Forming a Business Corporation in New York State- Stock Structure Question

[kyleqi]

Helloooo everyone,

I have a question and hopefully this community can help me out.

Background:
The standard New York incorporation generally provides for 200 non par value shares, which is far beneath the needs of our company that chose the corporate route (IPO, multiple traunches of capital, stock options, etc.)

Indeed, the 200 share threshold is only useful for â closed corporations (i.e., private corporations with a handful of shareholders, such as the family company). In a scenario that requires the grant of stock to a variety of founders, consultants, angels, and other parties, it is immediately clear that 200 shares will not suffice for our company. In such a scenario, the capital stock supply will have to increase to meet the various early stage growth demands.

Further Info:
New York State imposes a share tax on the issuance of new shares.

New York State imposes a share tax on the issuance of non par value shares that can be as high as $.05/share. So if there is a new company that was formed with the standard 200 share form, but now needs 10,000,000 shares to satisfy its needs, it will have to file a certificate of amendment with the New York State Department, enlarging its capital stock pool.

Although this seems simple enough, if the share pool was increased from 200 non par value shares (non par value means there is no minimum price at which the corporation is obligated to sell the stock) to NPV 10,000,000 shares, the corporation would be hit with a share tax, under section 180 of the New York Tax Law, of $.05/share minus the original share tax paid upon formation of the corporation (which in this case means $500,000 less $10 = $499,990). Obviously, that is not a palatable situation for any company, mature or otherwise. One has to be aware of this tax to properly structure their capital stock pool accordingly.

Main Question:
New York Tax Law Section 180- Organization Tax; Taxes on Changes of Capital
New York Tax Law Section 180 - Organization Tax; Taxes On Changes Of Capital. - New York Attorney Resources - New York Laws

An alternative is to issue stock with a minimal par value. Hence, in the above example, the corporation can opt to issue 10,000,000 shares of stock with a par value of $.001/share. This will only make them liable for a $10.00 tax under section 180.

Is this a good idea or otherwise what would you suggest?

Thank You All!!

New entrepreneurs can wrestle with the question, "limited liability company vs S corporation." But the confusion and hand-wringing is unnecessary

The Answer is Always "LLC"

If someone really, truly has a choice between a limited liability company and an S corporation, or Subchapter S corporation, the business can and should be operated as an LLC.

Here's why: A Subchapter S corporation isn't actually a real corporation. Rather, an S corporation is a tax accounting classification that's available to a variety of entities, including regular corporations, limited liability companies, and several other possibilities, too.

This reality--the fact that an S corporation is really a tax accounting classification--simplifies the decision if someone is trying to choose between an LLC and an S corporation. You can select the limited liability company option in this case. Why? Because you can elect to have the limited liability company treated for tax purposes as an S corporation.

To elect Subchapter S corporation tax accounting treatment, you file a 2553 form with the IRS. Some states (including Pennsylvania and New York) require their own separate state S election.

One quick aside: If you don't make an S election for an LLC, the LLC gets treated as "something else" for income tax purposes. An LLC with more than one owner is a partnership, for example. And a limited liability company with a single member is treated, typically, as a sole proprietorship.

But "LLC vs S Corp" Question May Be Wrong to Ask

An important point needs to be made about the whole "limited liability company vs. S corporation" question, however.

Sometimes, what people are really asking is whether a new business should be formed as a limited liability company or as a regular old-style corporation. In other words, the right question may be "LLC versus corporation."

As mentioned earlier, both LLCs and corporations can make an election to be treated as an S corporation. Accordingly, the decision to form an LLC is totally disconnected from the S corporation election. But there are still reasons to incorporate...

A Good Reason to Incorporate

Probably the best argument for a regular, old-style corporation is that stakeholders (like customers, employees or vendors) expect a corporation rather than a limited liability company.

Sometimes this preference for a corporation flows from a feeling that a business with the name "Acme Incorporated" just seems more solid than a business with the name "Acme LLC."

However a caution is in order here: Many entrepreneurs use a corporation rather than an LLC because they don't know enough about LLCs. The preference for a regular corporation may indicate the entrepreneur lacks sophistication.

Reasons to Choose LLC Formation

Finally, it's important to note that as compared to a regular corporation, LLCs offer up some big benefits.

For example, one big benefit already hinted at concerns the tax flexibility of an LLC. A limited liability company can be treated as a partnership, a sole proprietorship, a regular corporation, or an S corp.

A common tax planning technique with LLCs is to keep things simple in the beginning by operating as, for example, a sole proprietorship. Then, after the business is running along profitably, an S election can be made. This flexibility is unique to a limited liability company.

Another big benefit of the limited liability company concerns the safety of the ownership interest. As a general rule, shares of stock in a corporation can be seized by creditors of the shareholder. In other words, if some shareholder goes bankrupt or gets sued, that shareholder's shares will probably end up in some other person's hands.

In many states, however, member interests in a limited liability company can't be seized. Rather, the best an outside creditor can do is get a judge to order that money the LLC disburses to the LLC member go instead to the creditor. These orders, called "charging orders," mean than a business or investment owned via an LLC is actually much safer in many cases than a business or investment owned via shares in a traditional corporation.

[Barkri12]

There is a cliché that you should never go into business with your friends because they will soon become former friends. This is particularly true with business entity formations.

Starting a business is a positive move. One tends to think of the success you will have and how great things are going to be. While this is natural, smart business planning also requires you to consider the potential for things to go poor. If you form a corporation or limited liability company for your business, this can be particularly true.

Assume you and a couple of friends come up with a great business idea. You jointly agree you should form a corporation or LLC to make sure you are all protected if things go poorly. This is a smart move for a wide variety of reasons, but you need to take extra steps.

When forming a business entity, most people are worried about getting sued for something. This is known as an external risk concern, to wit, a customer or vendor sues your business for doing something wrong. There is, however, also an internal business risk that most people don’t think about.