A Sub-Chapter S in New York

If you are planning to establish a legal business entity (ex: Limited Liability Company (LLC) or Corporation) or have an existing legal business entity in New York and are considering a sub-chapter S election, there are a few things you’ll want to keep in mind.

First, it’s important to understand that single-member LLCs (defaultly treated as a disregarded entity and taxed like a sole proprietorship for tax purposes), multi-member LLCs (defaultly treated as a Partnership) and Corporations making a sub-chapter S election are all considered pass-through entities for federal tax purposes. This means that the entities themselves are generally not subject to income taxes. Profit/loss from the business is passed through to the individual members (LLCs) or shareholders (S-Corps), generally reported on a Schedule K-1 for Partnerships & S Corps, and each member or shareholder reports and pays their respective share of income taxes on their respective share of profit/loss on their individual tax returns.

Eligible single-member LLCs, multi-member LLCs (Partnerships) and corporations (C-Corps) can elect to be treated as sub-chapter S for federal tax purposes in lieu of their default classification. There are various pros and cons associated with making a S election, so it is best to consult with your Accountant, CPA Firm and/or legal counsel so that you may make a well-informed decision.

At the federal level, to make a sub-chapter S election, eligible LLCs will need to file both Form 8832 – Entity Classification Election and Form 2553 – Election By A Small Business Corporation. Eligible corporations (C-Corps) will need to file Form 2553 – Election By A Small Business Corporation. When filing Form 8832, keep in mind that the election may take effect no more than 75 days prior to the date the election is filed or no later than 12 months after the election is filed. When filing Form 2553, keep in mind that the form must be filed no more than 2 months and 15 days after the beginning of the tax year for which the election shall take effect or any time during the tax year preceding the tax year for which the election shall take effect. Both forms do allow “Relief for Late Elections.” Eligibility information is available in the instructions for each form. Your Accountant or CPA Firm should be able to help prepare the necessary forms for you to sign and send to the IRS. The IRS should provide written notice as to the acceptance or rejection of the filing(s) within 60 days of receipt.

At the state level, things start to get complicated. While many states recognize the federal S election at the state level, New York State does not. By default, New York State will treat your entity as a C Corporation for tax purposes even if you have made a federal S election. In order for your entity to be recognized and taxed as a S Corporation at the state level, you must file New York State’s Form CT-6 – Election by a Federal S Corporation to be Treated As a New York S Corporation. Again, your Accountant or CPA Firm should be able to help prepare the necessary form for you to sign and send to the New York State Department of Taxation & Finance (NYS DTF). The NYS DTF should provide written notice as to the acceptance or rejection of the filing within 60 days of receipt. While filing Form CT-6 will allow your entity to be treated as a New York S Corporation for tax purposes, New York State requires most general business corporations to pay a franchise tax at the entity level under Article 9-A of New York law.

One last complication is at the city level. New York City does not recognize the federal S or New York State S elections. Therefore, S Corporations are subject to New York City’s General Corporation Tax (GCT) and will be required to pay this tax at the entity level.

If you are planning to make a S election for your business, be sure to seek and consult with professional counsel (ex: Accountant, CPA Firm) to understand the pros and cons as well as the administrative requirements and tax implications at the federal, state and local levels. As you can see in the case of New York, there are a couple of added complexities at the state and local level that you’ll want to be aware of. A good Accountant or CPA Firm should stay ahead of the game and keep you well-informed but don’t hesitate to ask your Accountant or CPA Firm directly about how the S election works within your state and local levels.

Do Your Own Taxes or Seek A Professional?

As the tax season kicks off, a fundamental question comes to mind – Should you do your own taxes or seek a professional?

Well, the answer depends on a variety of factors including:

  • How comfortable you are preparing your own tax returns?

  • How familiar you are with your tax situation and history?

  • How complex your tax situation is?

Generally, if you are comfortable preparing your own tax returns, are familiar with your tax situation and you don’t have a complex tax situation (ex: you only have income from W-2 wages, interest income from interest-bearing accounts, you don’t itemize your deductions or only itemize state & local taxes & charitable contributions), you should be able to prepare your own tax returns using either an online or desktop version of tax preparation software from companies like Intuit (TurboTax), H&R Block and TaxAct, just to name a few.

