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27 Haziran 2012 Çarşamba
Documents You Need Before You Die
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This is a very useful graphic that showsthe documents you should have collected in one place or immediate access to ifyou want to insure your family does not struggle looking for information whenyou die. In a recent estate we handled it took morethan four months and numerous hours by staff to identify all of the informationrequired to process the estate through probate. Five separate investment accounts, original stock certificates, passbooksavings accounts, four checking accounts, several savings accounts withdifferent people named as owners of the accounts, original deeds and the listgoes on. The delay and the expense allcould have been avoided if the parties involved had collected and organizedthis information for the inevitable. The financial consequences of not havingthis information organized could be very costly. According to the National Association ofUnclaimed Property Administrators, state treasurers currently hold $32.9billion in unclaimed bank accounts and other assets. Here in New York you can search for unclaimedfunds at Office of the New York State Comptroller’s Unclaimed Funds website. Some of these documents such as your “originalwill” should never be left at home or in a safety deposit box. When youare preparing your will, speak with your attorney about where to keep thesedocuments. Your attorney can provide you with copies of the importantdocuments to keep in your file at home while safely storing originals. Here at Ciminelli and Ciminelli we candigitally store all of these documents and give you direct access to thedigital file if you need to recover any of the information. Additionally,we will store your original will in our fireproof safe to insure the originalis available to the Surrogate Court for probate proceedings.
What You Need To Know About REOs
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Last fall an associate of mine published this article in The Daily Record. It is informative to anyone working in the Real Estate industry so I asked permission to reprint here......
___________________________________________________
What You Need To Know About REOs
by
Kirsten W. Lamb, Esq
The last four years have been a roller coaster ride for the national housing market. The states of Nevada, Florida and California are some of the locations hardest hit by the ongoing foreclosure epidemic. In Nevada alone foreclosures make up approximately 37% of the real estate market or almost two of every five homes for sale. Rochester however, has had one of the most stable housing markets in the country and as a result, has been relatively unaffected by the default onslaught. Indeed, Good Morning America, Zillow.com and Forbes.com have all listed Rochester as one of the best places to buy a home in America. One of the factors Zillow.com took into consideration was the almost microscopic foreclosure rate in the “Flower City” of .24%.
Current market conditions indicate that the foreclosure tide may last for another five to seven years. Even though the local foreclosure rate is miniscule as compared to other parts of the country, Rochester still has almost 200 foreclosed properties currently listed for sale. Where at one time the REO (Real Estate Owned (by the bank)) transaction was a rare beast, the local real estate bar is likely to see these transactions with increasing frequency.
REO sales do not necessarily conform to local practice however and as such, counsel for the purchaser should be aware of the pitfalls a purchaser may encounter.
The Real Estate Brokers – Many real estate brokers do not have experience with selling REO properties. However, even the most experienced broker can fail to advise the purchaser that these transactions often have extended timelines for closing and that the purchaser is responsible for many of the fees that would otherwise be a seller expense.
The Seller Addendum – The local Monroe County Bar Association contract is familiar to most of us, but attached to that contract will be the seller’s addendum. If there is any conflicting language or terms between the local contract and the addendum, the addendum will control, even if it is contrary to local practice. The attorney approval period is often waived.
“AS IS, WHERE IS” – With the glut of REOs in the market, lenders are less likely than ever to take an additional loss on the property by agreeing to repairs; in many cases even if the buyer is obtaining an FHA/VA loan. The standard contract will indicate the property is being purchased in its current condition and the seller will not make any repairs.
Closing dates and per diem – The local practice with regard to closing dates is “on or about”. Do not presume that your REO transaction will follow this rule. If you do, you may cost your client anywhere from $50.00 to $150.00 per day in fees charged by the seller for not closing on time. Be proactive with the lender and seller.
Title and title insurance – The seller addendum may or may not indicate that the seller will pay for a fee policy. In many instances, they do so as an incentive to utilize the seller’s title company. Be on the lookout for marketable or insurable title clauses in the contract. Most REO sellers only offer insurable title.
Referee’s Deed – It is not unusual for the Referee’s Deed and Report of Sale to not be of record. Obtaining the Deed and RROS often delays the closing.
Surveys and Abstracts – An REO seller will not generally pay for either the abstract or the survey.
