NEW YORK STATE BAR ASSOCIATION Choosing the Right Legal Entity for a Startup Business Maureen Crush, Esq.
FACTORS TO CONSIDER: º COST (What the Client is worried about) - Including filing fees, annual report fees, franchise taxes, tax return preparation, income taxes, publication fees º PRIVACY What information is made public º LIABILITY PROTECTION For Members, Shareholders and Directors of the entity FORMATION
New York -LLC Articles of Organization $200; Publication Requirements (cost); Certificate of Publication filing fee $50; Biennial Statement $9; must have an Operating Agreement (legal cost); Annual Fee Based on Revenue: Min of $25-max $4,500 -Corporations Incorporation $125 402 BCL (as of 1/1/15 eliminated separate organization tax);biennial Statement: $9. Annual franchise tax. Delaware -LLC Formation: $90; Certified copy $50; Annual Franchise Tax is $300 6 Del.C. 18-1107; no annual filing fee; required to have Delaware registered agent. -Corporations Incorporation $89+ depending on stock (par/no par & # of shares); Certified copy $50; required to have Delaware registered agent; Annual Franchise Fee 8 Del C. 381 - minimum franchise tax is $175.00, for Authorized Shares method and a minimum tax of $350.00 for Assumed Par Value Capital Method; Annual Report filing fee $50 Formation Requirements
WHAT INFORMATION WILL BE DISCLOSED º Names º Addresses º Titles º Changes to the above PRIVACY ISSUES
New York -LLC Name of Organizer (not required to be a member); Name and Address of Filer; County; Address for Service of Process; Biennial Statement name of signing member or manager. -Corporations Name of Incorporator (not required to be a shareholder or director); Name and Address of Filer; County; Address for Service of Process; Biennial Statement - name and business address of chief executive officer and street address of principal executive office, name of filing officer. Delaware -LLC º Formation: Incorporator name & address; º Registered agent name & address in Delaware. -Corporations º Formation: Incorporator name & address; registered agent name & address in Delaware. º Annual report required each year by March 1st naming the Directors and Officers. Required Disclosures
PERSONAL LIABILITY º Statutory Protection for Shareholders & Members & Directors º Judgment and Charging Order Enforcement º Efficiency of the Courts º Special Exceptions to Protection LIABILITY ISSUES
State Rules on Creditors' Remedies Remedies Available to Personal Creditors of an LLC Owner/Member: Obtaining a court order (Charging Order) that the LLC pay to the creditor all the money due to the LLC owner/ debtor from the LLC Foreclosing on the owner/debtor s LLC ownership interest, or Obtaining a court order for LLC to be dissolved. Charging Orders/Judgments
State Rules on Creditors' Remedies Remedies Available to Personal Creditors of a Corporation Owner/Shareholder: Obtaining a court order (Judgment) that the Corporation pay over distributions to the Shareholder or the actual shares. Foreclosing the Judgment on the debtor s shareholder interest, or Obtaining a court order for corporation to be dissolved. Charging Orders/Judgments
New York -LLC: º Charging Orders are not the exclusive remedy for creditors of a multi-member LLC or single member LLC; courts have permitted foreclosure against a membership interest and dissolution notwithstanding the statute. -Corporation: º May foreclose on judgment to obtain shares, dissolution Delaware -LLC: º Charging Orders are the exclusive remedy for creditors of a multi-member LLC and single member LLC; no foreclosure and no dissolution. Delaware LLC Act 18-703. -Corporation: º Creditor may foreclose on judgment to obtain shares, dissolution Charging Orders/Judgments
State General Rules on Personal Liability Shareholders & Members: The general rule is that Shareholders and Members have limited liability and are subject to loss only of their investment in the entity. Personal Liability arises typically under these scenarios: An act or omission by the member/shareholder, such as their own negligence, fraud or illegal act A contract, particularly one personally guaranteed by the member/shareholder Piercing the veil" of the LLC/Corporation Consenting to or receiving a distribution violating the written agreement or statute Directors: The general rule is that Directors can be held personally liable for breaches of fiduciary duty, but if otherwise acting in good faith and with reasonable business judgment are protected from personal liability for their service as directors. Member/Shareholder Liability
