on a corporation's
income.
The New York individual income tax is imposed at a maximum
tax rate of 7.7% on taxable income in excess of $500,000 in 2004
and 2005. Individual taxpayers generally pay state income tax on
their business earnings from a sole proprietorship, or on their
share of the earnings of a pass-through entity, such as a partnership,
S corporation, or LLC. The New York State personal income tax
return is Form IT-201 for residents, or Form
IT-203 for nonresidents, which must be filed with the New
York State Department of Taxation and Finance by April 15th
following each taxable year. Persons with New York City sources
of income must also pay City income tax, which is computed on
the state income tax form (attaching Form NYC-203
for nonresidents of New York City). The top City tax rate is
4.45% in 2003 through 2005, a slight increase after being gradually
reduced in recent years, prior to the 9/11 attacks.
Residents of Yonkers are also subject to Yonkers city income
tax. The Yonkers personal income tax surcharge that was scheduled
to expire on December 31, 2003 was extended another two years,
to December 31, 2005.
Note that if your sole proprietorship business is taxable
by New York City, you will not only pay federal, state, and
City income taxes on the business income, but will also be
required to file Form NYC-202 and pay City
Unincorporated Business Tax on your income, as well, at a 4%
rate. Thus, you will pay two business taxes to the City on
your income, although a partial (15% to 65%) tax credit is
now allowed for UBT paid. Certain very small businesses are
exempted from the UBT, including sole proprietorships, unless
they have more than $75,000 of gross receipts, or more than
$35,000 of taxable income. Partnerships are exempted unless
they have more than $25,000 of gross receipts, or more than
$15,000 of taxable income.
Partnerships, or entities taxable as partnerships, such as
LLCs, are not subject to state income taxation in New York,
but must file an information return with the New York State
Department of Taxation and Finance each year, showing each
partner's share of taxable income, losses, and credits, on
Form IT-204. The partnership information return
is due by April 15th of the following year, in the case of a
calendar year partnership. Again, note that the income of an
LLC that is taxable in New York City will be subject, at the
entity level, to the New York City unincorporated business tax,
unless it has gross income of $25,000 or less and taxable
income of $15,000 or less. However, from 15% to 65% of the
unincorporated business tax may be used as a tax credit to
offset your individual City income tax.
Like LLCs, limited liability partnerships (LLPs) must
pay an annual fee of $100 per partner, with a minimum fee of
$500 and a maximum fee of $25,000. File Form IT-204-LL
with the New York State Department of Taxation and Finance within
30 days after the end of the taxable year, to pay this fee, for
taxable years 2003 and 2004. (In prior and subsequent years, the
fees are $50 per partner, with a minimum of $325 and a maximum
of $10,000.)
All partnerships and LLCs taxable as partnerships, which
have New York-source income, must pay estimated taxes on
behalf of any partners that are C corporations or nonresident
individuals, for tax years beginning on or after January 1,
2003.
Individual taxpayers doing business as sole proprietors,
or who are partners in partnerships, or members of LLCs, are
required to make payments of estimated New York individual
income taxes, if their net tax liability (not covered by
withholding) exceeds $300, for New York state income tax,
New York City income tax, or Yonkers income tax (computed
separately for each tax). Estimated tax payments are due
in four installments, on the 15th day of the 4th, 6th, and
9th months of the taxable year, and the 15th day of the
first month of the following year.
To avoid penalties for underpayment of estimated tax, you
must either pay in 90% of the current year's tax, or 100%
(110% if prior year adjusted gross income was over $150,000)
of the previous year's tax. If basing your estimated tax on
your prior year tax liability, you must recompute the prior
year's tax, using current year tax rates and rules.
New York State does not have a corporate income tax, as
such. However, it does impose a franchise tax, which is
computed in four different ways, one of which is based on
its entire net income, and is thus like an income tax. If
the tax computed under any of the other three methods is
higher, however, the highest amount computed is the franchise
tax for the year. The four methods of computing the state
franchise tax, for corporations other than S corporations,
are as follows:
As complex as this tax calculation seems, it is actually
significantly more complicated than indicated by the brief
outline above. In addition to whichever of the four taxing
methods applies in a given year, a corporation must also pay
an additional franchise tax on .09% of its "apportioned
subsidiary capital," if that tax is applicable to any
subsidiary companies owned by the taxpayer corporation.