Inspections – All inspections are usually at purchaser’s expense unless otherwise clearly noted in the addendum. This includes termite inspections, radon tests, structural engineers, etc. The cost of inspections may be mitigated by any closing concession provided by the seller.
The Settlement Statement and closing costs – Like all standard purchase and sale transactions, REO’s utilize the HUD-1 Settlement Statement. Sellers do not generally accept the local settlement statement however. Even an all cash transaction must use a HUD-1 and any fees and all concessions must be reflected. If the seller has allowed the purchaser concessions, there are two general principles to be aware of: 1) Total closing costs on page 2 of the HUD-1 must match or exceed the concession; and 2) the seller will generally not allow the purchaser to receive back at closing more than the purchaser paid up front. For example, if the purchaser paid a $1,000.00 deposit and, after all bank fees and seller concessions, the buyer is receiving back $1,003.00, the seller may require a reduction in its concession by $3.00 to match the initial deposit. Some REO sellers however, do not allow the purchaser to receive any funds back at closing at all.
Possession – Finally and most importantly, until the seller (not the seller’s attorney) has received its funds, the purchaser is usually not permitted possession of the property under the terms of the contract. Therefore, if closing is on Friday afternoon and the deed is not on record until Monday, the seller will not usually permit the purchaser to have possession until Monday.
Exercising due diligence and communicating with the purchaser will often be the difference between a smooth closing and a transaction fraught with last minute extensions and frustration.
___________________________________________________
What You Need To Know About REOs
by
Kirsten W. Lamb, Esq
The last four years have been a roller coaster ride for the national housing market. The states of Nevada, Florida and California are some of the locations hardest hit by the ongoing foreclosure epidemic. In Nevada alone foreclosures make up approximately 37% of the real estate market or almost two of every five homes for sale. Rochester however, has had one of the most stable housing markets in the country and as a result, has been relatively unaffected by the default onslaught. Indeed, Good Morning America, Zillow.com and Forbes.com have all listed Rochester as one of the best places to buy a home in America. One of the factors Zillow.com took into consideration was the almost microscopic foreclosure rate in the “Flower City” of .24%. Current market conditions indicate that the foreclosure tide may last for another five to seven years. Even though the local foreclosure rate is miniscule as compared to other parts of the country, Rochester still has almost 200 foreclosed properties currently listed for sale. Where at one time the REO (Real Estate Owned (by the bank)) transaction was a rare beast, the local real estate bar is likely to see these transactions with increasing frequency.
REO sales do not necessarily conform to local practice however and as such, counsel for the purchaser should be aware of the pitfalls a purchaser may encounter.
The Real Estate Brokers – Many real estate brokers do not have experience with selling REO properties. However, even the most experienced broker can fail to advise the purchaser that these transactions often have extended timelines for closing and that the purchaser is responsible for many of the fees that would otherwise be a seller expense.
The Seller Addendum – The local Monroe County Bar Association contract is familiar to most of us, but attached to that contract will be the seller’s addendum. If there is any conflicting language or terms between the local contract and the addendum, the addendum will control, even if it is contrary to local practice. The attorney approval period is often waived.
“AS IS, WHERE IS” – With the glut of REOs in the market, lenders are less likely than ever to take an additional loss on the property by agreeing to repairs; in many cases even if the buyer is obtaining an FHA/VA loan. The standard contract will indicate the property is being purchased in its current condition and the seller will not make any repairs.
Closing dates and per diem – The local practice with regard to closing dates is “on or about”. Do not presume that your REO transaction will follow this rule. If you do, you may cost your client anywhere from $50.00 to $150.00 per day in fees charged by the seller for not closing on time. Be proactive with the lender and seller.
Title and title insurance – The seller addendum may or may not indicate that the seller will pay for a fee policy. In many instances, they do so as an incentive to utilize the seller’s title company. Be on the lookout for marketable or insurable title clauses in the contract. Most REO sellers only offer insurable title.
Referee’s Deed – It is not unusual for the Referee’s Deed and Report of Sale to not be of record. Obtaining the Deed and RROS often delays the closing.
Surveys and Abstracts – An REO seller will not generally pay for either the abstract or the survey.
Inspections – All inspections are usually at purchaser’s expense unless otherwise clearly noted in the addendum. This includes termite inspections, radon tests, structural engineers, etc. The cost of inspections may be mitigated by any closing concession provided by the seller.