Sole Proprietorships Partnerships Certificate of Conversion; 1006 NYLLC Law ; $200; Fillable Form on Line Legal Entity Overview
Limited Liability Companies Corporations S Corporations and C Corporations Legal Overview
Taxation of C Corporation: Carl owns a graphic design business as a C Corporation with one shareholder/ Carl Profit of $90,000 in 2014 Tax on the C Corporation $19,000 (assuming $13,750 plus 34% of the amount over $75,000). Dividend of $90,000 declared and paid to Carl. 15% tax on the dividend. Carl's total tax payments; $32,500 consisting of $19,000 (corp) plus $13,500 (personal) Legal Overview
Taxation S Corporation Same graphic design business a C Corporation with S Election Same $90,000 profits in 2014 No corporate income tax paid. Reasonable wage paid assume $50,000; taxed at his personal tax rate as W 2 Income Distribution of Profits of $40,000 as dividend at 15% qualifying dividend rate. Total Tax Paid: W 2 Income Tax $8,293.75* plus $6,000 ($40,000 at 15% dividend rate): total of $14,293.75 (versus $32,500) *5,156.25+ 25% over $37,450 Taxation of Entities
Requirements, Complexity and Costs to Set Up Ownership and Control Liability for Business Obligations or Losses Continuity and/or Transferability of Ownership Taxes on Earnings Sources of Capital Other Key Considerations
Requirements, Complexity and Costs to Set Up Ownership and Control Liability for Business Obligations or Losses Other Key Considerations
Continuity and/or Transferability of Ownership Taxes on Earnings Sources of Capital Other Key Considerations
Lawyers: Liability Protection for Owners Clients: Costs Filing fees, Legal fees to advise and draft necessary documents Taxes on an ongoing basis Insurance Hidden costs Costs to transfer property to the entity Commercial registered agent fees if required Franchise fees Corporate Formalities Annual Costs to Maintain Liability Protection (annual meeting minutes; tax filings and returns) Bank fees Cost of revised stationery, signs, business cards, form contracts, etc. to reflect corporate name and business titles. Costs, Costs, Costs
Limited Liability Company Pros Pass Thru Taxation Limited Liability Status of the Charging Order Few Corporate Formalities Flexible Owners- No. & Type Flexible Profit/Loss Allocations Membership Classes Permitted Cons All wages (guaranteed payments) subject to both portions of selfemployment tax S Corporation Pros Pass Thru Taxation Limited Liability Wages Not Subject to Employer Portion of SSI Tax Cons Corporate Formalities Number & Types of Owners One Class of Stock Rule The LLC and the S
S corporations Advantages - Sales of Equity and Initial Public Offerings - Ease of Conversion to C Corp Status - Traditional Equity Compensation Available - Ability to Participate in Tax Free Reorgs - Simplicity of Structure - Fringe Benefits - Self-employment Taxes S Corp Advantages vs LLC s
LLC Advantages - Flexibility of Ownership - Special Allocations of Tax Attributes - Debt in Basis - More Certainty in Tax Status - Tax-Free Distributions of Appreciated Prop - Profits Interest - Ease of Tax-Free Formations LLC Advantages vs S Corps
C Corp Advantages - Traditional Venture Capital Investments - Investors Won t Receive a K-1 - Retention of Earnings/Reinvest Capital - Eligibility for Qualified Small Bus Benefits - No One Class of Stock Restriction - Flexibility of Ownership When is a C Corp a Right Choice?
Costs, Costs & Costs Filing anywhere in New York requires publication of a notice of the LLC formation in two newspapers (See Section 206 of the NYLLC Law Cost in New York City: about an additional $1300 to your formation costs. Forming a foreign LLC (Nevada, Delaware or any other state) won t save you the expense. Section 802 (b) NYLLC Law. Outside NYC, newspaper ads are much cheaper $200 to $300 in many cases. Form outside and relocate the business to NYC. Should You Form an LLC in NYC?
