https://www.tormey.org/business3.htm
LLC’s, Corporations, And
Other Business Structures - Part III:
Written By New York Entertainment Attorney
And LLC Counsel
John J. Tormey III, Esq.
This article is not intended to constitute, and does not constitute, legal advice with respect to your particular situation and fact pattern. Do secure counsel promptly, if you see any legal issue looming on the horizon which may affect your career or your rights. What applies in one context, may not apply to the next one. Make sure that you seek individualized legal advice as to any important matter pertaining to your career or your rights generally.
Part II
of this article discussed
how individuals historically incorporated
their businesses in the hopes of avoiding personal liability, but then
often became dissatisfied with the so-called “double taxation”
thereby resulting. This, among other motivations, brought the S-corporation
and then, the limited liability company (LLC), into being. As a New
York entertainment lawyer practicing in this day and age, I most often
see limited liability companies (LLC’s) as opposed to other forms
of entities used in film, music,
television, publishing,
and Internet businesses.
However one cannot understand and appreciate the advantages typically
provided by the limited liability company (LLC) unless superimposed
as bas-relief upon the entity’s historical context – which
gives further meaning to the LLC across all sectors and industries including
entertainment and media.
Society clearly benefits from encouraging people to start businesses
- and take some commercial risks without an attendant risk of personal
ruin. Yet otherwise well-intentioned and well-motivated people were
either quitting businesses or exposing themselves to personal liability
- in both instances due to their aversion to the so-called “double
layer of taxation” engendered by the C-corp. Additionally, the
“double” taxation of the C-corp was creating a disincentive
for new people to go into business - particularly those who were risk-averse.
There had to be a better way.
That better way, at the time, was the S-corp, which came
into existence a number of years ago principally for the above types
of reasons and rationales. It was named after a “Subchapter-S”
in the Internal Revenue Code of the United States, and was regularly
recognized by the IRS and state tax authorities alike. One of the familiar
tasks for a
That better way, at the time, was the S-corp, which came into existence
a number of years ago principally for the above types of reasons and
rationales. It was named after a “Subchapter-S” in the Internal
Revenue Code of the United States, and was regularly recognized by the
IRS and state tax authorities alike. One of the familiar tasks for a
music lawyer, film
lawyer, television lawyer, publishing lawyer, or
other form of entertainment
lawyer became the act of ensuring that clients timely made their
appropriate S-corp elections (see below) with appropriate governmental
authorities – hardly the romantic notion one would have of
what it is like to interact with talent and go to celebrity premieres.
Akin to the C-corp in most other respects, the S-corp only mandated
a single layer of taxation, as opposed to the C-corp’s double
layer of taxation. But there were also a few catches.
One had to make a formal written “election” (or in some
cases, “elections”) to qualify as an S-corp. If one didn’t
do so in time by a strict deadline, one would lose S-corp status and
be “doubly” taxed like a C-corp instead. As most entertainment
lawyers can attest, this kind of eventuality
could actually snuff
out a fledgling entertainment or media start-up
business in its first years of existence, already engaging in risky
and speculative business activity as is often the case in media and
entertainment.
There were other restrictions on S-corps, too, such as a limit on the
number of shareholders, a limit on foreign ownership, and a limit on
corporate parent-subsidiary ownership. Some of these restrictions have
been loosened - and in some cases eliminated - in recent years; so one
should not rule out the S-corp without first updating its tax code requirements
with one’s lawyer – entertainment
lawyer or otherwise – as well as one’s tax accountant.
The historical restrictions of the S-corp put business owners in a “Catch-22”
situation - they clearly wanted a single layer of taxation, but in the
context of an entity that wasn’t so restricted. The newer solution:
scrap the idea of a corporation at all, and instead form a limited liability
company, or LLC.
The limited liability company (LLC) is akin to the S-corp but without
most of the attendant historical restrictions. Yes, there were a certain
number of restrictions on the LLC, too, when it first appeared on the
scene - most of which were subsequently lifted by either the IRS or
state legislatures, or both. Again, S-corp restrictions have also been
lifted in recent years, making the S-corp and limited liability company
(LLC) look more similar to each other as time goes on.
But even as of this writing, the limited liability company (LLC) is
usually considered the most advantageous entity from a tax perspective
of all three most commonly available forms, for the small business owner
to create. As a media and entertainment lawyer, the LLC is the entity
which I am most often asked to create. The LLC is also considered the
most flexible of all three entities. What does “flexible”
mean? Well, it is considered easier to adapt the LLC to later-occurring
additional equity-holders in one’s business, for example, which
is another familiar task for an entertainment lawyer in the context
of artistic co-ventures - and the word “easier” in this
context translates to “less legal fees”. The LLC is in most
cases an entity which is easier to manage and administrate.
There are some disadvantages to the limited liability company (LLC),
too. The LLC can take more time to finalize, and in some cases can be
more expensive to form and/or file with the government - as compared
to an S-corp. Some states historically prohibited one-person LLC’s.
Some states still have an underdeveloped body of judicial case law on
the LLC, since the entity is still quite new in many states - so the
treatment of the LLC under the law may be less certain than the treatment
of a corporation. We in New York have an odd restriction, too, as a
result of the powerful newspaper and media lobby galvanized during the
legislation’s enactment which as a media and entertainment lawyer
I suppose that I should not begrudge. This restriction may be present
in another state or two as well in analogous form. The restriction is
this: if one elects to form a New York LLC, one must publish
its existence in periodicals for a number of weeks, before being accorded
the legal privilege of initiating a litigation - as a plaintiff - in
the LLC’s name in the New York courts. Publication of an LLC’s
naissance in Manhattan is expensive - the publication of a limited liability
company in periodicals of the creation of a proposed Manhattan LLC can
range between $1,000 and $3,000 (the figures can vary and are smaller
in other parts of New York State apart from Manhattan).
Even so, the limited liability company (LLC) is considered the trend-setting
entity of those “in the know”, across the country. As an
entertainment lawyer in New York, I have noticed that hipster Californians
gravitate to LLC’s just as much as hipster New Yorkers seem to
do. And part from hype, assuming that one can afford to form an LLC,
and assuming that one can live with whatever restrictions apply to the
LLC in one’s jurisdiction, it may in fact be the entity of choice,
and an improvement over the older S-corp and C-corp structures.
A limited liability company (LLC), though frequently mistaken
for a corporation, is technically not considered a corporation –
rather, it is an unincorporated entity under the tax code, more like
a partnership than anything else, but one that (like the S-corp and
C-corp), if properly formed and maintained, should provide its members
with insulation against personal liability.
If one doesn’t incorporate or form a limited liability company
(LLC), the business will likely be what is known as either a sole proprietorship
(if a one-person company), or a general partnership, de facto or otherwise,
(if comprised of two or more persons). Any entertainment lawyer or other
lawyer will opine that this could result in unlimited personal liability
for the entity’s owner or owners. Again, that means that an owner’s
personal assets can be at risk to satisfy the obligations and debts
of the business. Any entertainment lawyer or other lawyer will opine
that personal liability is not a risk worth taking. In addition, using
a corporate entity or limited liability company (LLC) – particularly
an LLC in this day and age - could add a good deal of “cachet”
or credibility to one’s business endeavors, in the eyes of other
persons and companies
with whom the business has contact.
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