The Settlement Statement and closing costs – Like all standard purchase and sale transactions, REO’s utilize the HUD-1 Settlement Statement. Sellers do not generally accept the local settlement statement however. Even an all cash transaction must use a HUD-1 and any fees and all concessions must be reflected. If the seller has allowed the purchaser concessions, there are two general principles to be aware of: 1) Total closing costs on page 2 of the HUD-1 must match or exceed the concession; and 2) the seller will generally not allow the purchaser to receive back at closing more than the purchaser paid up front. For example, if the purchaser paid a $1,000.00 deposit and, after all bank fees and seller concessions, the buyer is receiving back $1,003.00, the seller may require a reduction in its concession by $3.00 to match the initial deposit. Some REO sellers however, do not allow the purchaser to receive any funds back at closing at all.
Possession – Finally and most importantly, until the seller (not the seller’s attorney) has received its funds, the purchaser is usually not permitted possession of the property under the terms of the contract. Therefore, if closing is on Friday afternoon and the deed is not on record until Monday, the seller will not usually permit the purchaser to have possession until Monday.
Exercising due diligence and communicating with the purchaser will often be the difference between a smooth closing and a transaction fraught with last minute extensions and frustration.
Forming an S-Corporation (Sub-S Corp) and a Limited Liability Company (LLC) in New York Part 1
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So you want to start a business. One decsion you will have to make is whether to create an entity for this new business. As important is deciding what type of entity you should form, Most small business owners end up deciding between a New York S corporation and a New York limited liability company (LLC) when choosing a formal legal structure for their New York business. Both entities offer limited liability and a start-up friendly tax treatment. So, which entity is the best for one for your enterprise and individual circumstances?
In the next few blog entries we will answer many of the questions you may have when considering forming a business entity.
An S corporation is a (regular) business corporation that elected a special tax treatment with the federal tax authorities and/or the New York State tax authorities. Otherwise, an S corporation’s characteristics are just like a regular business corporation, which means that it is a legal entity that can be formed by one or more persons. Once a corporation is formed, the S corporation (not its owners in their personal capacity) will enter into all contracts, issue all invoices and undertake all business activities. Remember too that professionals can only form a professional corporation.
On the other hand, a limited liability company (LLC) is a business entity that can be formed by one or more persons or other business entities. Once an LLC is formed, the LLC (not its owners in their personal capacity) will enter into all contracts, issue all invoices and undertake all business activities. As with professionals and corporations, professionals can only form a professional limited liability company.
FAQ:
How do I form an S Corporation?
You start by forming a regular business corporation.
The formation of a corporation requires the filing of a “certificate of incorporation” with New York’s Department of States.
Once the corporation is in existence, you will have to elect S corporation status with the federal and state tax authorities.
How do I form an LLC?
The formation of an LLC requires the filing of “articles of organization” with New York’s Department of State.
Who can form an S Corporation?
Only individual U.S. citizens or U.S. residents can form an S corporation.
Who can form an LLC?
Any person or business entity.
How many Shareholders can an S Corporation Have?
An S corporation can only have a maximum of 100 shareholders all of which have to be individuals (some exceptions apply).
How many Members can an LLC have?
An LLC can have an unlimited number of members.
Who are the Owners of an S Corporation?
The owners of an S corporation are called shareholders. The corporation issues share certificates to the shareholders in exchange for something of value, like cash, services or property.
Who are the Owners of an LLC?
The owners of an LLC are called members. You become a member by contributing something of value (cash, services, property) to the LLC and receiving a membership interest in return.
How much does it cost to form an S Corporation?
It costs about $235 to form a corporation in New York, excluding legal fees.
How much does it cost to form an LLC?
It costs about $800 in fees to form a limited liability company in New York, excluding legal fees. The main costs of formation stem from the fact that limited liability companies are required to publish their formation in two newspapers. Depending on your location, this publication requirement can be quite costly. The estimated cost of formation above is based on Monroe County’s approved rates for newspapers newspapers (about $500); it is less in other counties and much more (up to $1000.00) in the New York City Area.
How long does it take to form an S Corporation?
For about $200 in fees, your corporation will be in existence within 24 hours. However, you normally have to wait a couple of days to receive the necessary documents in the mail to prove that your corporation has been formed. This may be necessary for opening a bank account.
How long does it take to form an LLC?