1. Locate your LLC s filing receipt. The Department of State will not issue a duplicate copy of your filing receipt. 2. Call the county clerk of the county where your LLC has its principal office for the listing of newspapers in which to publish. If the county is New York (i.e. your principal office is in Manhattan), the county clerk (see phone listing here) will ask you to fax them your filing receipt before giving out the names of the newspapers. 3. Contact the approved newspapers Review the sample, but check the law. The newspapers will usually send you a sample notice, so that you know what to write for publication. But also check the law to make sure that they got it right. If one of the publications is the New York Law Journal, you can take care of that notice online. 4. File a Certificate of Publication. You will receive an affidavit of publication from each newspaper. Send to Department of State along with a Certificate of Publication. 5. File within 120 days after the formation of your LLC. 6. What happens if you don t publish? No right to use of the courts; no ability to obtain a good standing certificate. Process for Required Publication
Reinvesting Profits the Phantom Income Issue Venture Capital Funding preferred by Venture Capitalists difficulty in converting an LLC to Corp When is a C Corp a Right Choice?
Formation in New York vs Delaware vs Nevada Corporate Income Tax Franchise Tax Tax on Shares Gift or Estate Tax Other Fees New York Yes Yes Yes Estate Tax Publication/ Foreign License Fee Delaware Yes if doing Yes Yes Estate Tax business Nevada No No No No Bus License & Officer Fee Privacy Min Capital to Form Case Law Liability Protection New York Yes shares Yes Excellent Statutory No Delaware No No Excellent Bus Judgment Rule Nevada Yes No Limited Statutory Yes Higher Audit Risk No
No income taxes in Delaware BUT If doing business in NY and formed in DE, entity will pay NY tax More than 50% of all corporations on stock exchange are from Delaware BUT Is this start up going public soon? Sophisticated Legal System in Delaware BUT not really necessary for start up and NY entity can later merge with DE entity and change Delaware Cheaper to Form Entity BUT other expenses to operate as Delaware entity in NY (foreign corporation filing, license fee, annual maintenance fee) The Arguments
Foreign corporations doing business in NY pay a license fee All businesses in Nevada pay a business license fee domestic and foreign Licensing of technology State Law Licensing is dependent upon the nature of the business operations Safety of the general public Is a License Needed?
Maureen Crush, Esq. Shareholder About Presenter Maureen Crush heads the corporate practice groupofcrush&varmalawgroupp.c.she received her B.S. Accounting from New York University and her J.D. from Fordham University School of Law. Ms. Crush practices primarily general corporate and business transaction law, including banking and commercial finance, and has extensive notfor-profit corporate law experience. Presentations: Updates: NY Not-for-Profit Law, Sullivan County Bar Association., January 2015 Start Up Ventures, New York State Bar Association, December 2014, December 2015 Probate Process from Start to Finish, National Business Institute, January 2015 & December 2014 Strategic Leadership, Leadership Orange-Leadership Session, Stewart ANG Base 2013 & 2014 Buying and Selling a Small Business New York State Bar Association 2012 Affiliations: Women s Bar Association of the State of New York (Vice President 2013-2015); Women s Bar Association of Orange and Sullivan Counties (President 2006-2008); Mid-Hudson Women s Bar Association, Orange County Bar Association, Dutchess County Bar Association, New York State Bar Association; American Bar Association. Board member: Hudson Valley House of Hope. Professional Advisors Committee: Orange Regional Medical Foundation, Community Foundation of Orange Sullivan, Women s Professional Network (WPN). Recent Awards: 2012 Root/Stimson Award - New York State Bar Association 2012 Tribute to Women of Achievement Business Category Orange County 2011 ATHENA Award Honoree-The Chamber Foundation, Inc. Dutchess County 2010 Distinguished Attorney-Women's Bar Association Orange/Sullivan Chapter