In the course of my practice, when clients are starting a business or changing their current business structure, they ask which entity is better for their needs, an S-Corporation or an LLC. While both entities share similar qualities, they also have distinct differences. A client should review the pros and cons of each entity prior to deciding.

Pros and Cons of an LLC

The most attractive feature of an LLC is its operational ease. There are fewer initial registration requirements and no requirement to have formal meetings or maintain minutes.

LLC’s have fewer restrictions on sharing profits. Members may have contributed more money than others or worked more hours; the profit allocation may be altered to reflect this.

A negative aspect of an LLC is it has a limited life. A specific date is chosen when it terminates upon filing with the state. Additionally, when Member dies or goes bankrupt, the LLC will be dissolved.

The biggest drawback of an LLC is that the owner(s) of an LLC are considered to be self employed and must pay the self employment tax contributions towards social security and Medicare. The entire net income of an LLC is subject to this tax.

Pros and Cons of an S-Corporation

The most attractive feature of an S-Corporation is the tax savings. Only the wages of a shareholder are subject to employment tax. The remaining distribution is taxed at a lower rate, if at all. Compensation to shareholder must be reasonable or the IRS may reclassify. This is a red flag and you do not want this attention from the IRS.
An S-Corporation has independent life separate from its shareholders. If a shareholder dies or leaves, the S-Corporation can continue doing business.

The biggest drawback of an S-Corporation is that it has structural requirements such as director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and records maintenance.

Typically with both entities, owners are not personally responsible for business debts and liabilities. Both entities have pass-through taxation (taxed at the individual level). Both are subject to state-mandated formalities and fees. I personally prefer the flexibility and lack of formal requirements of an LLC.

Tags: limited liability company, llc, s corp, s-corporation

The name of your company and the slogans and logos you use with your products or services are called trademarks or servicemarks and are used by consumers to identify the source of the products or services. If your business would suffer if someone else used your name, slogan or logo, then you should proactively take steps to protect these. Although a “common law” right in your trademark is acquired by use, it is very difficult to enforce common law trademark rights unless the mark is registered.

A mark that is used in more than one state or country is eligible for federal registration, while a mark that is only used within a single state (no out of state sales) may only be registered in that state. Federal registration is much stronger and more desirable; it provides nationwide protection and will become incontestable after five (5) years. A cease and desist letter to demand that someone stop using your mark will carry much more weight and you will have greater rights in court if your mark is registered.

If you are developing a new mark, it is important to search in advance to see if that mark is in use. Although registration of a mark is based on actual use, it is possible to apply for registration of the mark before sales commence on an intent to use basis.

Each trademark registration application is examined by an attorney in the Trademark Office and in many instances an Office Action refusing registration is issued. The advance work in anticipating and dealing with objections that may be raised and in responding to trademark office actions requires experience and knowledge.

At HoganWillig we can help you evaluate the marks you use or would like to develop and take them through the registration process.

Tags: service mark, servicemark, trademark

Many commercial landlords often find themselves litigating the terms of a lease agreement to obtain a recovery against a tenant that has defaulted. To increase the likelihood of succeeding against a tenant that has defaulted, the following three provisions should be included in the lease agreement:

1. Acceleration Clauses – these clauses are very important especially for long-term lease agreements. Acceleration clauses allow a landlord, upon default of the tenant, to accelerate and immediately demand payment in full of the tenant’s rental obligation under the lease for the remaining term of the lease following the default. Without an acceleration clause, a cause of action to recover unpaid rent will have to be brought periodically as payments would become due or at the end of the lease term.
2. Personal Guarantees – in connection with renting a commercial space to a corporation, partnership or limited liability company, a unconditional guarantee by the principal of the tenant-entity is a must have. A guarantee by the principal allows the landlord to recover rent due from the owner of the company generally without having to proceed against the company first. If your tenant is a business entity with no assets, and a default occurs, without a personal guaranty, any judgment obtained for rent, costs, etc. will not be recoverable. The personal guarantee provides additional security for payment to the landlord.
3. Attorneys’ Fees – to ensure that you can recover the attorneys’ fees you incur in connection with litigation or curing a default by a tenant, the lease agreement must specifically provide the right to recover attorneys’ fees and costs. To the extent that the tenant will agree to a clause that allows a landlord to recover fees and costs, without a right of reciprocal recovery to the tenant, this is a more favorable position for the landlord. Otherwise, the clause should provide for the right of the prevailing party to recover attorneys’ fees and costs. Without this clause, New York State Courts disfavor awarding them to any party.

We have several attorneys on staff that can review your commercial lease agreement to provide you with suggestions on improving and/or updating the provisions contained therein.

Tags: acceleration clause, attorney fees, commercial lease, commercial lease agreement, lease agreement, personal guarantee

Despite the challenging economic times we are experiencing, it is encouraging to receive inquiries regarding how to set up Not-For-Profit (NFP) corporate entities in New York for providing scholarships to students. In response to the interest we have received on this issue, what follows is a basic idea of what is involved in getting a corporate NFP underway for this worthwhile purpose.

The first step entails choosing a business name that is legally available and meets the legal naming requirements. The Certificate of Incorporation is then prepared and filed with the Department of New York State Division of Corporations ($75 filing fee applies). An Employer Identification Number (tax ID number for the corporation) must then be applied for with the IRS. Corporate bylaws are created which set forth the rules and procedures for running the NFP corporation. Additionally, an initial Board of Directors consisting of a minimum of three individuals over eighteen years of age (there are some exceptions to this age requirement) is selected or recruited. It is not necessary that the board members reside in New York State to serve on the board.

