Under NY Business Corporation Law (“BCL”), a corporation is formed in New York by filing a Certificate of Incorporation with the NYS Department of State. Individual shareholders will not be held personally liable for the debt of the corporation unless the “corporate shield” can be pierced. The corporate shield can be pierced in New York if a court finds that the corporation was an alter ego of the shareholders, it was grossly undercapitalized, if personal and corporate funds were intermingled, or if there was a disregard of corporate formalities (e.g., shareholder minutes, setting forth Bylaws, annual Board of Directors meetings).
The owners of a corporation are called “shareholders, who own “stock”. The corporation should memorialize Bylaws setting forth the procedure for shareholder to elect the Board of Directors. The Board of Directors will then elect officers (e.g., President, Vice-President, Secretary, and Treasurer). The Board of Directors is charged with management responsibilities of the business.
C-Corp, S-Corp, and B-Corp – Picking the Right One
There are three main types of corporations for tax purposes: C-corporations (“C-corp”), S-corporations (“S-corp”) and B-corporations. C-corps and S-corps are the most common types of corporation for New York farms and agri-businesses. Each have its own inherent advantages and disadvantages.
C-Corporations (“C-Corps”) were once favored by the estate and business-planning community. The advantages to C-Corps include limited liability to share-owners, tax deductions not available for other types of entities, and a low tax rate on the first $75,000 of income made. However, the C-Corp has some built-in disadvantages, particularly if it has highly-appreciated land in it. C-corps are taxed twice: (1) the corporation will be taxed on its earnings for the tax year and (2) the corporation’s shareholders will be taxed on their distributions from the corporation. Reasonable employee salaries can be paid to help reduce corporation taxes. A company must be a C-corp to be a publically traded company.
S-Corporations (“S-Corps”) are a meld of partnership principles and the limited liability of corporations. Like partnerships, the S-Corp passes through the losses and gains to the shareholders, so it is not subject to the double tax problem that C-Corps face. So what exactly is a “pass through” tax? If the S-Corp makes $100K in profit, then the shareholders will pay taxes on that $100K even if the monies are kept in the business. S-Corps are limited to a certain number of shareholders, and they do not offer all the tax advantages available with a traditional C-Corp. This election is only available to small business corporations.
B-corps (“Benefit Corporations”) must have an underlying purpose of a general public benefit as defined in Article 17 of the NY Business Corporation Law. This is a fairly new type of business structure and has been available in New York since February 2012. Under Section 1708, a B-corp must give its shareholders an Annual Benefit Report.
Every food and agriculture operation should have a “sit down” with their lawyer to talk about choice of business entities. Perhaps a corporation isn’t the best choice! Be informed. For more information, check out my book on Amazon.com– I have a whole chapter dedicated to business entities.