You can form an LLC within 24 hours. However, you normally have to wait a couple of days to receive the necessary documents in the mail to prove that your LLC has been formed. This may be necessary for opening a bank account. Many banks will also require you to show an operating agreement (see discussion below) before they will open an account for your LLC. The publication requirement has to be completed within 120 days of formation. Notwithstanding, you can start doing business with your LLC as soon as it is born. If you fail to fulfill the publication requirement, your business loses the authority to conduct business in New York with the expiration of the 120-day period.
In the next few blog entries we will answer many of the questions you may have when considering forming a business entity.
An S corporation is a (regular) business corporation that elected a special tax treatment with the federal tax authorities and/or the New York State tax authorities. Otherwise, an S corporation’s characteristics are just like a regular business corporation, which means that it is a legal entity that can be formed by one or more persons. Once a corporation is formed, the S corporation (not its owners in their personal capacity) will enter into all contracts, issue all invoices and undertake all business activities. Remember too that professionals can only form a professional corporation.
On the other hand, a limited liability company (LLC) is a business entity that can be formed by one or more persons or other business entities. Once an LLC is formed, the LLC (not its owners in their personal capacity) will enter into all contracts, issue all invoices and undertake all business activities. As with professionals and corporations, professionals can only form a professional limited liability company.
FAQ:
How do I form an S Corporation?
You start by forming a regular business corporation.
The formation of a corporation requires the filing of a “certificate of incorporation” with New York’s Department of States.
Once the corporation is in existence, you will have to elect S corporation status with the federal and state tax authorities.
How do I form an LLC?
The formation of an LLC requires the filing of “articles of organization” with New York’s Department of State.
Who can form an S Corporation?
Only individual U.S. citizens or U.S. residents can form an S corporation.
Who can form an LLC?
Any person or business entity.
How many Shareholders can an S Corporation Have?
An S corporation can only have a maximum of 100 shareholders all of which have to be individuals (some exceptions apply).
How many Members can an LLC have?
An LLC can have an unlimited number of members.
Who are the Owners of an S Corporation?
The owners of an S corporation are called shareholders. The corporation issues share certificates to the shareholders in exchange for something of value, like cash, services or property.
Who are the Owners of an LLC?
The owners of an LLC are called members. You become a member by contributing something of value (cash, services, property) to the LLC and receiving a membership interest in return.
How much does it cost to form an S Corporation?
It costs about $235 to form a corporation in New York, excluding legal fees.
How much does it cost to form an LLC?
It costs about $800 in fees to form a limited liability company in New York, excluding legal fees. The main costs of formation stem from the fact that limited liability companies are required to publish their formation in two newspapers. Depending on your location, this publication requirement can be quite costly. The estimated cost of formation above is based on Monroe County’s approved rates for newspapers newspapers (about $500); it is less in other counties and much more (up to $1000.00) in the New York City Area.
How long does it take to form an S Corporation?
For about $200 in fees, your corporation will be in existence within 24 hours. However, you normally have to wait a couple of days to receive the necessary documents in the mail to prove that your corporation has been formed. This may be necessary for opening a bank account.
How long does it take to form an LLC?
You can form an LLC within 24 hours. However, you normally have to wait a couple of days to receive the necessary documents in the mail to prove that your LLC has been formed. This may be necessary for opening a bank account. Many banks will also require you to show an operating agreement (see discussion below) before they will open an account for your LLC. The publication requirement has to be completed within 120 days of formation. Notwithstanding, you can start doing business with your LLC as soon as it is born. If you fail to fulfill the publication requirement, your business loses the authority to conduct business in New York with the expiration of the 120-day period.
Forming an S-Corporation (Sub-S Corp) and a Limited Liability Company (LLC) in New York Part 2
To contact us Click HERE
In Part II of our series on choosing a corporate entity, we continue to answer many of your questions about which entity is best for you.
How long does it take to form an S Corporation?
For about $200 in fees, your corporation will be in existence within 24 hours. However, you normally have to wait a couple of days to receive the necessary documents in the mail to prove that your corporation has been formed. This may be necessary for opening a bank account.
How long does it take to form an LLC?
You can form an LLC within 24 hours. However, you normally have to wait a couple of days to receive the necessary documents in the mail to prove that your LLC has been formed. This may be necessary for opening a bank account. Many banks will also require you to show an operating agreement (see discussion below) before they will open an account for your LLC. The publication requirement has to be completed within 120 days of formation. Notwithstanding, you can start doing business with your LLC as soon as it is born. If you fail to fulfill the publication requirement, your business loses the authority to conduct business in New York with the expiration of the 120-day period.