These companies have been developing tax preparation software for many years and have many customers who successfully use these products to prepare and file their tax returns annually. That said, you do need to have patience, be organized and dedicate a reasonable amount of time to go through the process. While the software will walk you through the process step-by-step, you do need to understand what information the tax preparation software is asking for then input the proper and correct information for your tax returns to be accurate. Keep in mind . . . Garbage in, Garbage out!

Even though these companies work to ensure their tax preparation software is accurate and apply computations and calculations based on the applicable tax laws, having a general understanding of your tax situation and history is extremely helpful so that you can raise a red flag if you notice that the tax preparation software is showing you too high of a tax refund or too much in taxes owed. Errors can occur due to incorrect user input or a software glitch.

If you are not at all comfortable preparing your own tax returns or have a more complex tax situation, consider seeking a professional tax preparer, Accountant or CPA firm. They should have a thorough understanding of the applicable tax laws and, provided you bring them all the necessary paperwork and documentation required, they should be able to properly and correctly prepare your tax returns, as well as identify and apply all applicable and available tax deductions to get you the optimal refund or try to minimize your tax bill/taxes owed. When looking for a professional tax preparer, Accountant or CPA firm, be sure to do your research, read reviews, get recommendations and compare service fees/rates.

In the case where you run/own a business, the tax situation can get even more complicated. There are different requirements on the federal, state and local level depending on the type of legal business entity you have created (ex: LLC: Single-member LLC, Partnership, LLC taxed as a sub-chapter S, Corporation: C-Corp or S-Corp) and the state in which your entity was established.

On the business side, you’ll probably want to have a tax professional, Accountant or CPA firm that you use on an ongoing basis. Except for the single-member LLC, all other entities are required to file a business tax return (separate from the personal return) even if the entities themselves do not pay income taxes (ex: pass-through entities). You also don’t want to reinvent the wheel dealing with a different tax professional, Accountant or CPA firm every year.

On the personal side, again, it depends on your comfort level and the complexity of the situation. For an individual with a single-member LLC, MAYBE you’ll consider doing your own tax return; but generally, it’s not a bad idea to consider hiring a tax professional, Accountant or CPA firm if you run/own a business especially as a member of a LLC Partnership, LLC taxed as a sub-chapter S, or you’re a shareholder of a corporation (C-Corp or S-Corp). There are a lot of requirements (not only income tax returns) that you may or may not be aware of at the federal, state and local level (ex: estimated quarterly tax payments) so having access to a good tax professional, Accountant or CPA firm can save you major headaches down the road. Yes, a good tax professional, Accountant or CPA firm will cost a bit more, but in the end, it will be well worth it!

Getting Ready for the Tax Season

With the holidays passed and the New Year upon us, it’s time to take some proactive steps in preparing for the upcoming tax season. That’s right! Now is a good time to start gathering and organizing all your 2018 financial/tax documents in preparation for the tax season. Don’t wait until it’s time to have your tax returns prepared to start hunting for all the crucial documents. Get a head start now by putting together a checklist of all the applicable documents you’ll need and start building a file if you haven’t already begun to do so.

Everyone has their own tax situation so first and foremost, if you have an Accountant, CPA Firm or Certified Tax Professional, get in touch with them to review 2018 and go over the documents that you’ll need to have ready to provide to them to prepare your tax returns. Due to changes in the tax law last year, you hopefully have been actively communicating with your Accountant, CPA Firm or Certified Tax Professional to discuss any applicable tax changes that could potentially affect you in the upcoming tax season. It’s also a good practice to reach out to your Accountant, CPA Firm or Certified Tax Professional in the fourth quarter of the year (if your Accountant, CPA Firm or Certified Tax Professional has not already done so), to discuss any applicable year-end tax matters and/or appropriate actions that need to be taken prior to year-end.

If you are a business owner, you’ll want to get in touch with your personal Accountant, CPA Firm or Certified Tax Professional to discuss any tax matters, issues or concerns applicable to your personal tax situation while also getting in touch with the company’s Accountant or CPA Firm to make sure the company is on the right track for year-end.

