Using an Online LLC Incorporation Service

This past month, I have had numerous Long Island clients calling me and asking me to fix their corporations and LLC’s that they ordered and paid for online.  It seems that these online documents come complete with any number of their forms left blank.  I have seen two this week where the first page of the bylaws or the operating agreement still reads “Sample.”

I can tell why people are accessing my blog, what search terms they use when they find me.  The biggest “hits” to my blog are the ones looking for Long Island publications to fulfill the LLC publication requirement.  So, I know many of you are attempting to do this on your own.

And then you get sued.  Or you apply for non-profit status.  Or you just read something that advises you that if you don’t do proper recordkeeping, your personal assets are not protected from your business liability.  And then I get called and you need me to amend your Articles of Incorporation, or help piece together all your corporate actions since you incorporated five years ago.   Now how much money have you saved by incorporating online?

If you are looking for the convenience of online incorporation or LLC formation and don’t have the time to meet a lawyer at their office, many of us, myself included, can do your incorporation by phone, and fax and e-mail.

It angers me when small business owners like myself are paying for services that they are not receiving.  And then having to pay again to do it correctly.

If you have corporate books that have been sitting on your shelf, and many of the pages are still blank, or you have never updated that book by having annual meetings, adding resolutions about opening bank accounts, taking out leases, contracting with employees or vendors or any other of a number of corporate acts, please call to schedule an appointment to ensure you will get the protection you originally sought for your personal assets.

Overpromising? “Limited” Liability and Small Business

If you are just starting a small business or have a sole proprietorship, you have probably thought about and received advice about either incorporating or forming a limited liability company (LLC).

What protections do these business entities actually offer to the small business owner?

The Promise

You have probably heard that by incorporating or forming an LLC,  you, as the owner, will be protected from personal liability, whether  through contract (from creditors) or tort (from intentional or negligent wrongful act, injury or damage other than breach of contract).

This is true to a great extent.  However, as a small business owner you are probably not totally shielded from personal liability even if you do incorporate or form an LLC.

The Reality

Leases

Commercial landlords will often demand a personal guarantee from the principals or owners of the small business despite business entity status.  A lease is a contract between a landlord and a tenant.  If you have not been in business for very long or your business assets are limited, you can expect to be asked to personally guarantee a lease.  Your spouse may also be asked for a personal guarantee.  Depending on how long you have been in business or how in demand the property is, this may be a negotiable point. You might want to contact a business attorney to review and negotiate your commercial lease.

Loans

Bank loans. Whether you need a loan to finance inventory or to expand, a lender may require you  put up your personal property as collateral.  Even  if your business were to dissolve, you would remain personally liable for paying back the loan.  However, depending on the business’ creditworthiness, this too is open to negotiation.

Small Business Administration loans.  The SBA requires that all loans they guarantee must be collateralized with both the business assets and a personal guarantee.  Often you may need to take out a second (or third) mortgage on your home.  Nevertheless, SBA loans often have excellent terms.

Credit Cards

Most business credit card issuers will not approve a business application unless the owner personally agrees to be liable for any debt incurred.  Take note that any default on your business card will impact your personal credit.  After several years of being established, you may want to ask the issuer to allow you to separate your business and personal liability.

Torts

Your own acts.  Corporate/LLC formation provides protection for corporate acts;  it may not provide protection for your own acts.  Even if you are acting for the corporation, if you are negligent you are potentially personally liable. You can’t commit intentional wrongdoing even in the guise of your corporate self.  You can’t embezzle, defraud or assault someone.

Your employees’ acts.  Although in theory, the corporation or LLC should shield your personal assets from your employees’ bad acts, in reality, if the act is egregious enough you are likely to be brought into the lawsuit.  Negligent hiring, failure to ensure the person you sent on an errand has a clean driving record, or negligently maintaining your property are just some of the ways you personally can be brought into litigation, even though you’re incorporated.  This doesn’t necessarily mean you will lose the lawsuit, however, even good defenses cost money.

Taxes

You can be held personally liable if  the corporation neglects to pay over to the IRS  the employees’ share of withholding and social security taxes.  Many states also will hold corporations personally liable for failure to turn over retail sales taxes due from the corporation.

The Solution

Despite some pitfalls and incomplete protection, it is still worthwhile to either incorporate or form an LLC.  Business formation will protect your personal assets to a great extent.  The longer your business exists,  the more creditworthiness your business can show, the better your bargaining power will be with landlords, credit card companies and lenders.

Insurance

It is a good idea to ensure you have sufficient personal insurance coverage on your assets to cover any business liability.  Consider buying an umbrella policy for your cars and home.  Insuring your business is also a necessity.  Should you get sued, the insurance company will defend you, pay for your attorney and pay up to policy limits.

NY LLC Publication Requirements are a Burden for Small Businesses

In order to form a Limited Liability Company (LLC) in New York, the LLC must first choose an available business name, the county in which your LLC will be located, and prepare and file Articles of Organization with the Department of State along with a check for $200.  However, if you do not take the extra step of publishing notice of the formation of your LLC within 120 days of formation, your authority to conduct, transact or carry on any business within New York state will be suspended.

