S Corp Bylaws and ao on

[erchess]

Client of mine who has been Sch C is becoming Corp at the behest of a company with which it will share some clients.The other firm will handle web based advertising and my client will handle printed advertising. The actual printing will be handled either by the periodicals in which ads appear or a third company which does so much printing for itself that it in order to save money prints for others at pretty much its cost provided that other firms deal with the customers. I don't know why the web based advertising company does not want to deal with an unicorporated business. Both companies will have clients not shared with the other and whenever a client is shared the company that found the client will receive $100 from the other company.

In this scenario I have a number of questions.

The most immediately pressing is whether the Bylaws and other founding paperwork for this corp can be safely for both of us written by me and my client or whether I had better tell him to pay a lawyer to write them. Do they have to be written before we go on the NC Secretary of State Website?

The owner of the Graphics Design Company is under the delusion that because he runs all his items of income and expense through Pay Pal he is not required to report the income for tax purposes Federal or State. He does appear to be sincere in this belief. There was discussion of the two forming a partnership but discussions bogged down over the issue of tax reporting. My client is a straight arrow guy who is really the only client I have who does literally everything I tell him to. Does the relationship I have outlined jeapordize me or my client?

Is there any problem becoming Corp at just past midyear? I realize that cone 2012 I will need to file a corp return for the possibly short calendar or fiscal year on the fifteenth day of the third month following the end of the year and his individual return with the Sch C will need to be filed or extended by 4/15.

[Gary2]

The most immediately pressing is whether the Bylaws and other founding paperwork for this corp can be safely for both of us written by me and my client or whether I had better tell him to pay a lawyer to write them. Do they have to be written before we go on the NC Secretary of State Website?

The issue of practicing law without a license pops into mind. Even if it's not illegal under your local law, the mere fact that you have to ask whether they need to be written before going to the Secretary of State suggests that you should be leaving this to people with expertise.

I discourage people from relying on real estate agents for tax advice. I think the same goes for relying on non-lawyer tax professionals for non-tax legal advice.

[oceanlovin'ea]

Llc

My first suggestion would be that he set up and LLC and chose to be taxed as an S corp.

He is a legal entity with the state but avoids the complicated corporation bylaws and meeting requirements of a corporation.

Linda, EA

[ChEAr$]

Formerly I would have gone the full corporation route, choosing S status of course. But nowdays, it's so much simply to form an LLC and elect S corp status.

However, to pick a nit with LInda, "He" may not become an LLC. He must form an LLC or corporation and then take steps to transfer/sell assets into the new entity. For this, then, legal services are needed unless you have experience in such matters (which I do.)

You just have to make sure your client dots the "i"'s and crosses the "t"'s.

(A lot of people think that they may "become" a corporation! Just don't work that way.)

[erchess]

I appreciate the advice

There seems to be consensus that I should involve a lawyer, which is where my thinking was already leaning. There also seems to be consensus that LLC is the way to go, when I was thinking that they were too new and their track record at providing a "corporate shield" was spotty.

I have picked up several clients who were or rather thought they were S Corps. Some were born with help of an attorney and others were not but in literally every case the S Election had not been filed with the IRS but I was able to fix that. I have not run into a client with whom the Secretary or State or the State DOR had a beef at the time the client came to me. I have never had a client who had an LLC but with the lawyer creating the entity and titling the assets all I have to do is order the stock certificates, advise the client on how to be taxed, make the S election timely and prepare the returns.

A single member S Corp can elect to be taxed as a Sole Proprietor. As long as we're talking about a small amount of profit isn't that the most reasonable way to go? Then we can make the S Election for the first year in which it looks like profit may be sufficient to allow a dividend instead of the entire amount on a W-2.

[JohnH]

Part of the LLC question revolves around whether they may be doing business out of state. Some states have odd laws concerning single-member LLC's, for example, which might be different from those of the home state.

But if they're certain that all business will be in the same state, then an LLC might be the better choice due to simplicity. Although in NC the LLC annual fee is $200, whereas the Franchise tax + Annual Report fee can be as low as $55.

[erchess]

Out of State

We're within an hour of TN and SC borders and maybe three of the Va border so it's not inconceivable that some clients will come into NC from those states to do business with him. He also does business electronically with people all over the US. On the other hand, there are no current plans to set up other offices at all much less set them up in other States. It would strike me as reasonable to set things up for now and make changes when and as needed but as we all seem to agree I need him to get legal advice.

[Gary2]

A single member S Corp can elect to be taxed as a Sole Proprietor.