On a personal level, some of the financial/tax documents you should gather include:

  • Form W-2s from all employers that you worked for in 2018. Employers are required to furnish Form W-2s to their employees by January 31, 2019. A Form W-2 is considered “furnished” if it is postmarked by January 31, 2019. Most payroll companies also provide employee access to electronic copies of Form W-2s.

  • Form 1099-MISC from all companies/businesses for which you performed work or services as a non-employee/independent contractor in 2018. Companies/businesses must issue Form 1099-MISC if you were paid $600 or more during the year for work or services performed. Form 1099-MISC must be furnished by January 31, 2019. You are still required to report all applicable income even if you do not receive a Form 1099-MISC.

  • Form 1099-INT from all banks/financial institutions for which you earned interest income in 2018. Banks/financial institutions must issue a Form 1099-INT if you earned $10 or more in interest income during the tax year. You are still required to report all applicable interest income even if you do not receive a Form 1099-INT.

  • If you maintained health coverage through a Health Insurance Marketplace, you should receive a Form 1095-A. If you maintained health coverage through a health insurance provider or non-Applicable Large Employer (non-ALE), you should receive a Form 1095-B. If you maintained health coverage through an Applicable Large Employer (ALE), you should receive a Form 1095-C. These forms provide information regarding the health insurance coverage provided, to whom coverage was provided and when coverage was provided. Except for recipients of Form 1095-A, recipients of Form 1095-B and Form 1095-C generally do not need to wait for these forms to arrive to prepare their tax returns provided you have the information readily available including, who was covered and when, for tax preparation purposes. Keep in mind that for 2018, the Affordable Care Act’s Individual Mandate remains in full force. Individuals who fail to maintain proper health insurance coverage for all of 2018 may be subject to a penalty. You can get more information about these Health Insurance Information/Tax forms on the IRS website.

  • Form 1099-DIV from all financial institutions/brokerages for which you earned dividend income.

  • Form 1099-G if you itemized your deductions in the prior tax year and took advantage of the state/local tax deduction and received a state/local tax refund.

  • Form 1099-R if you received a distribution from a retirement plan, pension plan, profit sharing plan, etc.

  • Form 5498 if you made contributions to an Individual Retirement Account (IRA).

  • Schedule K-1 if you are a member of a multi-member LLC, LLC taxed as a sub-chapter S or a shareholder of a sub-chapter S.

  • Copies of donation confirmation/acknowledgment letters for tax-deductible donations made to qualified charitable organizations.

The list above is not intended to be a complete list of the financial/tax documents that you may need for the preparation of your tax returns nor does it necessarily reflect all the financial/tax documents that are applicable to your specific tax situation. Again, speak with your Accountant, CPA Firm or Certified Tax Professional to review the financial/tax documents that you should gather in preparation for the current tax season. If you prepare your own tax returns, look through the financial/tax documents you received last year while accounting for any applicable changes made in 2018 (ex: opening a new savings or brokerage account, working for more than one employer within the same tax year) as you put together your checklist and gather your financial/tax documents.

A little early preparation and staying proactive can go a long way in helping to make this tax season go smoother and be less stressful!

Considerations When Starting A Business: Seeking Professional Counsel

As you get started with your new business, there may come a time when you will need to seek professional counsel from a good business law firm and/or CPA firm. Even if your circumstances may not warrant professional counsel at the onset of your new business, you may eventually need to seek counsel as your business grows. Speaking with a good business law firm and/or CPA firm can help you stay on the straight and narrow and in compliance of the constantly changing local, state and federal regulations, requirements and laws.

Legal Counsel

A good business law firm can provide an array of vital services to your business. They can provide key legal counsel during the initial setup and establishment of your new business, helping you to better understand what the legal implications of your new business venture will be. They can offer important insight to help you operate your business legally and avoid unnecessary risks. They can also serve as a critical line of defense between you, your business and potential third-party litigation.

