Business Organization in New York: For-Profit versus Not-For-Profit Corporations
The incorporation or organization of an entity as either a for-profit or not-for-profit corporation carries significant benefits over an unincorporated entity, including personal asset protection, additional name and brand protection, taxation flexibility, deductible expenses, and perpetual existence. Depending on the intended purpose and structure of the entity, it may qualify for not-for-profit status, which significantly decreases the taxes assessed against the entity, but limits the scope of certain aspects of its operation, including mandating certain aspects of management and limiting distribution of profits and other activity. Whether an entity wishes to organize as a for-profit or not-for-profit corporation, working with a skilled attorney experienced in business organization is always recommended.
The significant differences between For-Profit and Not-For-Profit Organizations include: how they are taxed, how profits of the organization can be distributed, the management requirements for the organization, and the formation process for the organization.
Taxation of For-Profit vs. Not-For-Profit Corporations
The largest difference between for-profit and not-for-profit corporations organized in New York are the ways in which the entities are taxed. For profit corporations may be subject to corporate income tax, as well as New York’s separate “corporation franchise tax” which is defined as a tax on the right or privilege of doing business in the state. These taxes can be structured based on a flat fee, or on a business’s net worth.
New York has a corporation franchise tax, applying to both C-Corporations and S-Corporations in the state, as well as a tax known as the “filing fee” which applies to other organizations including LLCs, LLPs, and some regular partnerships. In addition to corporate taxation, any income that passes through an entity to an individual personally will be subject to taxation on that person’s New York tax return as well.
For traditional corporations organized in New York, the amount of corporation franchise tax which is due is the highest of four amounts: (1) a certain percentage of the corporation’s entire net income, or ENI; (2) a certain percentage of the corporation’s business and investment capital; (3) a certain percentage of the corporation’s maximum taxable income, or MTI; or (4) a fixed dollar minimum, or FDM, tax. The Entire Net Income of a corporation is based on federal taxable income with certain modifications which are specific to the State of New York. Business and investment capital is the total investment and business capital allocated to New York State, after deducting liabilities which are attributable to the corporation’s assets. The Minimum Taxable Income, or MTI, is a business’s entire net income allocated to New York State, plus certain federal tax preferences and adjustments which are allocated to the state. Fixed Dollar Minimums, or FDMs, are based on a corporation’s New York State receipts on a tiered system. Corporations may also be subject to the state’s subsidiary capital tax, as well as the metropolitan business tax which applies to any business with specific connections to the Metropolitan Commuter Transportation district.
It is important to note that New York does not recognize the federal S-Corporation election, so to be recognized as such, the organization must file a New York election form in addition to the federal S-Corporation election form. If the corporation does not properly file for S-Corporation status with the State of New York, the state will tax the entity as though it were a traditional C-Corporation.
Not-for-Profit Corporations, unlike For-Profit Corporations, may file for tax exemptions depending on which type of not-for-profit organization type they organize under. Because the type of organization, Type A through Type D, has implications on taxation and other factors, it is imperative that a New York attorney be consulted before organizing to ensure compliance with all relevant regulations.
Distribution of Profits
If a for-profit corporation makes a profit, it can choose to either retain the earnings in the company as part of its operating capital, or it may elect to distribute the profits as dividends to shareholders.
In contrast, dividends are prohibited for not-for-profit corporations. A not-for-profit corporation may not distribute any part of its income or profit to its members, directors, or officers. It may pay compensation in a reasonable amount to its members, directors, or officers for services rendered, and may make distributions of cash or property to members upon dissolution or final liquidation, however. No person who may benefit from such compensation may participate in any deliberation or vote concerning such person’s compensation. A not-for-profit corporation may confer benefits upon members or non-members in conformity with the corporation’s purpose as well as make other distributions of cash or property to its members or former members, directors, or officers prior to dissolution or final liquidation as authorized by state law, except when the corporation is insolvent or would be made such.
Another difference between for-profit and not-for-profit corporations is the management styles required by statute, with not-for-profit corporations being more heavily regulated and requiring management by its board of at least three directors, each of whom must be at least eighteen years of age.
While a for-profit corporation typically has shareholders in addition to its board of directors, a non-profit corporation does not. Instead, it may elect to have members, which grant certain rights such as the power to vote for directors and approve significant corporate activity such as mergers or sales. Many non-profits do not have members due to the required formalities and paperwork, and those that choose to have members often elect to be board-driven with members holding limited or no rights.
All corporations have basic requirements for formation, and for-profit and not-for-profit corporations have additional requirements which designate their status as for-profit or not-for-profit entities.
In order to form a for-profit corporation, the entity must choose a name which includes “Incorporation,” “Incorporated,” or “Limited,” or an abbreviation thereof. The corporation must also file a Certificate of Incorporation which is filed with the New York Secretary of State. Every New York corporation must appoint the New York Department of State as its registered agent for service of process in the state, and the corporation must also create and maintain a records book in which all important papers are kept, including minutes of director and shareholder meetings, stock certificates, and stock certificate stubs. The corporation must also prepare corporate bylaws, which are an internal document which set the basic ground rules for operation, as well as appoint initial directors who will serve on the board until the first annual meeting of shareholders. A for-profit corporation must also hold its first board of directors meeting to adopt bylaws and settle administrative matters, and must also issue stock. Due to the complexity of the requirements to properly form a for-profit corporation in the State of New York, it is highly recommended that any entity wishing to organize in the state do so with the assistance of an experienced attorney.
A not-for-profit corporation is unique in that its formation depends on the purpose of the entity’s organization, which is guided by statute. A not-for-profit corporation can organize as a Type A, Type B, Type C, or Type D corporation class, and each type will influence the requirements in formation and operation of the entity. Due to the complexity of statutory guidelines for incorporating a not-for-profit corporation in the State of New York, it is highly recommended that any entity wishing to organize as such consult with an attorney prior to filing its certificate of incorporation.
Seeking Knowledgeable and Experienced Counsel
The incorporation or organization of an entity as either a for-profit or not-for-profit corporation carries significant benefits over an unincorporated entity, including personal asset protection, additional credibility and name protection, perpetual existence, tax flexibility, and deductible expenses. As such, it is in most entities’ best interest to incorporate in one form or another.
Depending on the intended purpose and structure of the entity, it may qualify for not-for-profit status, which would significantly decrease the taxes assessed against the corporation, but limits the scope of aspects of operation, such as mandating certain aspects of management and limiting distribution of profits and other activity. If a corporation is eligible to organize as a non-profit, the benefits significantly outweigh most burdens, making it an attractive option for an entity’s organizational structure. Due to the complexity of the statutes involved in the organization process as well as the requirements to obtain not-for-profit status recognized by the IRS as well as the State of New York, it is highly recommended that any entity wishing to organize do so with the assistance of an experienced attorney. The attorneys at Urban Thier & Federer, P.A. are knowledgeable in business organization and transactional matters and are available for a consultation.