S-Corp or C-Corp? What’s the Difference?

When you first form your corporation, it comes into existence as a C Corporation.  If you do nothing more, your corporation will remain a C Corporation.

 

A C Corporation becomes an S Corporation only when special tax treatment is sought by filing Form 2553 with the IRS.

http://www.irs.gov/pub/irs-pdf/f2553.pdf

Although a small business lawyer can advise you on the choice of entities, choosing whether to elect S Corporation status is best discussed with your accountant.  This is a tax decision, and a tax professional should review your entire financial picture before you make this decision.

New York State S Corporation Status

 

New York State also requires you file a form to be treated as an S Corporation under State Rules.  This form CT-6 Election by a Federal S Corporation to be Treated as a New York S Corporation.

 

http://www.tax.ny.gov/pdf/2007/fillin/corp/ct6_707_fill_in.pdf

New York City S Corporation Status

However, New York State does not exempt S Corporations from all NYS corporate taxes.  Again, you should check with your accountant prior to making this decision

Interestingly, New York City does not recognize S-Corp status at all. If your small business has income from New York City, you will need to pay New York City’s General Corporate Tax.

 

 http://www.nyc.gov/html/dof/html/business/business_tax_gct.shtml

 

 

Lions and Kiwanis and Rotary, Oh My!


Frequently asked questions about becoming a 501(c)(3) foundation

 

Why Should Our Club Become a 501(c)(3) foundation?

 

I have recently had the pleasure of both incorporating and applying for 501(c)(3) non-profit status for a New York Lions and a New York Kiwanis Club.  One club had been in existence for more than 50 years but had just recently chosen to apply for not-for-profit status. The Club realized that in order to attract large donations and grants, it would need to create a foundation and apply for 501(c)(3) status.

But Our Club Already is a Non-Profit, Isn’t it?


When a New York Lions or Kiwanis or Rotary Club receives its charter from the parent organization, it is granted 501(c)(4) status under the parent clubs’ group exemption.  All 501(c)(4) organizations are also non-profits.

 

What is the difference between a 501(c)(3) and a 501(c)(4)?

 

Both kinds of 501(c) entities are tax exempt, which means that they are exempt from paying federal and New York (and even local Long Island) taxes.  However, 501(C)(4) organizations do not allow for tax deductible donations.  When people give money to charity, while they love being charitable, they also love taking the donations as deductions on their tax returns.  Unless your Kiwanis or Rotary or Lions Club has applied for 501(c)(3) status, donors cannot deduct their donations to your organization.

 

What is the next step?

 

Once a New York Kiwanis or Lions or Rotary Club decides to establish its club as a charitable entity, it must do so by creating a foundation, then incorporating in New York as a not-for-profit corporation, then applying to the IRS for a determination letter by filing Form 1023.

 

 

 

Long Island Small Businesses and the Onerous MTA Payroll Tax

I confess, I only incorporated my business this past year.  For a solo attorney such as myself, there aren’t as many reasons to incorporate as there are for other businesses.  I have malpractice insurance that covers most of my liability, and a corporation or LLC formation would offer little in the way of additional protection.  So, I was quite surprised when my accountant sent me a form and invoice for the MTA tax.

The tax is formally known as the Metropolitan Commuter Transportation Mobility Tax (MCTMT).  Besides the cost of paying the tax, there is no simple way of tacking on the tax to your other tax filings.  Aside from the usual federal and New York state tax forms, these additional forms must be filed quarterly.

This tax is imposed on certain employers and self-employed individuals engaging in business within the Metropolitan Commuter Transportation District (MCTD). Specifically, the tax applies to (1) employers required to withhold New York state income tax from employee wages and whose payroll expense exceeds $2,500 in any calendar quarter, and (2) individuals with net earnings from self-employment allocated to the MCTD that exceed $10,000 for the tax year (according to the Department of Taxation and Finance, this includes partners in partnerships and members of a limited liability company (LLC) treated as a partnership).