The state corporation franchise tax return is Form
CT-3 (or CT-4 for certain qualified small businesses),
which must be filed with the New York State Department of Taxation
and Finance by the 15th day of the third month following the
end of the taxable year, or by March 15th in the case of a
corporation whose taxable year is the calendar year.
Corporations are required to make estimated tax payments
of their state corporate income tax in advance, if their tax
liability for the year equals or exceeds $1,000. Estimated
tax payments are due in advance, in four equal installments,
on the 15th day of the 3rd, 6th, 9th, and 12th months of
the taxable year. An estimated tax declaration is due by
the 15th day of the 6th month. The total estimated tax
that must be paid in is usually equal to 91% of the actual
tax liability for the year (100% for large corporations).
However, if the preceding year was a full year of 12 months,
the current year payments need only be equal to 100% of the
prior year's tax liability, if less.
For tax years beginning on January 1, 2003 and before
January 1, 2006, certain large corporations that paid over
$100,000 of state tax for the prior tax year are required to
pay in an amount equal to 30% of the prior year's tax on the
first quarterly payment date, rather than the usual 25%
minimum.
Penalties are imposed for failure to make the required
estimated tax payments on a timely basis.
Note that S corporations are not entirely exempt from the
franchise tax. They must generally pay a tax equal to the
difference between the top individual income tax rate and
the corporate tax rate on income, or, if higher, the
fixed-dollar minimum tax. However, for tax years beginning
in 2003, 2004 or 2005, only the fixed-minimum tax applies to
S corporations (generally $800 or more).
For tax years beginning on or after January 1, 2003,
S corporations, like partnerships, must now make estimated
tax payments on behalf of nonresident individual shareholders.
New York City imposes an income tax on corporations
that are subject to its jurisdiction. It is computed in a
complex manner, similar to the State franchise tax, with
the tax on income being calculated at a rate of 8.85%,
and with an added tax computed on subsidiary capital.
In New York, a limited liability company (LLC) is taxed
in the same manner as a partnership, thus avoiding the
possible double taxation of income that can occur with
a corporation. As with partnerships, an LLC that is
recognized as a partnership for New York State tax purposes
must pay an annual fee of $100 per member, with a minimum
fee of $500 and a maximum of $25,000, for taxable years 2003
and 2004. (In prior and subsequent years, the fees are $50
per partner, with a minimum of $325 and a maximum of $10,000.)
LLCs that are "disregarded entities" for federal tax purposes
are only required to pay an annual fee of $100.
Under revised IRS regulations, an LLC is now
able to elect to be treated as a partnership if it has
more than one owner, or as a sole proprietorship if it
does not, for federal tax purposes. New York state law
currently recognizes the validity of a one-owner LLC.
Note that it is not always entirely clear whether an LLC is a
"single-member LLC" LLC or not, where the "single owner" is a
married couple who hold the entire ownership of the LLC in some
form of co-tenancy, such as joint tenants with right of survivorship,
tenants by the entirety, or as tenants in common. The federal Internal
Revenue Service (IRS) has taken a very lenient position in Rev. Proc.
2002-69, where a couple hold the LLC interest as community property,
ruling that the IRS will accept whatever choice the couple make,
either to disregard the LLC as an entity (treating it as a
"single-member LLC") or to treat it as a partnership between
the husband and wife.
However, New York is not a community property state, so where
the LLC is owned by a husband and wife in some form of co-tenancy,
it is unclear whether the IRS treatment would be as lenient as
for community property owners, since the IRS has not issued any
published rulings on whether an LLC can be a disregarded entity
if held in one of the various forms of co-tenancy by a married
couple, rather than being held as community property. Thus, it
is also unclear, where an LLC is owned by a husband and wife as
co-tenants, whether New York would treat the LLC as a single-member
LLC or as a partnership.