Although the courts have not yet addressed what the consequences would be of operating without the authority to conduct business, it is possible that the members of the LLC might become personally liable for actions taken or that contracts could be voided if the publication requirement is not fulfilled.

LLCs cannot get around the New York publication requirement by forming their LLCs in a less expensive state.  Foreign LLCs doing business in New York are subject to the same publication requirement.

Section 206 of the NY Limited Liability Company Law calls for the newly formed LLC to publish notice of its formation, the location of its principal office (the county), the date of formation and a statement that the Secretary of State has been designated as agent against whom process may be served and several other items that can be found in the LLC’s Articles of Organization.  This notice must be published in one daily newspaper and one weekly newspaper, once each week for six weeks.

Fortunately for Long Island LLCs, the costs are much less than those found west of us in NYC.  Newsday and a weekly local newspaper cost between $300 and $500 for the six weeks.  Additionally, information about which designated newspapers are approved to fulfill the publishing requirement can be found online at the Nassau County Clerk and the Suffolk County Clerk websites.

At the end of the six weeks, the newspapers will send you an affidavit of publication which must be sent to the Department of State along with a Certificate of Publication and $50.

Although the requirement to publish is purportedly intended to protect the community, hardly anyone actually reads these notices in the paper.  The information itself is of little use, as it does not list an actual address or name the members of the LLC.  Newspapers rely on these notices as a source of income.  You may draw your own conclusion as to why the New York legislature included these provisions in the NY LLC law.

I conclude, however, that the publication requirement for LLCs in New York is unduly burdensome for small businesses and should cause local Nassau and Suffolk small businesses to think twice before choosing this form of business entity over incorporation.

How to Incorporate Your Sole Proprietorship

Although the plethora of inexpensive online incorporation and LLC formation services would have you believe that all you need to do to incorporate your small business is  fill out a simple form, pay a few dollars, and voila! your business is incorporated, this is even less true if you have already been running your business as a sole proprietor.

The mere act of incorporation does not transfer the existing business assets and liabilities to the new corporation.  And while it is almost always a good idea to either incorporate or form a limited liability company (LLC) in order to reduce your personal liability and protect your personal assets, there are some administrative tasks and potential tax liability associated with changing the form you use for your small business entity.

You’ve Incorporated–Now What?

Let’s assume you’ve already incorporated. You’ve determined that the name you chose is acceptable under the New York Business Corporation Law. You’ve run a search on your company name (or had an experienced lawyer run one for you) to ensure you haven’t violated another company’s trademark under state or federal trademark law.  If you formed an LLC, you’ve published notice of the formation in two newspapers.  Here on Long Island, Newsday is a good choice for a daily paper, and Nassau and Suffolk Counties have many options for weekly local newspapers.

That’s All, Right?

Not quite yet.  There are numerous administrative tasks, including:

Obtain a new Employer Identification Number (EIN). You can learn how to do this here at the IRS website.  If you are forming a one-member Limited Liability Company (LLC), you can choose to be a “disregarded entity” for tax purposes, and continue to use your own Social Security number. However, I would strongly encourage the use of a separate EIN so you don’t  share your personal number with employees or vendors.  You want to protect your Social Security number against identity theft.

Your assets must be transferred from your name as sole proprietor to your new company’s name.  This must be done formally.  In exchange for the assets, you will receive shares (corporate stock)  of your new corporation.

Your small business bank accounts must be closed, and new ones opened in your new corporate or LLC name.  Insurance companies need to be notified.  Any permits or licenses that have been issued to you need to be formally transferred.  Inform your employees, customers or suppliers.  Should your small business own any intellectual property  registered with the United States Patent and Transfer Office,  it may need to be assigned to the new owner.  If your business owns a car or truck, you need to change the title and pay fees to the New York Department of Vehicles.  Any transfer of real property must be reported to the clerk’s office in Nassau or Suffolk Counties.

Additionally, corporations must have formal meetings, take minutes and prepare and ratify resolutions for all the changes.

Are You Done Yet?

There may be both state and federal tax consequences from transferring assets and liabilities from a sole proprietorship to either a corporation or an LLC.  If you are transferring real property, New York State may assess a transfer tax on any mortgage still owing.

If you have previously taken deductions on your income tax returns for your small business assets (i.e. furniture, computers), depending on how you transfer those assets to the new corporation or LLC, you may create a taxable event.  There are two ways an item that has already been depreciated by the sole proprietor can be transferred.  You can make either a capital contribution or  a sale in your capacity as sole proprietor to your new corporation or LLC.

The mechanics of choosing the method of transfer for tax purposes is beyond the scope of this article.  It is best before you make any transfers to speak to a qualified CPA as well as an attorney.

Should You Just Forget the Whole Thing?

Absolutely not.  Despite some expense, paperwork, time and energy there are numerous reasons you should incorporate your small business or form an LLC.  To list just a few:  Protection of your personal assets should your business fail or get sued; savings on employment tax and deductions for insurance; protection of your business assets should you get personally sued; ease of raising funds to expand your small business.

When you are ready to take your Long Island small business to the next level, contact a small business lawyer in your area.

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.