The small business owner cannot withhold any of the tax from the employee’s compensation.

The recently elected Governor Cuomo has come out  in opposition to this tax, calling it “onerous.”

Small businesses on Long Island pay $3.40 for every $1,000 of payroll. If you are a small Long Island business, you are probably not using the LIRR to commute, and your customers are probably not taking the MTA to see you.

This tax is burdensome to Long Island small businesses and is not proportional to their use of the MTA.

Small Businesses Need Minutes of Meetings

Why Does a Small Corporation Need to Keep Minutes?

Corporate minutes are a reflection of the decisions of the Board of Directors.  Even more importantly, corporate minutes are an indication that formalities of the corporation are being kept.  If involved in a lawsuit, one way an attorney will attempt to reach personal assets of the officers of the corporation is to check to see if corporate formalities are followed.  One important type of formality is keeping records, or minutes of meetings.

Even if you are a single officer of a corporation, or you are a family business, or there are just two of you and the meetings are not formal affairs, you need to keep records of these informal meetings and decisions that are being made for your corporation.  Resolutions need to be drawn up ratifying those decisions that affect the life of the business.  Corporate minutes are among the most important documents a company must produce and keep.  Failing to keep accurate and complete minutes can expose officers and board members to personal liability.

What Should the Minutes Include?

There is no required format, but minutes should include all important decisions made for the company.

  • List all directors/members attending
  • Include a brief narrative description: What issues were discussed; what significant points raised; what actions taken
  • Include record of how each director/officer/trustee voted, including whether the vote was unanimous and if anyone abstained from voting

It is important to ratify and vote on the prior meeting’s minutes.  This ensures that each director had a clear understanding of the proposed actions.

What Needs to be Documented in your Minutes?

Is every item as important to record as all others?  Absolutely not.

The general rule is if the transaction is in the ordinary course of your business, the kind of transaction you engage in all the time, then there is no need to add those discussions to the minutes.  However, if the action is one that enables the business to engage in its business, the discussion of that action should be voted on and added to the written records.

Some major decisions that should appear in the minutes:

  • leases–for office space or equipment rental
  • significant contracts
  • elections of officers and directors
  • taking out loans or other kinds of financing
  • marketing and advertising campaigns
  • mergers, reorganizations or transactions involving the bulk of the corporation’s assets
  • providing employee benefits

LLC requirements

Although LLCs are generally not required by law to keep minutes or have formal meetings, a writing is always helpful in establishing that the members were in agreement on the actions that are taken.

Conclusion

Finally, if you keep your minutes on your computer, make sure you have a back-up.  Discard your notes since they are not a final accounting.  Minutes should be kept for at least seven years.

Operating your corporation properly by following state law allows you to focus your attention on running your business, and removes concerns about having to defend lawsuits and losing the limited liability protection that was your purpose for incorporating.

Your Family Small Business Succession Plan

When your business succession planning involves family, a whole new set of variables need to be thought about.

In some ways, it is easier when you have family to leave your business to, in other ways it can be way more difficult as you add family dynamics to the mix

First of all, some statistics: according to the Small Business Administration and researchers at Baylor University’s Institute for Family Business, only 30% of family businesses survive from one generation to the next, and even fewer to a third generation.  The mostly commonly given reason for this huge drop is the lack of a plan for an orderly succession.

If you own a family business, and would like to see your business survive  into the next generation, there are a few questions you should address:

  • Do your children or grandchildren want to take over your business?  It is never a good idea to insist your children take over the business.  You know how much hard work it is to make the business you love succeed, imagine if it was not a passion.
  • Is the interested family member qualified?  Has that family member worked in the business?  Learned skills at school or on the job?
  • If you have more than one child, there are other possibilities to consider.  More than one of your children may want to go into the business, but it is possible that some will not.   Many of us want to treat our children fairly when we leave our assets in our wills.  Can you treat your children fairly if leaving the business to one child?
  • If no family members want or are capable of running your business, do you want to hire management to run the business while retaining ownership, or does it make more sense to sell the business?