Business law firms can help you figure out the best legal entity for your business (ex: LLC, Corporation - C-Corp or sub-chapter S), assist with filing the necessary paperwork with the appropriate federal, state and local agencies (ex: Department of State, IRS) to setup the legal entity, prepare Operating or Shareholder agreements specifically customized for your business and act as a designated agent for legal notices. They can help prepare and review contracts/agreements (ex: client contracts, NDAs, merger agreements, employment contracts) and they can step in to provide legal aid/counsel in the event of legal action for or against your business.

CPA Firms

A good CPA firm can provide your business with an array of vital Accounting services. They can provide guidance on the different types of legal entities best suited for your business (ex: LLC, Corporation - C-Corp or sub-chapter S). They can provide insight on the potential tax liabilities and obligations you, as a business owner, should be aware of and can expect. CPA firms can handle a variety of required tax reporting and filings for federal, state and local jurisdictions. They should stay current on all the latest changes to the tax laws and requirements to keep you (and the rest of their clients) compliant and up-to-date on the potential impacts those changes will have on you and your business.

For instance, if your business is a single-member LLC treated as a disregarded entity for tax purposes or a multi-member LLC taxed as a Partnership, the owners or LLC members typically do not take a salary through payroll. An owner of a single-member LLC will take a draw and members of a multi-member LLC taxed as a Partnership will receive what are called Guaranteed Payments in lieu of salary via payroll. In either case, unlike salaries via payroll, payroll taxes are not withheld on the income. As such, owners/LLC members are responsible for making quarterly tax payments to the appropriate federal, state and local tax agencies on the applicable earnings. Failure to make the appropriate payments may result in a huge tax bill and tax penalty at tax time.

In addition, single-member LLCs, multi-member LLCs taxed as Partnerships and corporations taxed as a sub-chapter S (including LLCs that elect to be taxed as a sub-chapter S) are treated as pass through entities for tax purposes whereby the business entities themselves are not taxed. Taxes on income/profit are passed down to the individual owners (usually reported on a Schedule K-1) and reported on their individual tax returns. While LLCs taxed as Partnerships and corporations taxed as a sub-chapter S (including LLCs that elect to be taxed as a sub-chapter S) are not taxed at the entity level, they are still required to file the proper annual Partnership or Corporation tax returns for the applicable tax year.

This is just a scratch on the surface, but you can see how complex the tax obligations and implications can be if you don’t understand how the tax laws affect you and your business and/or have appropriate guidance from a tax professional like a good CPA firm. You and your business can easily fall into a tax maze. A good CPA firm should be an active partner in helping you and your business remain compliant with all applicable tax laws and requirements.

There will be times where it may be necessary for your business law firm and CPA firm to collaborate and work together. For instance, when deciding what type of business entity to form for your business (ex: LLC, Corporation - C-Corp or sub-chapter S), it’s a good idea to get insight from both a legal and an Accounting perspective as different types of business entities will have different requirements and implications. While your law firm and CPA firm won’t necessarily tell you which type of entity to form, they should advise you, make recommendations and offer pros and cons. You’ll want to gain as much insight from their counsel to make a well-informed decision.

It should go without saying that both business law firms and CPA firms can be quite expensive so it’s important to know how and when to properly use these professional resources to avoid unnecessary costs. Far too often, business owners use professional counsel prematurely, fail to use counsel until situations get out of hand, don’t know the right questions to ask and/or how to lead, manage and streamline the conversations. Before you speak with a business law firm or CPA firm, take some time to gather your thoughts and put together an overview of what you want to discuss and the questions you want to ask. Try to keep the conversations on point and focused. Don’t be afraid to ask questions if you are unsure about something being discussed. At the end of any conversation with a business law firm or CPA firm, you should feel comfortable that you have gotten the answers that you needed to get from the conversation.

Considerations When Starting A Business: Putting Together A Game Plan

Now that you’re ready and committed to starting a business, you need to put together a game plan. There are a lot of moving parts when it comes to starting a business so it’s important to be organized, detail-oriented and have all your ducks lined up. You’ll first want to take a “view from 10,000 feet” and then drill-down into the specific details.