Subsequent to the formation of the NFP corporation, an organizational meeting would then be called to officially appoint the organization’s directors and corporate officers, adopt the corporate bylaws, establish the corporation’s budget for the fiscal year, and designate a bank for the corporation. Establishment of a Corporate Records Book containing meeting minutes and pertinent corporate documents is also necessary.

The NFP corporation must also register with the Office of the Attorney General of New York State, and with the New York State Tax Department for state business tax purposes.

Once these steps have been completed, application for federal tax exemptions is then made by filing an IRS Exemption Organization Determination Letter Request (IRS filing fees for this range from $400 to $850), and by filing an Application for Recognition of Exemption under IRS §501(c)(3), Form 1023. However, there is no requirement to file under §501(c)(3) to obtain federal tax exemption status if an organization has gross receipts in each taxable year of normally not more than $5,000. In such case, filing under §501(c)(3) may still be advisable to receive an IRS Determination Letter recognizing its tax exempt status for its records. Such filing must generally be made within 27 months after the date of incorporation.

Filing for a §501(c)(3) tax exempt status is somewhat involved. Among other things, the federal government requires submittal of the following information from organizations that are planning to award scholarships:

Criteria used for selecting recipients, e.g., academic performance or financial need, including the rules of eligibility;

• How and by whom the recipients are or will be selected;
• A copy of the scholarship application form and any literature describing the scholarship program;
• How the award will be administered;
• Description of how the scholarship will be paid;
• Where the scholarship funding will come from.

Once a federal tax exemption is obtained, New York State requires filing of its Form ST-119.2 to achieve state and local tax exemptions for a NFP corporation. Subsequent to obtaining a tax exempt status from the federal and local governments, there will of course be on-going obligations for the newly formed NFP corporation, such as annual meetings and administrative activities, including the filing of annual tax returns.

Hopefully, this provides you with an idea of the steps involved in this process. Should you wish to discuss any of this information, please give us a call.

Tags: certificate of incorporation, nfp corporation, not-for-profit, scholarships, tax exempt

From April 9th, 2011 onward, employers must comply with significant new procedural obligations under New York State’s recent Wage Theft Prevention Act. The first major change is the requirement of employers to provide every employment with written notification of information such as rates of pay, allowances, the regular payday, the employer’s full name and physical address, overtime rates, etc. This information must be provided both at the time of hire and annually. Furthermore, these notifications must be in writing (not transmitted electronically), they must be provided in English as well as the employee’s primary language, employers must receive written acknowledgement that the notification was received, both the notice and acknowledgement must be preserved for six years, and employees must be notified of any changes to the information at least seven days prior.

Another component of the Act makes it mandatory (more…)

Tags: wage theft prevention act

At the end of 2010, Governor Patterson signed a new bill into law which set realistic limits on the current levels of exemption values which will reflect today’s values and households and bring New York State into accord with other states exemption statutes. This law will be a welcome face lift to the current Debtor Creditor statutes and the Civil Practice Law and Rules! (more…)

Tags: bankruptcy protection, personal property exemption, real property exemption

Hiring is good news for your business.  It is growing and more help is needed.  However, should you hire a new employee or an independent contractor?  Consider the pros and cons of hiring an employee or an independent contractor:

Pros of Hiring An Independent Contractor

·        Reduced Costs:  Payroll, benefits, and other overhead are reduced.  Such reduction in overhead can mean less pressure to bring in new business revenue to cover the costs of the added labor.

·        No Health Benefits:  Deserving of specific mention is the huge burden on small businesses is the ever increasing costs of employee health benefits.

·        Use as Needed:  Independent contractors may agree to work inconsistent numbers of hours based on your small business’s changing needs.

·        Specific Expertise:  Your small business can select someone who already has the specific expertise that you require for a particular project.

Pros of Hiring An Employee

·        Flexibility: Employees can be much more flexible in different areas and as changes in tasks require. 

·        Single Minded Loyalty: An employee is likely to have a much stronger loyalty, which can mean more productivity as well as a long term investment in the growth of the business.

·        Knowledge of Business:  There is greater knowledge of your small business as a whole and see it in operation on a consistent basis.

Cons of Hiring An Employee

·        Burden of Payroll:  The burden of having to make payroll often means that your ability to count on your own paycheck is less consistent.

·        Additional Overhead:  In addition to the costs of employee benefits and payroll often comes the need for bigger space and more equipment.

·        Management Role:  As your small business grows in size, there comes with it the burden of training and supervising employees.  This can divert your attention from the business operations.

·        Legal Issues:  Your small business becomes exposed to worker-related lawsuits. There are many laws that must be addressed and complied with.

Cons of Hiring An Independent Contractor

·        Loss of Control:  Part of what makes a contractor independent is their ability to choose the projects they take and how they perform them.  Contractors may have outside projects and less commitment than an employee.

·        Rates Can Vary:  An independent contractor may charge different rates based on varying projects.  This unpredictability can may it difficult to ascertain the cost of a prospective project. 

·        Harsh Penalties for Misclassification:  If you make an error in classifying an employee as an independent contractor, you can be held liable for many penalties, including with respect to employment taxes, interest charges, and penalties. 

Given the severe costs of misclassifying an employee as an independent contractor, the rules should be carefully reviewed with an attorney prior to hiring. 

Visit our Corporate & Business Law Department at www.hoganwillig.com.