This is not a decision the business owner should make on his or her own.  The best thing to do is to sit down with your family and discuss it.

One of the most important aspects of family succession planning is estate planning.  If you are ready to start planning for the next generation, contact your Long Island small business lawyer soon.

Do You Need A Business Succession Plan?

Once you’re past the startup phase of your small business, it is time to start thinking about your business succession plan.  If you are years from retirement, this may be the last item on your to-do list.  You surely have enough to do in your daily operations without building in time to work on the future.  However, succession of your business should be built into any business plan from the beginning.

Starting  from your choice of name for your company (have you named it after yourself?  While law firms in New York have no choice but to include the owner’s name in the name, is your company name going to prevent an orderly transition?) you should be thinking about succession planning.  After all, you would not have started a business if you had no expectations it would live on to support you during your retirement, and hopefully continue to take care of your family after you are no longer able to do so.

A  business succession plan should be considered years before you plan to retire in case of a sudden emergency, such as a serious accident or illness.

Business succession planning should also be an integral part of your estate plan.  You must consider where the money will come from to pay estate taxes, or, if you have a partner, where the money will come from to buy out the deceased partner’s share.

f you own a small business either as a sole proprietor, or an S- or C-Corporation, or LLC, you need to consult with a business lawyer and your accountant to start planning for an orderly transition.

Choosing the Business Entity That’s Right for YOUR Small Business

If your business is located in Nassau or Suffolk County, Long Island, New York, there are four (4) main types of business structures to choose from:

  • Sole proprietorship: In both Nassau and Suffolk Counties, a business that is operating as a sole proprietorship must register with the County Clerk in the county in which it is conducting business. You can find the Certificate of Business online at the respective County Clerk websites. The cost to file the Certificate of Business is $35.
  • Corporation: A certificate of incorporation needs to be prepared. A sample form can be downloaded from New York’s Department of State, Division of Corporation website. The form then needs to be filled out as required by the New York Business Corporation Law and returned to the Division of Corporation along with a check for $125. However, I recommend you pay for expedited service and additional certified copies so that you don’t have to wait weeks to start running your business. Most banks will not open a business account without a filing receipt and a certified copy of your certificate of incorporation, so expect your total cost to be $170 for a timely filing.
  • Partnership: General or Limited. General partnerships are formed when two or more people start doing business together without choosing a business entity. You must file a Certificate of Business with either Nassau or Suffolk County. I suggest you see a qualified business lawyer before choosing this form of doing business. By not choosing a different business form, you are opening yourself up to unlimited liability for not only your acts, but also any acts of your partners. Your partner could incur debts and enter into agreements in the name of the partnership. Limited liability partnerships and limited partnerships in New York are acceptable partnership forms. New York charges $200 to file the paperwork, and I recommend paying for expedited service and two copies of the certified filing, bringing the total cost to $245.
  • Limited Liability Company (LLC): Many new small businesses and real estate ventures are choosing LLCs these days for the flexibility they offer. LLCs are often known as hybrids between partnerships and corporations. They offer the flexibility of a partnership, and the protection from business liabilities of a corporation. However, New York makes this process a bit more difficult and expensive than other forms of business entities. Filing the Articles of Organization costs $200, and after expediting the filing and requesting certified copies, the total cost to you is $245. However, within 120 days after the Articles of Organization have been filed with the state, you must publish the facts of the LLC’s formation in two newspapers, one daily and one weekly for six successive weeks. This can cost between $300 and $500. Afterwards, you will receive an affidavit of publication from each of the two newspapers, and these must be filed with NYS along with a completed Certificate of Publication and $50.

Additionally, many small businesses require special licenses and permits to operate their business in New York State. Professionals, as defined in the New York statutes, have special rules regarding naming and forming their business entities.

Choice of entity is a highly complicated issue involving liability and tax issues. A qualified small business lawyer will help you understand the consequences of this choice for your small business.