During the process, gather information and be prepared to answer a series of questions related to your business venture. This information will be extremely helpful during the setup of the legal entity and establishing business operating parameters as you begin operations. In addition, if you need to consult with professionals (ex: business law firm, CPA firm), this information will help to streamline the conversation. You’ll learn quickly that streamlining conversations and meetings are crucial when dealing with law firms and CPA firms, especially if you don’t want to rack up enormous legal and accounting bills.

Below is a list of questions that you should seek answers to. This list is not intended to be a complete list of questions but serves as a starting point in putting together your game plan.

  • What type of business do you plan on starting?

  • Will you be the sole owner or will there be other owners?

  • Do you or any of the other owners have non-compete agreements (or similar) that would prevent or prohibit you and/or the other owners from joining or participating in this business venture? Are there any potential conflicts of interest?

  • Are you or any of the other owners currently participating in or are a part of another business venture, whether in the same industry or a different industry?

  • Will the business be owned by individuals, another business entity or a combination of individuals and business entities?

  • What will be the name of your business?

  • Is the business name unregistered and available to register with your state’s Department of State?

  • Are there any other individuals, companies or organizations using this business name or names similar that may cause confusion for clients/customers and/or pose legal issues (ex: trademark)?

  • Is the corresponding Internet domain name available for your business name?

  • Are the corresponding social media handles available for your business name?

  • What type of legal business entity is best for your business (ex: LLC – single-member LLC, multi-member LLC taxed as a Partnership, LLC taxed as a sub-chapter S, Corporation – C-Corp or sub-chapter S)?

  • What will be the designated role (ex: job function or area of responsibility) of each owner?

  • What does each owner bring to the table of the business venture?

  • How will the business be managed (by the owners, by designated managers, by owners and designated managers)?

  • How much starting capital do you and your partners have to invest in the business?

  • How much capital will you and your partners need to invest in the business to cover startup costs and at least the first three to six months of business operating expenses?

  • If you and your partners don’t have the necessary capital, how will you and your partners secure the necessary capital (ex: bank loans)?

  • Do you and your partners have a solid credit history and a good/excellent credit rating? Do you and your partners have collateral, if necessary?

  • When do you expect to officially begin business operations?

  • Will the business operate in a single state or multiple states?

  • Where will the principal office for the business be located? Will there be a single office location or multiple office locations?

  • Will you require commercial space for your business?

  • Will you be hiring employees?

  • Will you be using independent contractors or external personnel?

  • What resources will you require to operate your business (ex: supplies, equipment, software)?

  • Do you currently have or are you working with existing clients?

  • Who are your target clients or customers?

  • What’s your business plan or strategy for acquiring new clients or customers?

  • If your business requires inventory, how do you plan on acquiring, storing and securing inventory?

  • Will your business be required to collect sales tax?

  • Does your business operate within an industry that has industry-specific or governmental requirements (ex: certifications, memberships, licenses, permits, insurance)?

Forming an LLC in New York? Don’t forget the Publication Requirement!

If you decide to go into business for yourself, you’ll eventually want to form a legal business entity. A common type of entity for startups and small businesses is the Limited Liability Company or LLC. LLCs are easy to form and don’t have as many requirements as Corporations.

A single member LLC is typically treated as a disregarded entity for tax purposes and a LLC with two or more members is treated, by default, as a Partnership unless an election is made to tax the entity as a Corporation (either as a C-Corp or sub-chapter S). If you are unsure about the type of legal business entity you should form, seek counsel from a business attorney and/or a CPA. These professionals can help you make the best choice for your specific business requirements.

Once you determine the type of legal business entity you should form, there are various ways you can go about forming the legal business entity. A business attorney or law firm can help you do the necessary filings with the appropriate state agency, usually your state’s Department of State. You can also use companies like LegalZoom.com, IncFile.com etc. to do the proper filings for you. Companies like LegalZoom.com and IncFile.com will typically prepare and file the necessary documents for a service fee with add-on services available a-la-carte. If you don’t have a complex situation, using LegalZoom.com, IncFile.com and the like can be a cost-effective option. However, in more complex situations, seeking a business attorney or law firm is highly recommended.

That gets us to the actual topic of this post which is the obscure requirement in New York referred to as the LLC Publication Requirement.

