Entrepreneurs Push Back Against Rising LLC Fees

Entrepreneurs Push Back Against Rising LLC Fees

ANGUS LOTEN and RHONDA COLVIN

Updated Feb. 12, 2014 7:48 p.m. ET

Patrick Lewis filed paperwork to incorporate his mobile-app design firm in New York state late last month, paying the state-required $200 fee up front. No problem.

But the 24-year-old software designer faces another hurdle to incorporation. Under state law, he must arrange to print a notice in a local newspaper within four months that announces his firm, Butterscotch Labs LLC, is officially open for business. That will cost an additional $2,000, or about as much as four months’ rent for a typical New York City work space, he says.

“When you start a business your most valuable resources are time and money, and this weighs on both,” he says.

The burdens and costs related to limited liability companies, or LLCs—a popular legal category for businesses that passes profits through to individual owners’ personal taxes while shielding them from liability for corporate debts—are drawing complaints from some entrepreneurs around the U.S. They question why they should have to pay hundreds, and sometimes thousands, of dollars just to incorporate.

The number of LLCs has boomed since the 1990s, when most states first enacted LLC laws as an alternative to corporations or partnerships. For instance, more than half of the roughly 8.4 million businesses formed between 2004 and 2007 were LLCs, ranging from a low of 35% in Illinois to more than 90% in Connecticut, according to a study by Liberty University School of Law. In Illinois, where state-required filing fees are among the highest in the nation, more than 29,000 businesses filed as LLCs last year, up from more than 27,000 in 2012 and roughly 25,000 in 2011, according to the Illinois secretary of state.

State officials and state lawmakers say they are eager to demonstrate they are doing everything they can to encourage new business creation. On Jan. 29, Illinois Gov. Patrick Quinn proposed cutting the state’s LLC filing fees from $500 to just $39, arguing that “small but important step will encourage entrepreneurs to start their business and put more people to work.” In Massachusetts, two separate bills, introduced last year, would cut the state’s $500 filing fee in half for businesses with fewer than six employees.

Under the current New York law, entrepreneurs not only have to pay for the notice but also ensure that it is published within 120 days of incorporation—and, by law, before their firm’s first sale. Rachel Hofstetter says she was surprised to learn last year that she would have to shell out $2,000 after incorporating a firm that converts photos of friends and family into keepsake wedding-day magazines. “It cuts into your costs,” says the 29-year-old, who launched Guesterly LLC with her husband and roughly $10,000 in savings: “You’re talking about 20% of our entire budget,” she says of the additional notification cost.

Many entrepreneurs dip into their personal savings to cover the outlay. The cost of publicizing New York LLC notices alone cost the state’s entrepreneurs more than $40 million last year, says Nehal Madhani, whose New York-based service, PlainLegal, connects small-business owners with lawyers. “There are plenty of things you already have to spend money on when you’re starting a business,” such as product development and recruiting, adds Mr. Madhani, who is lobbying to eliminate the publication requirement.

In January, lawmakers in New York introduced a bill that would eliminate the publication requirement, charging instead a basic $200 filing fee and a $50 fee that would allow entrepreneurs to post their LLC notices on the website of the secretary of state, like new LLCs in most other states. Other states with similar LLC notice requirements include Arizona, Pennsylvania and Nebraska, though the costs tend to be lower.

In Springfield, Ill., Frank Kopecky, owner of Kopecky Accounting LLC, says he didn’t give LLC filing costs a second thought when he incorporated in 2005 because the idea of establishing limited liability—that is, protection from business debts—was important for him. Now that he represents more than 100 small- to mid-size Illinois companies, Mr. Kopecky says he sees how the costs can weigh on a business owner’s decision making.

“I actually have some clients that choose [their business’s legal category] based on the secretary of state’s fee,” Mr. Kopecky says. “Say they’re a startup business. They don’t know what’s going to happen, so they’re watching their costs.”

He supports the governor’s proposal to lower the fees, adding: “Whatever we can do to keep the cost down is a good idea.” But he advises owners not to make incorporation decisions based on the filing fee alone.

Dane Stangler, a researcher at the Kauffman Foundation, a Kansas City, Mo., advocacy group for entrepreneurship, says that overall U.S. business creation dropped sharply during the recession and then picked up again by 2011. Startup rates are still lagging far behind where they were from 2000 to 2006, according to the latest data.

But that probably has less to do with filing fees than with the housing-market crash and the aging baby-boomer population. “There are longer-term forces at play than a few hundred bucks,” he says.

Jim Norris, co-owner of Propel Doors LLC, a Springfield company that makes automation systems for sliding barn and shed doors, says that LLC fees don’t amount to much when compared with other costs, such as workers’ compensation. “I really don’t see that stopping anyone that’s really trying to get a business off the ground,” he adds.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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