New York City generally treats an LLC as a partnership,
and thus requires it to pay the City unincorporated business
tax. As in the case of other unincorporated businesses, from
15% to 65% of the unincorporated business tax that is paid
may be claimed as a tax credit by the individual LLC members
on their New York City personal income tax. (d) Sales and Use Tax. New York imposes a general sales tax on retail sales of tangible personal property and certain types of services at the statewide rate of 4.25% from June 1, 2003 to May 31, 2005 (formerly, 4%). The state tax rate is scheduled to revert back to 4% on June 1, 2005. Localities are also allowed to impose sales and use taxes of up to 4.5% in some areas. The total rate in New York City is 8.625%, consisting of the 4.25% state rate, and the 4.125% local tax and a 1/4% Metro Commuter District tax. The combined sales tax rate in New York City is scheduled to revert back to 8.25% on June 1, 2005. Sellers are required to register and obtain sales tax certificates of authority from the Department of Taxation and finance at least 20 days before starting a business, generally. Sellers are generally required to file quarterly sales tax returns (Form ST-100), and monthly returns (for the first 2 months of each quarter, on Form ST-809, or Form ST-810 at the end of the quarter) if taxable gross receipts were $300,000 or more in any of the four preceding quarters. Permission to file annual returns only (on Form ST-101 ) may be granted for firms with not over $3000 sales/use tax liability for the last 6 quarters and not over $3000 of tax expected for the next 12 months. There are numerous exemptions from the sales tax, the most important of which is the resale exemption. If you are a wholesaler or retailer who purchases goods that you will resell, your purchase of such goods may qualify as an exempt sale for resale. Similarly, if you sell goods to wholesalers or retailers for resale by them, your sale may also qualify as an exempt sale for resale. In any such transaction, the exemption is ordinarily available only if the purchaser gives the seller a valid resale certificate, certifying that the items are being purchased for resale, and not for use or consumption by the buyer. Some of the other major categories of goods and services that are subject to sales or use tax in New York include:
Major categories of goods or services that are exempt from sales tax in New York include:
A shadow tax, the use tax, is also imposed at the same rate as the sales tax. It is primarily intended to tax property that is acquired from sources outside of the state, in transactions not subject to sales tax, when such property is used or consumed within New York. Use tax may also apply to items purchased on an exempt basis, such as for resale, if such items end up being used or consumed, instead of being resold. Before making any taxable sales, you will need to register with the State Department of Taxation and Finance on Form DTF-17, Application for Registration as a Sales Tax Vendor. For more information on New York sales and use tax registration and compliance, see contact information for the offices of the Department of Taxation and Finance in Section VI(a). (e) Real and Personal Property Taxes. In New York, as in every other state, any business real estate you own will be subject to real property taxes. In general, there is little that you must do, unless you wish to challenge your assessed valuation, since the assessor will bill you for each year's property taxes as they come due. New York, unlike most other states, does not impose any property taxes on personal property of any kind, either tangible or intangible. Note that New York City imposes a commercial occupancy or "rent tax" on commercial or business rentals of premises, if the base rental is $200,000 or more. At one time, this tax applied to rents in all of the boroughs of New York City. However, it now only applies to the portions of Manhattan that are south of the center line of 96th Street. New York City also imposes various other miscellaneous taxes relating to real estate, such as a real estate conveyance tax and a tax on recording of mortgages. (f) Other Business Taxes. New York state imposes a number of other taxes on businesses, including:
There are no natural resource severance taxes in New York. (g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. In New York, state law requires any business doing business under an assumed name to file an assumed name certificate. You can pick up a certificate of assumed name form at almost any stationery store in New York. Complete and file it with your county clerk in each county where you do business, unless your business is a corporation or a limited partnership. Keep in mind that registration of an assumed name is not permission to conduct business. For a corporation or a limited partnership, file with the secretary of state and include a list of all counties where you will do business in the state. Include a $25 filing fee for the secretary of state, plus applicable filing fees for each county clerk in counties where you will do business. The county filing fee is generally $25, or $100 in the five counties (boroughs) that make up New York City. You can register trademarks, service marks, and certification marks that are used in interstate commerce with the U.S. Patent Office in Washington, D.C. A trademark is a word, name, symbol, device or any combination of these that identifies and distinguishes goods, while a service mark is a mark that identifies and distinguishes services and includes various distinctive features of advertising. A certification mark is a mark used in connection with the goods or services of any person other than the owner of the mark to certify regional origin, quality, accuracy, material mode of manufacture, production of goods by union labor, or other characteristics of the goods or services. The primary advantage of registering any kind of mark is that it gives notice of your claim to the mark, so that someone else cannot claim any rights to the mark. Trademark and service mark registration is available for local marks in New York. Under state law, if you adopt and use a trademark or service mark in the state you may file it with the secretary of state, who will issue a certificate of registration. For more information and an application form for registering trade or service marks, contact the Miscellaneous Records Section of the New York Department of State, at the address listed for that agency in Section VI(a) of this chapter. