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To Incorporate or Not to IncorporateNY State

By: Ragini SubramanianEnrolled Agent/ Master Tax Advisor

Contents are material, non-public, confidential & proprietary. Unauthorized distribution or dissemination prohibited. The materials are not intended to provide legal advise. You must seek legal counsel before incorporating or otherwise.

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AGENDA


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Decision Matrix

Available Entity Choices

Business objectives and typical business entities in your industry

Costs to incorporate, Tax Burden/Savings, and

Compliance Requirements

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And Then Some More

� Common Mistakes Before and After Incorporation

� Why Incorporate?

� What Happens After Incorporation?

� Useful Weblinks


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CHOICE OF ENTITY


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Entity Choices

Under NY State Business Incorporation Laws

Under Internal Revenue Code


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Entity Choices

� Sole proprietorship or D/B/A

� Limited Liability Company (LLC)

� Partnership – GP, LLP� General Business

Corporation (Inc.)� Professional Services

Corporation (PC)

� Sole proprietorship or D/B/A

� Partnership� “C” Corporation� “S” Corporation

NY StateBusiness Corporation Laws

Internal Revenue Code


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A Brief Entity Description

� Sole proprietor• Owner of an unincorporated business by himself or

herself

• Not a separate legal entity

• Principal features are –centralization of management, lack of perpetual duration/existence, owner personally liable for all actions related to business activity


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� “C” Corporation• An organization incorporated under the general business

incorporation statues of NY State

• Prospective shareholders exchange money, property, or both, for the corporation’s stock

• Taxed as a “C” corporation unless elects to be taxed as an “S” corporation

• It is a legal entity separate from the individual/s who compose the business

• Principal features are – perpetual duration, limited liability for owners, may afford easy transferability of interest, possibly centralization of management


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� “S” Corporation• An organization incorporated under the general business

incorporation statues of NY State

• Prospective shareholders exchange money, property, or both, for the corporation’s stock

• Elects UNDER IRC to pass corporate income, losses, deductions and credit through to their shareholders that is elects to be taxed as a “S” corporation


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� Professional Services Corporation• Incorporated under section 1503 of the NY State

Business Corporation Laws (as opposed to section 301 of the NY State General Business Corporation statutes) (can choose to be incorporated under NY State LLC statute instead)

• Examples of Professions – attorney, accountant, architect, nurses, chiropractors, etc

• Is automatically treated as a “C” Corporation BUT CAN specifically elect to be taxed as an “S” corporation

• It is a legal entity separate from the individual/s who compose the business

• Principal features are – perpetual duration, limited liability for owners, may afford easy transferability of interest, possibly centralization of management


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� Partnership • Relationship between two or more persons who join to

carry on a trade or business. Each partner contributes money, property, labor or skill, and expects to share in the profits and losses of the business. No written agreement is required.

• Is taxed as a Partnership, that is, a pass thru entity under federal and NY tax laws BUT CAN specifically elect to be taxed as a “C” or a “S” Corporation

• Principal features are – generally owners do not have limited liability unless LLP partner, limitations on transferability of interest, limitation on centralization of management


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� Limited Liability Company • An unincorporated business organization (other than a

partnership or trust) with one or more members, each having limited liability for the contractual and other liabilities of the company, formed under the NY State Limited Liability Laws

• A single member LLC is taxed as sole proprietor unless it elects to be taxed as a “C or “S” corporation

• A multi member LLC can elect to be taxed as corporation – “C” or “S”, or partnership

• Principal features include – limited liability for owners, limitations on transferability of interest, limitation on centralization of management


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Entity Choices

MULTI-OWNER

Partnership

LLC

Corporation

Partnership“C” corporation“S” corporation

“C” corporation“S” corporation

Partnership“C” corporation“S” corporation

SINGLE-OWNER

LLC

Corporation



Sole Proprietor


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INCORPORATION COSTS, TAX BURDEN/SAVINGS, AND

COMPLIANCE


16$25

Costs and Compliance - NY State

Costs and Compliance

Sole Proprietorship

Partnership Limited Liability Company

Corporation

Filing requirements

File copy of certificate of doing business as sole proprietor with the county

File copy of certificate of doing business as partnership with the county

File copy of Articles of Organization with NY State Department of State, Division of Corporation

For PLLC further requirements related to education, may apply

Publish notice related to LLC formation or publication of articles of organization in two newspapers in county of business

File copy of Certificate of Incorporation with NY State Department of State, Division of Incorporation


17$25

Costs and Compliance - NY State

$235$450$50$25Total

Costs and Compliance

Sole Proprietorship

Partnership Limited Liability Company

Corporation

Fees $25 to obtain certified copy of D/B/A certificate

$5 for each name search

$20 for name reservation

$25 to obtain certified copy of certificate of doing business as partnership



$200 for Articles of Organization,

$50 to obtain affidavits of publication



$125 for Certificate of Incorporation

$10 for issuance of maximum 200 shares no par value or par value of up to $20,000. Addl. Shares 5 cents per share no par value and 1/20 of 1% for shares with stated par value.


