When forming a legal entity for your business, it is imperative that the owner understand the difference between their choices and what it all means.
In New York, there are only two types of legal entities that are allowed to be formed by a licensed professional: a Professional Corporation (“PC”) and a Professional Limited Liability Company (“PLLC”). Forming a legal entity provides legal protection to the owners, namely it puts up a what’s called corporate shield. It protects and separates the personal assets from the business assets of the legal entity, so long as they are kept separate and apart and the funds are not commingled. Many individuals who own property, investments, valuable items choose to incorporate their business in order to protect these personal assets from their business.
To understand which legal entity is best suited for your practice, the owner will discuss with their certified public accountant (“CPA”) to understand the tax consequences for each type. There are very rigid requirements in forming either a PC or PLLC, and in NY, it can take anywhere between four to five months. Knowing the amount of time it takes, will assist in anyone thinking of opening up their practice in getting the paperwork started as soon as possible so there are no other delays. Once the entity is formed, regardless of whether it is a PC or PLLC, your CPA will need to be involved in order to designate how it will be treated for tax purposes with the Internal Revenue Service (“IRS”).
Depending on a number of circumstances, including the number of owners in the legal entity, the type of legal entity, the location of the legal entity and perhaps even in the projected revenue of the legal entity, may determine how it is taxed. It may be taxed as a sole proprietor, a partnership, a corporation or an S-Corp.
Many individuals confuse an “S-Corp” with a type of legal entity, as opposed to its true purpose – an IRS tax designation for a legal entity. For clarity, the only types of legal entities that are allowed to be formed for licensed professionals are either a PC, a PLLC or Limited Liability Company (“LLC”) if outside of New York. Once one of these entities are formed, then it can be decided how it will be treated for taxes purposes, based on the choices listed above. This should be discussed with your CPA for a full understanding of the different types of tax classification.
If you are having a discussion with a colleague and the colleague says, “Oh, my PC is an S Corp. You should make sure that yours is an S Corp”. What they’re referring to is the tax designation with the IRS. This election needs to be done within seventy-five (75) days of forming the legal entity and is completed by completing IRS Form 2553, which can be found here: https://www.irs.gov/pub/irs-pdf/f2553.pdf.
Working with your CPA prior to formation and afterwards will ensure that you understand the tax consequences of your legal entity, regardless of the type of legal entity. Doing so will allow a more seamless formation and alleviate any related future worries about potential taxes.
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