So, what is the LLC Publication Requirement?

Well, according to New York’s Department of State, Division of Corporations, State Records and UCC:

“Section 206 of the New York State Limited Liability Company Law requires that within 120 days after the effectiveness of the initial articles of organization, a limited liability company (LLC) must publish in two newspapers a copy of the articles of organization or a notice related to the formation of the LLC. The newspapers must be designated by the county clerk of the county in which the office of the LLC is located, as stated in the articles of organization. After publication, the printer or publisher of each newspaper will provide you with an affidavit of publication. A Certificate of Publication, with the affidavits of publication of the newspapers attached, must be submitted to the New York Department of State, Division of Corporations, One Commerce Plaza, 99 Washington Avenue, Albany, NY 12231. The fee for filing the Certificate of Publication is $50.”

What you may not realize is that companies like LegalZoom.com, IncFile.com and the like typically DO NOT handle the Publication Requirement as part of their service fee nor do they offer an add-on service to handle the Publication Requirement. Some companies do indicate on their site that they do not handle the publication requirement, but it may take some digging around to find the information.

BetterLegal.com does appear to handle the Publication Requirement for you provided you designate them as your Registered Agent, but you do need to dig around their site to find the information. USACorpInc.com is another company that will handle the Publication Requirement for you without being designated as your Registered Agent. They have a link right on their homepage navigation bar for “NY LLC Publishing.” If you don’t mind the work and you’re looking to cut third-party costs, you could opt to take care of the Publication Requirement yourself. Depending on what county in New York your LLC is located, the cost to publish in the required two newspapers will vary. For instance, running ads in Manhattan newspapers may cost $1000-$2000 whereas running ads in newspapers located in upstate New York may cost a few hundred dollars.  

There are exceptions to the LLC Publication Requirement for theatrical production companies:

“A limited liability company that is a theatrical production company is exempt from the publication requirements provided the words "limited liability company" appear in its name. Also, a limited partnership that is a theatrical production company is exempt from the publication requirements provided the words "limited partnership" appear in its name. See Section 23.03 of the Arts and Cultural Affairs Law.”

So what happens if you don’t comply with the Publication Requirement?

According to New York's Department of State:

“Limited liability entities that are formed or authorized to do business in New York after June 1, 2006, which fail to comply with the publication requirements within 120 days after their formation or qualification will have their authority to carry on, conduct or transact any business suspended.

Note that at any time following the suspension of a limited liability entity's authority to carry on, conduct or transact business, the limited liability entity may file the certificate of publication with the affidavits of publication of the newspapers annexed thereto, at which time the suspension of such limited liability entity's authority to carry on, conduct or transact business shall be annulled.”

While there aren’t any fines or financial penalties from failing to comply with the LLC Publication Requirement, suspension or annulment of a LLC’s authority to conduct and/or operate its business in New York can create potential headaches for your business down the road.

The New York State Senate has circulated several Senate bills over the years to update/amend the law with regards to the LLC Publication Requirement, which can be a burdensome cost to startups and small businesses. Until the day the New York State Limited Liability Company Law is updated/amended to remove the Publication Requirement, if you plan to form an LLC in New York, bear this requirement in mind.

Just a side note . . . if you operate a LLC in New York that was formed in another state (aka a Foreign Limited Liability Company or Foreign LLC), you are NOT exempt from the New York LLC Publication Requirement as per Section 802 of the New York State Limited Liability Company Law which reads:

“Section 802 of the New York State Limited Liability Company Law requires that within 120 days after the filing of the application for authority, a foreign limited liability company (LLC) must publish in two newspapers a copy of the application for authority or a notice related to the qualification of the LLC. The newspapers must be designated by the county clerk of the county in which the office of the LLC is located, as stated in the application for authority. After publication, the printer or publisher of each newspaper will provide you with an affidavit of publication. A Certificate of Publication, with the affidavits of publication of the newspapers attached, must be submitted to the New York Department of State, Division of Corporations, One Commerce Plaza, 99 Washington Avenue, Albany, NY 12231. The fee for filing the Certificate of Publication is $50.”