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Components of Taxes

COMPONENTS OF TAXES ON BUSINESS INCOME

Income Tax Filing Fees, Sales Tax, MCTMT

Self-employment, Employment Tax

Federal NY (Franchise Tax) NY FICA and

FUTA

UI-Federal and NY

Employer &Employee

Employer


Business Tax Returns A Snapshot

Attributes Sole Proprietor or

Single member LLC (SMLLC)

Partnership or

Multi-Owner LLC

“S” Corp. or an LLC electing to be a “S”Corp

“C” Corp or an LLC electing to be a taxed as a “C” Corp

Number of Income/ Franchise Tax returns

One each for federal and NY

Tax returns need not be filed if income is below threshold

Two each for federal and NY

Partnership returns must be filed if it has income, gain, deductions or credits


Corporate returns must be filed whether or not there is income


Corporate return must be filed whether or not it has income


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Partnership or

Multi-Owner LLC

“S” Corp. or an LLC electing to be a “S” Corp


Federal Income Tax Forms

Form 1040 together with Schedule C (business income/expense) and Schedule SE (self employment taxes)

Form 1065 - Filed by the Partnership but no income tax or self employment tax is payable by the partnership. It passes all items of income, loss, expenses to the partners by providing them with Form K-1

Form 1040 –After receiving K-1 from partnership, partner files his/her own income tax return reflecting items from K-1 and income from all other sources together with Schedule SE (self employment tax on income and guaranteed payments shown on K-1)

Form 1120S - Filed by “S” Corp. but no income tax is payable by the corporation. It passes all items of income, loss, expenses to shareholders by providing them with Form K-1

Form 1040 –After receiving K-1 from the corporation, shareholder files his/her own income tax return reflecting items from K-1 and income from all other sources

Form 1120 - Filed by Corporation to report and pay income tax on its net income. A “C” Corp, unlike partnership and “S” corp., is not a pass thru entity

Form 1040 –Corporation owner files his/her tax return to pay taxes on income from all other sources.

Unlike in the case of a Partnership and “S”corporation, the corporate return does not impact the personal return


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Partnership or

Multi-Owner LLC



NY State Tax Forms

IT-201 to pay income tax

IT-204 to pay franchise tax

IT-201 individual tax return

NY CT-3S to pay franchise tax


NY CT-3 or CT-4 to pay franchise tax


Filing Deadlines

April 15th Forms 1065 and IT-204 – April 15th

Forms 1040 and IT-201 – April 15th

Forms 1120S and CT-3S – March 15th

Forms 1040 and IT-201 – April 15th

Forms 1120 and CT-3/ CT-4 - March 15th

Forms 1040 and IT-201– April 15th


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Single member LLC

Partnership or

Multi-Owner LLC



Employment Taxes and Payroll Reporting

None unless employees

Note that self employment taxes are paid on Schedule SE along with Form 1040

Note: Sole proprietor never issues a W-2 or 1099 to himself/herself

Partnership - None unless employee

Partner none. Note however that partner pays self employment taxes on Schedule SE along with Form 1040

Note: Partnership never issues W-2 or 1099 to partners

Employee shareholder must be paid salary by the corporation. As such corporation pays its share of FICA, FUTA, UI, withholds employee share of FICA, FUTA. Corporation also files, reports, pays/deposits these taxes quarterly/annually on Forms 940, 941/944, NYS-45, W-4 and issues W-2 to shareholder employee

Employee shareholder must be paid salary by the corporation. As such corporation pays its share of FICA, FUTA, UI, withholds employee share of FICA, FUTA. Corporation also files reports, pays/ deposits these taxes quarterly/annually on Forms 940, 941/944, NYS-45, W-4 and issues W-2 to shareholder employee


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Partnership or

Multi-Owner LLC



Estimated Taxes

Yes quarterly Partnership/LLC –no

Partner/LLC member – yes quarterly

“S” Corporation –No

Shareholder – Yes quarterly

“C” Corporation –Yes quarterly

Shareholder - No

Sales Tax Yes if applicable

Yes if applicable Yes if applicable Yes if applicable


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Partnership or

Multi-Owner LLC



MCTMT No, unless net earnings from self-employment attributable to MCTD exceed $50,000 for the tax year

Yes, partnership provided it has employees and has payroll expense in excess of $312,500 in any calendar quarter

Yes, “S” Corporation provided it has employees and has payroll expense in excess of $312,500 in any calendar quarter

Yes, “C” Corporation provided it has employees and has payroll expense in excess of $312,500 in any calendar quarter

Other Taxes or Filing Fees

Sole proprietor –no

SMLLC – Yes must file Form IT-204-LL by January 30th

and pay fixed dollar annual fee of $25

Partnership and LLC – Yes must file Form IT-204-LL by January 30th and pay fixed dollar annual fee of $25

No No


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Potential Tax Impact* Single Member LLC or Sole Proprietorship

“S”Corporation

“C”Corporation

Partnership

(50% owner)

(1) Gross Income From Business $100,000 $100,000 $100,000 $100,000

(2) Business Expenses $40,000 $40,000 $40,000 $40,000

(3) Salary to Owners by Business Entity N/A $25,000 $25,000 N/A

(4) Less: SE tax deductible by Owner on Form 1040 $3,685 N/A N/A $3,685

(5) Less: SE tax on owner employee salary deductible by Business Entity on 1120 or 1120S

N/A $1,663 $!,663 N/A

(6) Taxable Income on Form 1040 after standard deduction ($5,800), and personal exemption ($3,700)

$46,815 $48,838 $25,000 $46,815

(7) Net Income on Business Tax Return 1120S or 1120 or 1065

N/A $33,338 Not taxable to corp.

