LLC vs S-Corp in New York State

August 5, 2014 2:10 PM

I'm forming a company around an app, with myself as the sole investor and shareholder -- and my lawyers (based in CA) have advised me to go with an S-Corp instead of an LLC to avoid paying an extra $2k for New York's ridiculous "publication requirements" for LLCs. What's the catch though? I mean if this works, why doesn't everyone do it?
posted by neat graffitist to Law & Government (20 answers total)

Did you ask your lawyers that question? What did they say?
posted by craven_morhead at 2:17 PM on August 5, 2014 [2 favorites]

I do LLC and Corporation filings in NYS (and all the other states) at my day job. In fact, about 50% of my job is fulfilling the publishing requirement for LLCs.

I get this question on an almost daily basis, and I always advise people to speak with an accountant and/or an attorney about whether an LLC or an S-Corp is better for them. Your lawyers should be able to explain to you the differences in liability, taxation, etc. of an Corp vs. an LLC, and there is a significant difference. Enough so that the lawyers and accountants I deal with pick and choose which sort of entity they need to form for which client.
posted by griphus at 2:18 PM on August 5, 2014 [7 favorites]

(Also, I'm not trying to be secretive about the difference; this is my job and because of that I know for a fact I'm not qualified to explain the difference to you in a way that will let you make the best decision for your company. It may make no difference for you, or it may make a huge difference for you. The only way you'll know if by speaking with someone who knows the law for both liability and taxes.)
posted by griphus at 2:19 PM on August 5, 2014 [2 favorites]

There are a lot of differences, echoing griphus on not having any idea specifically what would apply to you, but I think just worth mentioning that the differences specifically mean that for different people in different situations, you might well come up with different recommendations. Ask for more detail or contact a CPA or attorney who actually practices in your state. If they haven't brought up things like the differences in how you file and pay taxes yet--in particular the shareholder-employee payroll requirements for that S-corp--then you don't have nearly enough information yet.
posted by Sequence at 2:28 PM on August 5, 2014

As everyone has already pointed out, you need to ask your lawyer this question, and you need to retain the services of an accountant who can help you.

As a general matter, LLCs and S-corporations are taxed slightly differently. Both have pass-through taxation (meaning no corporate tax - the major tax drawback to the regular corporate form is double taxation, but an S-corp has pass-through taxation), but the profits of an LLC are subject to certain employment taxes to which the dividends of an S-corporation are not.
posted by sevensnowflakes at 3:10 PM on August 5, 2014

Response by poster: OK how about this: ignoring my situation completely, can you give an example or two of why a sole proprietor might elect the LLC for a business that doesn't require it? (I realize that some do e.g. law firms right)

YANML and I will ask my lawyers and my accountant too, and maybe I'll switch to a NY-based lawyer, but I'm also just curious what the most common S-Corp disadvantages are for others, even if they don't apply to me.
posted by neat graffitist at 3:14 PM on August 5, 2014

Best answer: First things first, an S corp is not a type of entity; it is a tax status - an LLC can be an S corporation, or it can be a partnership (if >1 owner), or it can be a disregarded entity. A corporation can be a C corporation or an S corporation.

LLC treated as disregarded entity: easier to administer on an ongoing basis; simpler taxation; no restriction on types of owners; generally all income subject to SE tax

LLC or Corporation with S corp election: potential to avoid SE tax on a portion of earnings; usually more state-level admin requirements; have to set up payroll and pay yourself a "reasonable salary"; tax prep is significantly more expensive; restrictions on who may be an owner

Do not do an S corp just to avoid publication. If you're in NYC, publication is between $800-$1500; outside NYC it's under $500. There are legitimate ways to reduce the cost of publication in NYC (like using a registered agent with an Albany address). Also while publication is a "requirement" it is something you may not actually need to do, depending on your business.

The only reasonable basis for electing S corp status is if your business will be one of the few for which the SE tax savings are significant (the IRS has been cracking down on this, so it really isn't worth pushing the envelope on this issue).

Other things:
NYS has an annual $25 fee for SMLLCs
NYC does not recognize S corporation status
NYC has an unincorporated business tax, but it kicks in only at a pretty high income threshold

You need a lawyer licensed in NY and a tax advisor; your CA lawyer is giving you irresponsible advice.
posted by melissasaurus at 3:36 PM on August 5, 2014 [3 favorites]

My experience is that lawyers are invested in charging you [sorry lawyers] up front and not as invested as accountants who are more likely to know how a business succeeds or fails.