Does an S Corporation offer limited liability to Shareholders?
As long as you keep up with all corporate formalities, a corporation offers almost complete limited liability. Shareholders only risk losing the initial investment in the corporation. Creditors normally cannot reach the shareholder’s personal assets.
Does an LLC offer limited liability to its Members?
Yes, the LLC is liable on all business debts, not the members personally. If the business goes under, creditors of the business cannot reach the personal assets of the members.
What formalities are required to maintain an S Corporation?
Among other formalities, S corporations require annual shareholder and director meetings. Important decisions by the S corporation must be documented in “minutes” or “written resolutions” of shareholders or directors’ meetings.
Formalities are important to preserve the “limited liability shield” of the S corporation.
What formalities are required to maintain an LLC?
LLCs require less ongoing paperwork than S corporations; however, unless the operating agreement (see below) of the LLC states otherwise, the LLC must also hold annual member meetings.
Can an S Corporation issue Shares with different economic rights?
No. All shares of the S corporation must have the same economic rights to profits, distributions and liquidation of assets. In other words, a shareholder who owns 50% of the shares of the S corporation can only receive 50% of the distributions of the S corporation.
Can an LLC have Membership Interests with different economic rights?
A special feature of an LLC is that the members can agree to share profits and losses in proportions different from their membership interests. In other words, the members could agree that 100% of the profits of the LLC are to be distributed to one member for the first three years, despite the fact that that member owns only 50% of the LLC and normally should have received only 50% of the profits and losses.
But these so called “special allocations” have to follow quite complicated tax rules to make them permissible. This adds a layer of complexity and extra cost to the management and accounting for the LLC.
Who manages an S Corporation?
A “board of directors” manages the affairs of the corporation through officers. Officers of a corporation are often named president, vice president, treasurer, secretary, chief operating officer and so forth. Sometimes the law or the “bylaws” of a corporation provide that the shareholders have to approve certain actions by the corporation. Bylaws are rules that govern the corporation. When a corporation is formed, the initial directors approve the original bylaws of the corporation.
All three groups in the corporation, directors, shareholders, officers, can be the same person. In other words, if you form a corporation and are the only shareholder, you will also be the only director and may be several officers in one.
Who manages an LLC?
An LLC can be managed by its members or by appointed managers. Unless the articles of organization of the LLC provides for management by managers, the LLC is managed by its members.
What is a Shareholders Agreement and do I need one?
Shareholders can enter into a shareholders’ agreement to regulate certain matters that come with their share ownership. For example, unless you agree with your fellow shareholders in a shareholders agreement that the shares are not “freely transferable”, any shareholder would be able to sell his shares to a third person. Such person would then become a co-owner of the business.
Thus, unless you are the sole shareholder of your corporation, it is advisable to enter into a shareholders’ agreement.
What is an Operating Agreement and do I need one?
Members of an LLC (even a sole member of an LLC) must enter into a written operating agreement.
Similar to a shareholders’ agreement, an operating agreement regulates ownership of the LLC and the business affairs of the LLC. For example, you can put restrictions on the transferability of the membership interests.
Does the S Corporation pay Taxes?
Not on the federal level, but for exceptions in New York State and New York City, see note below.
A regular business corporation is a taxpayer separate from its shareholders. The corporation pays taxes on its profits. When the corporation distributes profits to the shareholders (called dividends), the shareholder have to pay tax again on such distribution. This is called “double taxation.” By electing S corporation status, S corporations avoid this double taxation.
Each individual S corporation shareholder will include her share of the S corporation’s income, loss and deductions on his or her individual state and federal tax return. For this reason, an S corporation is also known as a "pass-through entity."
Does an LLC pay Taxes?
A one-member LLC is treated as a “disregarded entity.” The only member reports income, losses and deductions of her LLC on her personal federal and state income tax return like a sole proprietor.
A multi- member LLC is normally treated as a partnership for tax purposes. Just like a partnership, the LLC does not pay taxes, but files an informational return
Members report their share of the LLC's income, loss and deductions on their individual state and federal tax return. For this reason, an LLC is also known as a "pass-through entity."
Can a Shareholder deduct Losses of the S Corporation?