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since New York imposes a state income tax on the income of individuals, you will also need to withhold New York state income tax from the wages of your employees, as well as New York City or Yonkers earnings taxes, all of which taxes are administered by the state Department of Taxation and Finance. Before you begin to pay wages, you must register as an employer with the Department of Taxation and Finance. Note that it is not necessary to obtain a state employer identification number for state and City withholding tax purposes. For convenience, you are instead allowed to use your federal employer identification number for all State and City withholding tax filings. Also, you are allowed to file one Form WT-1 to report all state income tax withholding and withholding of New York City and Yonkers income or earnings taxes. Note that, effective since July 1, 1999, New York City employers are no longer required to withhold New York City nonresident earnings tax from wages of New York State residents who do not live in New York City. In early 2000, the state Court of Appeals ruled that the commuter tax was unconstitutional, by exempting only New York State residents, so the tax is now only imposed on residents of New York City. To claim exemption as a nonresident of New York City, workers must sign and submit to their employer a Form IT-2104-2 in order to avoid having New York City nonresident earnings tax withheld from their earnings. For more information on New York income tax withholding and registration requirements for employers, obtain a copy of Form NYS-50, New York State Employer's Guide from the Department of Taxation and Finance, and see the contact information for the offices of the Department, listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If your business has one or more employees, you, as an employer, will be required to pay state unemployment tax based on the amount of such wages paid, beginning with the first day of the first calendar quarter in which you pay $300 or more in wages. Employers subject to the New York unemployment tax are required to register with the New York State Department of Labor or State Department of Taxation and Finance on new Form NYS 100. New employers are required to pay tax (at a rate that is determined annually) on the first $8,500 of wages paid to each employee. There is a small subsidiary tax and a Re-employment Service Fund tax, resulting in a total new employer rate of 4.1% in 2004. Quarterly wage reporting returns, on Form NYS-45, must be filed by most employers with the New York State Department of Taxation and Finance. After you have had employees for a while, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. State unemployment taxes are imposed upon you as employer, and, under New York law, cannot be charged to your employees or withheld from their wages. For more information on your New York unemployment tax obligations as an employer, see the contact information for the offices of the New York State Department of Labor, listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In New York, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. In New York, you have the option of purchasing workers' compensation insurance from either the State Insurance Fund or from private insurance companies. Note, however, that a sole proprietor or a partner in a partnership is generally not considered an employee. Similarly, one or two employees of a corporation who are the sole stockholders of that corporation may be exempted from coverage for workers' compensation purposes. Every New York employer, subject to workers' compensation, must keep a detailed record of all injuries sustained by its employees in the course of employment, and must also report within 10 days to the Workers' Compensation Board all accidents which:
Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. Thus, if you fail to obtain required workers' compensation insurance, and an employee is injured on the job, you will have opened yourself to unlimited liability and severe legal consequences, so it is very important to obtain workers' compensation insurance for your employees. Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance. As an employer, you must notify injured employees of their benefits by posting a notice in the workplace informing your employees of their workers' compensation coverage. For more detailed information regarding your obligations as an employer under the New York workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the State Insurance Fund, listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the New York wage-hour laws, which have generally provided for a state minimum hourly wage that is the same as the federal minimum. The state minimum wage is set by a wage board, which issues wage orders from time to time. At present, it is set at $5.15 an hour, since March 31, 2000, and is likely to be raised to match any future increases in the federal minimum wage. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees are exempted from the New York wage-hour rules. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Division of Labor Standards, New York State Department of Labor. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in New York. In general, New York law prohibits employment of children under 18 when they are required to be in school. No child under age 16 may be employed in a factory, except certain delivery and clerical work. Children under age 14 generally may not be employed at all, with a few exceptions, such as for child performers or models, or minors of at least age 11, who may deliver newspapers. (e) State Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. New York is one of the states that has its own OSHA-type agency, but it only enforces job safety requirements for employees of state and local governments, leaving the enforcement of safety standards in the private sector to the federal Occupational Safety and Health Administration. To determine if your workplace is in compliance with federal job safety requirements, you may wish to contact the Division of Safety and Health, New York State Department of Labor, and request a free on-site safety consultation. You will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. Employers are required to display a "Right to Know" law poster in the workplace, outlining employees's right to be informed of any hazardous substances in the workplace. For information on your job safety and health obligations as an employer and to obtain required posters, contact the nearest office of the U.S. Department of Labor, Occupational Safety and and Health Administration. For possible on-site safety consultations, see the contact information for the offices of the Division of Safety and Health, New York State Department of Labor, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other New York labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to employees. State law requires that an employer pay wages at least semi-monthly, for most types of workers. Manual laborers must be paid at least weekly, while commissioned salespersons need only be paid once a month. Terminated employees must be paid their final wages by the next regular payday, and you must mail the payment to them if requested. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. New York does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in New York, and display a poster informing employees of their rights under the state's Human Rights Law. You can obtain this poster from the New York City office of the Division of Human Rights, at the address listed in Section VI(a). In addition to the typical prohibitions against discrimination on the basis of age, race, religion, gender, national origin, marital status or disability, or military status, the New York law also forbids discrimination on the basis of "genetic disposition or carrier status" for individuals with certain genetic anomalies. Also, effective January 16, 2003, New York has enacted a Sexual Orientation Nondiscrimination law, adding discrimination based on sexual orientation to the list of prohibitions. (4) Reporting new hires. Under federal welfare reform laws, employers in all states are now required to report newly-hired (or rehired) employees to a designated state agency (the New York State Department of Taxation and Finance for New York employers) within 20 days after the date of hire. If an employer reports new hires on magnetic media or electronically, reports must be filed twice monthly, not less than 12 days and not more than 16 days apart. See the New Hire Reporting contact information in Section VI(a) below. VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Unlike most other states, New York does not have a single agency to whom you can go to handle all your licensing and permitting requirements for your business under the laws of New York. Accordingly, you will need to contact the various New York state and City agencies that are mentioned in this book or listed below on an individual basis, to register and obtain any needed permits. A list of addresses and other contact information for such key agencies is set forth below for your convenience. The state provides a great deal of information and assistance for new businesses or businesses moving into New York State. BUSINESS STARTUP INFORMATION. A key agency that can provide helpful information on getting your business up and running in New York is the Governor's Office of Regulatory Reform, which offers a 24-hour telephone line where callers with touch-tone phones may listen to a number of prerecorded messages on topics such as taxes, licenses and government programs. This agency also has information on some 1200 required state permits, and can provide you with a comprehensive and personalized permit assistance kit to help you get through the permitting process with a minimum of difficulty. For information and help, contact:
For general information on business taxes:
For information on New York City business taxes, contact:
STATE SALES TAX. Obtain your sales and use tax license or permit and information on the New York sales and use tax law, from the Department of Taxation and Finance, at the address listed above for that agency. STATE UNEMPLOYMENT TAX. Contact the New York State Department of Labor to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject, at the address listed above for that agency. NEW HIRE REPORTING. Report newly hired or rehired employees to the New York New Hires Registry, at the following address (or see the Internet URL for new hires in Section VI(c)):
WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the following agency for further information:
STATE ANTI-DISCRIMINATION LAWS. Contact the following state agency for more detailed information on New York human rights laws that may apply to your business, and to obtain anti-discrimination notices you are required to post in the workplace:
(b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout New York to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you, at the address or website listed below.
(c) Internet Sites. If you have access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in New York. Since new sites are appearing constantly, you might also want to search for other New York government Web sites by using one of the popular Internet search engines, such as Google, Excite! or Yahoo. To start your Internet search for New York government information, you may want to begin with the following Internet sites: State of New York home page: New York State Government Information Locator Service: New York State Department of Labor home page: New York State Department of Taxation and Finance home page: New York Secretary of State (corporate, LLC, LLP, and limited partnership filings): New York City Department of Small Business Services: New York City Department of Finance (city tax forms and information): New Hire Reporting:(d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in New York, or contact the following state agency, which provides financing to small and medium-sized businesses having difficulty securing financing:
The New York City Regional Office of the U.S. Small Business Administration is located at:
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Copyright © 2004 Michael D. Jenkins
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