"NYC does not recognize S corporation status"
um,

If your shareholders have made an S election for federal purposes, you should be aware that New York State does not automatically treat your company as a New York S corporation unless you are mandated to file as an S corporation under Tax Law section 660(i). Therefore, unless you are mandated, you need to qualify to make the election to be a New York S corporation and follow the steps outlined below.

link

I don't mean to be contrary and welcome clarification but an LLC is to limit liability. Sometime in the mid nineties all the law firms changed from LLP's to LLC's so something must have changed.
posted by vapidave at 4:10 PM on August 5, 2014

That rule says you need to do a federal and a state election for S-corps in NYS, which is true. But the NYS Div. of Taxation and Finance and the NYC Tax Dept. are two totally different agencies.
posted by griphus at 4:14 PM on August 5, 2014 [1 favorite]

NYC as in New York City
posted by melissasaurus at 4:14 PM on August 5, 2014 [3 favorites]

What changed was that professionals were no longer required (in some states) to use a partnership or forgo incorporation altogether.

IIRC, and it's been a long time since I looked, the recordkeeping requirements for corporations are significantly more involved, but not at all undoable. However, all the general advice in the world won't help you. Nolo has some good books the various corporate forms if you really feel like you need to understand as much as you can without being an attorney and accountant.
posted by wierdo at 4:15 PM on August 5, 2014 [1 favorite]

Er, NYC Dept. Of Finance, not Tax.
posted by griphus at 4:15 PM on August 5, 2014

"What changed was that professionals were no longer required (in some states) to use a partnership or forgo incorporation altogether."

Ah, I was in California and temped with mostly California based firms so I likely overstated my understanding having only seen the ubiquitous letterhead change that [ill] informed my statement "Sometime in the mid nineties all the law firms changed from LLP's to LLC's".

Thanks. I appreciate the clarification.
posted by vapidave at 4:35 PM on August 5, 2014

Do not take advice from California lawyers on matters of New York law. Look for a New York lawyer.
posted by yclipse at 5:52 PM on August 5, 2014 [6 favorites]

And whatever you don't, don't form an LLC in California.
posted by RJ Reynolds at 6:15 AM on August 6, 2014

my lawyers (based in CA) have advised me to go with an S-Corp instead of an LLC

How about neither? You may not need a lawyer or an accountant if your business is simple.
posted by JackFlash at 11:51 AM on August 6, 2014

I always assumed LLC's of one form or another were the way to go, but I have a friend who owns a sole proprietorship consisting of a few apps he sells. He has an attorney approve his license agreements and the "no freakin' warranty" bits in particular, and the apps are low-stakes: they don't involve confidential data, finances, etc, so his likelihood of being sued for any damages or tried for criminal neglect is extremely low.

Not legal advice of course, but in some? many? cases the whole "limited liability" thing doesn't actually protect the sole owner of a corporation from being personally liable to some extent and your personal credit rating can still be vulnerable, and that ties in to the decision to incorporate in "S" or "C" status. One vaguely-recalled tidbit I learned from a small business seminar in my own state (CO).

YMMV, IANAL, etc
posted by aydeejones at 12:43 PM on August 6, 2014

Best answer: The other big tidbit being that corporations are state-regulated state-recognized entities and each state has different rules of incorporation and varying advantages depending on the product or services involved and target markets, and then that does branch out to a municipal / county level in terms of evaluating your tax advantages for the various options available before selecting a specific taxation structure.

So definitely an NY lawyer all the way, and ask them to really break down why you need a corporation at all in the context of the sort of apps being developed and their intended audience (national, low-stakes users, etc).
posted by aydeejones at 12:49 PM on August 6, 2014

Best answer: Some general information regarding incorporating in NY -- not legalese, and therefore not necessarily 100% accurate either, but a good overview similar to the best answer above.
posted by aydeejones at 12:53 PM on August 6, 2014

Best answer: Also, check with your NY attorney as to whether you would benefit from having a separate physical address through a for-profit entity like UPS (not a USPS PO BOX), and there that location should be. Other good general advice here, but it all can vary state to state.
posted by aydeejones at 12:59 PM on August 6, 2014