People come to me and want to set up a company and they want to determine if they set up a corporation or a limited liability company. Here are the facts to consider. When you’re considering a corporation, you have to make a determination whether you have a C Corporation or an S Corporation.
A C Corporation is the traditional corporate style where the corporation is treated as an individual entity. And as such, collects money, pays taxes and then distributes the money it earns to its stockholders; dividends. You’ve all heard of dividends. This creates a problem, however. You have a small company – it’s just you – and you want to pay yourself. Unfortunately, you don’t want to have the corporation taxed, and then you have to pay dividends. So, that means you pay double tax. The government decided the way to solve that problem is to set up what’s called an S Corporation.
An S Corporation creates a conduit whereby the profits that the corporation made can be distributed directly to the shareholders. There are technically requirements when you’re setting up an S Corporation, however the most important thing is to elect it properly when you form your corporation; as part of your initial organization, you can elect to be treated as an S Corporation.
Over the years, however, the taxing authorities have had trouble in dealing with the taxation of S Corporations. I used to have a professor in law school who used to tell me an S Corporation is like a dirty conduit. When you’re starting to distribute money from the corporation into the individuals, a lot of stuff sticks to the sides of the conduit and it is really when you get in complicated companies, the S Corporation doesn’t work.
And that’s why about ten years ago, the state of New York and other states starting using what’s called limited partnerships. They go under LLC (limited liability companies), and the reason to do that is it creates a simpler mechanism by which you can manage and run your company. You have partners, however your partnership is protected from liability the same way as if you had a corporation. However, the management is a little less formal. You can have minutes and meetings like you would a corporation, however it’s less formal.
The only drawback in setting a limited liability company in the state of New York is that, believe it or not, you have to pay publishing fees. The state legislature deemed it great to be able to set up these liability companies, however they say that we want the world to know who are the individuals involved in this company. Believe it or not, in this day in age, the state legislature said we have to publish in a newspaper. In the days of the internet, if I wanted to notify the world, I would think the better way to do it would be to post something on the internet. This is one of the drawbacks of a limited liability company. When you’re a start-up, if you’re setting up a limited liability company in New York, you have to pay a filing fee with the newspaper. For example, in New York, the average filing fee is close to $800-$900.