Facts: A friend of mine recently started his own business and is now running into all sorts of trouble since he did not properly file documents with the state or local governments or obtain the proper approvals.
Question: Is there some trick to opening a new business in New York?
Answer: There are no tricks to opening a business in New York but, there are laws and regulations that must be followed in order to properly create a business that is recognized as legitimate by the governing bodies and which is in compliance with all applicable laws and regulations. The best way to insure that your business falls into this category is to seek the assistance of an attorney with experience working with small businesses.
Unfortunately, having a great idea for a new business does not mean that the business will be successful. Before you make your first sale or receive payment from your first client, you must decide if you are going to operate your business as a professional corporation, limited liability company, partnership or as some other type of legal entity. Since your choice will dictate the types of documents that must be filed with the State and will have a direct impact on types of tax liabilities the business will face, it is important to understand the differences between various types of business entities. To some extent, the type of industry you will be working in may influence the type of entity you decide to create. For example, only individuals who are licensed through the State Education Department such as doctors, accountants and attorneys may create professional corporations (P.C.). If you are starting a landscaping business or a plumbing business, you are not able to create a P.C. but will be able to operate as an individual, perhaps using a DBA (“doing business as”), or as one of the other types of business entities recognized by the State.
Depending on the industry in which your business will be operating and the types of products/services it will provide, the business and/or the business owners may need to be licensed by the state or local government. For example, hairdressers must be licensed by the New York State Board of Cosmetology and their places of business must also be licensed by the New York State Department of State. In contrast, home improvement contractors must be licensed by the counties in which they do business. Failure to obtain the necessary licenses can not only lead problems with the licensing authorities but, in the case of home improvement contractors, will preclude the contractor from using the courts to force customers to pay.
Once a business owner files the appropriate documents with the State to create the business, there are forms that must be filed with the IRS relating to the tax status of the new business entity. The business owner must obtain an employer identification number from the IRS even if she is going to be the sole employee of the business. If the business is organized as an S-corporation, the business owner must not only seek IRS approval to operate as such but, she must also advise the New York Department of Taxation and Finance that the business is operating as an S-corporation. Once the business is up and running, the types of federal and state tax returns that must be filed will vary with the type of business entity the owner decided to create.
In addition to obtaining the appropriate licenses and filing the appropriate tax documents, an individual creating a new business must obtain insurance to protect the business’ assets. Depending on the type of business that is being created, there may be a need for general liability coverage, coverage for property damage and personal injury, disability insurance and/or professional liability insurance. Since the types of insurance needed by a new business will vary from one business, it is important for the business owner to understand the risks associated with her business and to purchase adequate insurance coverage.
Clearly there are numerous issues to consider when starting a new business and countless pitfalls for those who rush into the process without an understanding of the laws and regulations that govern small businesses. While some mistakes may be easily corrected, others may be quite costly in terms of time and money. To avoid expensive mistakes, seek professional assistance.
Linda M. Toga of The Law Offices of Linda M. Toga, P.C. is an East Setauket, New York attorney with a general law practice focusing on estate planning, real estate, marital planning, small business services and litigation.