$33,338 $93,630 Not taxable to Pship

(8) Income Tax Payable by Owner/ Member/ shareholder on Form 1040 on line (6) above

$7,831 $8,331 $1,904 $7,831

(9) Income Tax Payable by Business Entity on line (7) above

N/A $0 $5001 $0

(10) SE Tax Payable by owner/partner/employee shareholder

$7,370 $1,663 $1,663 $7,370

(11) Total Tax Liability (8)+ (9)+ (10) $15,201 $9,994 $8,567 $15,201

* Assumes single individual, no dependents and only business income. In each individual case, tax impact will vary and will depend on marginal tax rate, corporate rate, other taxable income, filing status, etc.


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Potential Tax Impact

� Tax impact analysis varies among taxpayers and depend on many factors,

• Income from other sources including that of spouse

• Filing status

• Number of dependents

• Objectives for the business

� A careful analysis is required in each individual case

� And we can help you do that


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Other Compliance Requirements

� Four prong test of IRC• Continuity of life

• Limited liability

• Centralization of management

• Free transferability of interest

� Must file election to be taxed as• “S” or “C” Corporation or Partnership

� Must obtain EIN# from IRS


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OBJECTIVES AND PRACTICES


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Objectives and Industry Practice

� Number and types of owners

� Commitment to business

� Owner’s marginal tax rate

� Growth and income potential

� Tolerance to adhere to continuous compliance requirements

� Type of business and industry practice

� IRS four prong entity test


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Common Errors


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Common Errors Upon Incorporation

� No entity election made

� Entity election made with feds but not with State

� Wrong entity election

� Fails to keep records of entity election

� Not obtaining EIN#

� Professional services company incorporated as general business corporation

� Does not meet the parameters of the IRC four prong entity test


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Common Errors After Incorporation

� Not filing tax return� Not filing correct tax return� Compliance with feds but not with NY and vice

versa� Forget to notify changes in business� Owner continues to represent herself/himself as

sole owner� Fail to meet the four prong entity test of IRC� Files wrong return or does not complete all sections

of the return� No minutes of meetings or corporate minutes

maintained


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� Lack of separation of business from individual accounts

� Employee owner/shareholder does not draw compensation from the corporation

� Sole proprietor pays salary via W-2 to herself/himself

� Partnership issues Form 1099 to partners� Partner draws salary via W-2 from partnership� Form 1099 not issued to independent contractors� Notice from IRS and NY DOR ignored


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� No one person or default person assigned to take care of tax and compliance responsibility

� Fails to maintain basis – “S” Corp. and Partnership� Fails to maintain correct tax year

• “S” corporation – calendar year• C” corporation other than Personal Services

corporation can maintain fiscal year• Sole proprietor – use tax year of the owner• :Partnership – must use tax year of majority

partner • LLC – must use fiscal year of majority interest

member


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Why Incorporate?


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Why Incorporate?

� Shield personal assets from business liabilities

� Have “business status” for what you do

� Save on taxes� Potentially provide for estate planning


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Incorporated, Now What Happens?


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What Happens After Incorporation?

� Pay estimated taxes

� Comply with payroll reporting

� Conduct organizational meeting

� Maintain accurate business records

� Maintain corporate records

� Respond to notices from IRS and NY State DOR

� Comply with NY State employment laws

� Ensure permits and licenses are up-to-date

� File biennial/five year statement and pay fees


IRS Audit Rates/Statistics

1.11%1,564,690140,837,499Individual

0.40%13,7703,434,905Partnership

0.42%18,5194,444,154Subchapter S

17.64%10,45959,291Large Corporation

1.02%19,6971,931,008Small Corporation

Percentage Audited Returns AuditedReturns Filed

(Prior Calendar Year)

By Tax Filing Type FY 2011


IRS Audit Rates/Statistics

9.77%0.01%$10,000,000+

6.47%0.02%$5,000,000-$9,999,999

4.02%0.23%$1,000,000-$4,999,999

2.98%0.43%$500,000-$999,999

1.92%2.25%$200,000-$499,999

0.98%8.69%$100,000-$199,999

0.69%7.99%$75,000-$99,999

0.69%13.44%$50,000-$74,999

0.72%24.31%$25,000-$49,999

0.90%40.51%$1 - $24,999

2.15%2.13%No adjusted gross income

Percentage of Returns Audited Percentage of Total Returns Filed

By Income Level for Individuals (2009)


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Useful Weblinks

� Federal• www.irs.gov

� NY• www.dos.ny.gov

• www.tax.ny.gov

� Small business administration• www.sba.gov

� H & R Block

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