Yes, a shareholder of an S corporation can deduct her share of the losses of the S corporation. However, there are limits. Compared to LLCs, S corporations allow for less loss deduction.
Can a Member deduct Losses of the LLC?
Yes, a member of an LLC can deduct his or her share of the losses of the LLC.
Do Shareholders have to pay Self-Employment Taxes on Money they receive from the S Corporation?
No. However, shareholders of an S corporation who work for the business have to pay themselves a reasonable salary. They are considered employees of the S corporation. Consequently, the S corporation has to withhold federal and state taxes from their salary, pay unemployment insurance and its share of social security and Medicare payments.
There still may be savings over the self-employment tax due from members of an LLC. S corporations can pay out all profits above a reasonable salary as dividends to their shareholders. There are no self-employment taxes or other employment taxes due on such payments. In determining a "reasonable" salary, be aware of the audit risks involved.
Do Members have to pay Self-Employment Taxes on Money they receive from the LLC?
Members who are actively involved in the business of the LLC have to pay 15.3% self-employment taxes on the first $106,800 of their combined wages and net earnings, including the income allocated to them from the LLC.
Can a Shareholder be an employee of an S Corporation?
Yes, by default, anybody working actively in the S corporation is considered an employee; i.e. the corporation must do payroll for the employee: withhold federal and state taxes, pay its share of social security and Medicare, and pay unemployment insurance. The corporation can deduct the cost as expenses.
Can a Member be an Employee of an LLC?
No. A Member cannot be an employee of an LLC. Even though a Member can actively work in the management of the LLC and receive so-called "guaranteed payments" similar to a salary, technically he or she would not be considered an employee.
Can an S Corporation choose a different Tax Status?
An S corporation can choose to abandon s corporation status and become a regular corporation again. There are limits and restrictions on how often the switch can be done.
Can an LLC choose a different Tax Status?
An LLC can choose to be taxed as a corporation or a partnership.
Can I raise money for the S Corporation from outside investors?
The S corporation can issue shares to investors in exchange for capital that can be used to grow the business. Investors will become owners of the corporation, but can be excluded from management (if they agree).
Can I raise money for the LLC from outside investors?
The LLC can issue membership interests to investors in exchange for capital that can be used to grow the business. Investors will become owners of the LLC, but can be excluded from management (if they agree). For their own valid reasons, certain venture capitalists will require a corporation for their investment.
In Part III of the series we will sum up the pro and cons of each entity. Feel free to contact us at LawInfo@CiminelliLaw.com if you have any questions about starting your business.
How long does it take to form an S Corporation?
For about $200 in fees, your corporation will be in existence within 24 hours. However, you normally have to wait a couple of days to receive the necessary documents in the mail to prove that your corporation has been formed. This may be necessary for opening a bank account.
How long does it take to form an LLC?
You can form an LLC within 24 hours. However, you normally have to wait a couple of days to receive the necessary documents in the mail to prove that your LLC has been formed. This may be necessary for opening a bank account. Many banks will also require you to show an operating agreement (see discussion below) before they will open an account for your LLC. The publication requirement has to be completed within 120 days of formation. Notwithstanding, you can start doing business with your LLC as soon as it is born. If you fail to fulfill the publication requirement, your business loses the authority to conduct business in New York with the expiration of the 120-day period.
Does an S Corporation offer limited liability to Shareholders?
As long as you keep up with all corporate formalities, a corporation offers almost complete limited liability. Shareholders only risk losing the initial investment in the corporation. Creditors normally cannot reach the shareholder’s personal assets.
Does an LLC offer limited liability to its Members?
Yes, the LLC is liable on all business debts, not the members personally. If the business goes under, creditors of the business cannot reach the personal assets of the members.
What formalities are required to maintain an S Corporation?
Among other formalities, S corporations require annual shareholder and director meetings. Important decisions by the S corporation must be documented in “minutes” or “written resolutions” of shareholders or directors’ meetings.
Formalities are important to preserve the “limited liability shield” of the S corporation.
What formalities are required to maintain an LLC?
LLCs require less ongoing paperwork than S corporations; however, unless the operating agreement (see below) of the LLC states otherwise, the LLC must also hold annual member meetings.
Can an S Corporation issue Shares with different economic rights?
No. All shares of the S corporation must have the same economic rights to profits, distributions and liquidation of assets. In other words, a shareholder who owns 50% of the shares of the S corporation can only receive 50% of the distributions of the S corporation.
