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.

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.”