Not exactly. A single member S-Corp can't result in a Schedule C. It has to treat an active owner as an employee, meaning a W-2, filing employment tax returns (940/941), paying withholding, FICA and FUTA (or state unemployment), etc. That's in addition to having to file the 1120-S. Being able to treat some of the profit as dividends as opposed to wages doesn't reduce the paperwork burden. The owner will wind up with an ordinary wage entry on line 7 along with a Schedule E. Hopefully all the expenses will be taken by the S-Corp, and not as employee business expenses (which would have to go on Schedule A).

A single member LLC can choose whether to be taxed as an S-Corp (same as above) or as a Sole Proprietor, reporting on Schedule C with no return comparable to the 1120S. Assuming there are no other employees, there won't be any employment tax returns.

[erchess]

Nice catch Gary

I meant a single member LLC. I guess I'm more brain dead than I thought this afternoon.

[veritas]

From North Carolina Bar

Q: What is the practice of law?

The North Carolina state legislature has defined the practice of law in North Carolina as:

• performing any legal service for another person, firm or corporation, with or without compensation;

• preparing court documents;

• assisting in legal work; or

• advising another person, firm or corporation about their legal rights. (N.C. Gen. Stat. § 84-2.1)

This statute and two other statutes identify specific activities as the practice of law that may be performed only by attorneys. (N.C. Gen. Stat. §§ 84-4 and 84-5). The list of specifically identified activities that constitute the practice of law includes:

• Abstracting and passing upon titles to real estate;

• Organizing corporations;

• Preparing or aiding in the preparation of deeds, trusts, wills or other legal documents;

• Preparing or aiding in the preparation of probate petitions and accountings;

• Preparing or aiding in the preparation of court pleadings; and

• Appearing in court or before any judicial or quasi-judicial body on behalf of another.

This list of specific activities is provided only as examples. Any activities involving the preparation of legal documents, giving legal advice, or providing legal services for another constitutes the practice of law.

Q: What is the unauthorized practice of law?

The unauthorized practice of law is engaging in the practice of law in North Carolina or advertising or otherwise holding out to the public of an ability to provide legal services by someone other than a licensed North Carolina attorney. The unauthorized practice of law is illegal because a person who is not trained and licensed as an attorney may seriously harm the interests of a member of the public by providing incompetent legal services.

[erchess]

Interesting and Useful

Thank you Veritas for posting that from the NC Bar. We had already I think reached consensus that bringing an entity into existence would constitute practice of law but if any doubt remained it is gone now. It may be that my client by himself and for himself could do this - I certainly have clients who did - but I can't afford to so much as suggest that he visit the SOS Website nor can I be in the position of suggesting to a client any course but hiring a lawyer. On the other hand, I think that NC Bar is somewhat over reaching on two points.

When an EA or a CPA represents a client before the Appeals Division of the IRS or a state or local agency, is that not a quasi judicial hearing? And yet it is specifically allowed by Federal Statute and is a common occurrence.

When anyone gives tax preparation, planning, or advice, are they not offering opinions on what the tax law is? Again the practice is both justified by statute and a common occurrence even for those who soon will be Registered Return Preparers.

[oceanlovin'ea]

I don't think it is wrong for you to give them websites where they can get the forms to set up their legal entity or who will do that for them for a nice price. Some prefer to do that than go to a lawyer. You would merely be giving him his options as to how he can set up the company.

I think you can tell him the tax benefits and consequences of sole prop, LLC's taxed as sole prop or as s corp or a partnerships and corporations taxed as C or S. That would be part of your responsibility as their tax professional. You would want to do this before they actually set up the business. As we all know, clients come to us after the fact and we have to deal with the mess. So explain the differences and then let him set up the company. He can come back then and you can help him with the bookkeeping and tax aspects.

Linda, EA

[JohnH]

I'm thinking about out of state operations from a legal standpoint. If the single-member LLC isn't recognized in one of the other states, then the limited liabllity protection might not apply for services performed there. Also, if that state doesn't recognize a single-member LLC, then your client would not have access to that state's courts in the event the client needed to sue someone in that state.

I think single-member LLC's are good if the activities are in-state only, but when operating across state lines a single-member LLC can be a roll of the dice.

[Davc]

The unauthorized practice of law is illegal because a person who is not trained and licensed as an attorney may seriously harm the interests of a member of the public by providing incompetent legal services.

Whereas, a person who is trained and licensed as an attorney may seriously harm the interests of a member of the public by providing incompetent legal services but at least they're doing it as a licensed attorney!

[veritas]

No doubt

Whereas, a person who is trained and licensed as an attorney may seriously harm the interests of a member of the public by providing incompetent legal services but at least they're doing it as a licensed attorney!

........