Can an LLC have Membership Interests with different economic rights?
A special feature of an LLC is that the members can agree to share profits and losses in proportions different from their membership interests. In other words, the members could agree that 100% of the profits of the LLC are to be distributed to one member for the first three years, despite the fact that that member owns only 50% of the LLC and normally should have received only 50% of the profits and losses.
But these so called “special allocations” have to follow quite complicated tax rules to make them permissible. This adds a layer of complexity and extra cost to the management and accounting for the LLC.
Who manages an S Corporation?
A “board of directors” manages the affairs of the corporation through officers. Officers of a corporation are often named president, vice president, treasurer, secretary, chief operating officer and so forth. Sometimes the law or the “bylaws” of a corporation provide that the shareholders have to approve certain actions by the corporation. Bylaws are rules that govern the corporation. When a corporation is formed, the initial directors approve the original bylaws of the corporation.
All three groups in the corporation, directors, shareholders, officers, can be the same person. In other words, if you form a corporation and are the only shareholder, you will also be the only director and may be several officers in one.
Who manages an LLC?
An LLC can be managed by its members or by appointed managers. Unless the articles of organization of the LLC provides for management by managers, the LLC is managed by its members.
What is a Shareholders Agreement and do I need one?
Shareholders can enter into a shareholders’ agreement to regulate certain matters that come with their share ownership. For example, unless you agree with your fellow shareholders in a shareholders agreement that the shares are not “freely transferable”, any shareholder would be able to sell his shares to a third person. Such person would then become a co-owner of the business.
Thus, unless you are the sole shareholder of your corporation, it is advisable to enter into a shareholders’ agreement.
What is an Operating Agreement and do I need one?
Members of an LLC (even a sole member of an LLC) must enter into a written operating agreement.
Similar to a shareholders’ agreement, an operating agreement regulates ownership of the LLC and the business affairs of the LLC. For example, you can put restrictions on the transferability of the membership interests.
Does the S Corporation pay Taxes?
Not on the federal level, but for exceptions in New York State and New York City, see note below.
A regular business corporation is a taxpayer separate from its shareholders. The corporation pays taxes on its profits. When the corporation distributes profits to the shareholders (called dividends), the shareholder have to pay tax again on such distribution. This is called “double taxation.” By electing S corporation status, S corporations avoid this double taxation.
Each individual S corporation shareholder will include her share of the S corporation’s income, loss and deductions on his or her individual state and federal tax return. For this reason, an S corporation is also known as a "pass-through entity."
Does an LLC pay Taxes?
A one-member LLC is treated as a “disregarded entity.” The only member reports income, losses and deductions of her LLC on her personal federal and state income tax return like a sole proprietor.
A multi- member LLC is normally treated as a partnership for tax purposes. Just like a partnership, the LLC does not pay taxes, but files an informational return
Members report their share of the LLC's income, loss and deductions on their individual state and federal tax return. For this reason, an LLC is also known as a "pass-through entity."
Can a Shareholder deduct Losses of the S Corporation?
Yes, a shareholder of an S corporation can deduct her share of the losses of the S corporation. However, there are limits. Compared to LLCs, S corporations allow for less loss deduction.
Can a Member deduct Losses of the LLC?
Yes, a member of an LLC can deduct his or her share of the losses of the LLC.
Do Shareholders have to pay Self-Employment Taxes on Money they receive from the S Corporation?
No. However, shareholders of an S corporation who work for the business have to pay themselves a reasonable salary. They are considered employees of the S corporation. Consequently, the S corporation has to withhold federal and state taxes from their salary, pay unemployment insurance and its share of social security and Medicare payments.
There still may be savings over the self-employment tax due from members of an LLC. S corporations can pay out all profits above a reasonable salary as dividends to their shareholders. There are no self-employment taxes or other employment taxes due on such payments. In determining a "reasonable" salary, be aware of the audit risks involved.
Do Members have to pay Self-Employment Taxes on Money they receive from the LLC?
Members who are actively involved in the business of the LLC have to pay 15.3% self-employment taxes on the first $106,800 of their combined wages and net earnings, including the income allocated to them from the LLC.
Can a Shareholder be an employee of an S Corporation?
Yes, by default, anybody working actively in the S corporation is considered an employee; i.e. the corporation must do payroll for the employee: withhold federal and state taxes, pay its share of social security and Medicare, and pay unemployment insurance. The corporation can deduct the cost as expenses.
Can a Member be an Employee of an LLC?
No. A Member cannot be an employee of an LLC. Even though a Member can actively work in the management of the LLC and receive so-called "guaranteed payments" similar to a salary, technically he or she would not be considered an employee.
Can an S Corporation choose a different Tax Status?
An S corporation can choose to abandon s corporation status and become a regular corporation again. There are limits and restrictions on how often the switch can be done.
Can an LLC choose a different Tax Status?
An LLC can choose to be taxed as a corporation or a partnership.
Can I raise money for the S Corporation from outside investors?
The S corporation can issue shares to investors in exchange for capital that can be used to grow the business. Investors will become owners of the corporation, but can be excluded from management (if they agree).
Can I raise money for the LLC from outside investors?
The LLC can issue membership interests to investors in exchange for capital that can be used to grow the business. Investors will become owners of the LLC, but can be excluded from management (if they agree). For their own valid reasons, certain venture capitalists will require a corporation for their investment.
In Part III of the series we will sum up the pro and cons of each entity. Feel free to contact us at LawInfo@CiminelliLaw.com if you have any questions about starting your business.
Forming an S-Corporation (Sub-S Corp) and a Limited Liability Company (LLC) in New York Part 3
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In Parts I & II of this series we discussed many of the considerations you will need to review in determining the best entity for your business. Part III summarizes all of this discussion.
Bottom Line for S Corporations:
Pros:
• An S-Corp is less expensive to form than an LLC.
• More people are familiar with the structure of an S corporation.
• It may be possible to save money on self-employment taxes.
Cons:
• S-Corps put serious limitations on the number and kind of permitted shareholders.
• S-Corps do not allow for special allocations and are less flexible than LLC's.
• S-Corps put limits on loss deductions on the shareholder level.
• S-Corps require ongoing formalities to preserve their limited liability shield.
• S-Corp status is not recognized by New York City, thus the s corporation is subject to corporate level tax.
Bottom Line for LLC's:
Pros:
• The LLC offers a very flexible structure. Members can agree to special allocations of profits and losses.
• The LLC offers more possibilities for loss deductions.
• LLC's have no limitations on the number and kind of owners.
• LLC's require less ongoing formalities.
Cons:
• LLC's are expensive to form.
• LLC's are expensive to maintain when special allocations are chosen by the members.
• LLC's can be more complex with respect to accounting procedures.
• LLC's can be more expensive for the members with respect to self-employment taxes.
So now that you have learned about the similarities and differences between S-Corps and LLC's, you will need to carefully consider what your business objectives are and which entity better supports your objectives. It is important to discuss options with your business advisers and CPA to determine what makes sense for the business you want to engage in and then let your attorney assist in setting up the entity. Good luck and great success in your future endeavors.
In Parts I & II of this series we discussed many of the considerations you will need to review in determining the best entity for your business. Part III summarizes all of this discussion.
Bottom Line for S Corporations:
Pros:
• An S-Corp is less expensive to form than an LLC.
• More people are familiar with the structure of an S corporation.
• It may be possible to save money on self-employment taxes.
Cons:
• S-Corps put serious limitations on the number and kind of permitted shareholders.
• S-Corps do not allow for special allocations and are less flexible than LLC's.
• S-Corps put limits on loss deductions on the shareholder level.
• S-Corps require ongoing formalities to preserve their limited liability shield.
• S-Corp status is not recognized by New York City, thus the s corporation is subject to corporate level tax.
Bottom Line for LLC's:
Pros:
• The LLC offers a very flexible structure. Members can agree to special allocations of profits and losses.
• The LLC offers more possibilities for loss deductions.
• LLC's have no limitations on the number and kind of owners.
• LLC's require less ongoing formalities.
Cons:
• LLC's are expensive to form.
• LLC's are expensive to maintain when special allocations are chosen by the members.
• LLC's can be more complex with respect to accounting procedures.
• LLC's can be more expensive for the members with respect to self-employment taxes.
So now that you have learned about the similarities and differences between S-Corps and LLC's, you will need to carefully consider what your business objectives are and which entity better supports your objectives. It is important to discuss options with your business advisers and CPA to determine what makes sense for the business you want to engage in and then let your attorney assist in setting up the entity. Good luck and great success in your future endeavors.
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