Proposed bill would allow S-corps to represent themselves in court

In this September 19, 2019, file photo, the North Carolina State Capitol is pictured. (NSJ file)

RALEIGH — A group of Republican state Senators have proposed a new bill that seeks to level the playing field when it comes to allowing certain small business owners to defend themselves in court without having to hire an attorney. Senate Bill 38, The Small Business Owners/S Corp Fairness Act, would impact businesses organized as S corps which are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations typically report the income and losses on their personal tax returns and are assessed tax at their individual income tax rates. Under SB 38, business owners could represent themselves as long as they’re the sole owner and the amount involved in civil court is less than $25,000.

The text of the bill reads, in part: “S Corporations may be represented by and appear in court in this State using a nonattorney representative who is the sole owner of the business entity if the owner files an affidavit with the court providing that the owner’s interest in the business entity is one hundred percent (100%). This subsection applies only to the trial of civil actions in which the amount in controversy is twenty-five thousand dollars ($25,000) or less.”

The bill was initially introduced in February by Senators Michael Lazzara (R-Onslow), Jim Perry (R-Lenoir) and Todd Johnson (R-Union). It passed the Senate unanimously 47-0 but is currently stuck before the House Rules Committee where it has been sitting for several weeks. Some sources involved with SB 38 express skepticism it will ever see the light of day, saying it could potentially sit in the Rules Committee and maybe even be turned into something else. Other lawmakers however say they are still hopeful something will come of the legislation, and provide much needed financial relief to one of groups hardest hit by COVID-19 shutdowns. 

All across the country the pandemic’s toll on small businesses has been severe. In certain regions like Brooklyn, NY., for instance, it is estimated that between one-fifth and one-third of small businesses have folded, depending on the neighborhood. Meanwhile the federal government has authorized two rounds of its Paycheck Protection Program in an effort to stem the loss of revenue and workers. After closing last August, the PPP reopened in January with $284 billion in funding to provide loans to first- and second-time applicants. The deadline for second round funding is March 31.

The evolution of the SB 38 stems from a situation involving one of Sen. Perry’s constituents. Reportedly, the business owner wasn’t paid for a service and took the client to court to recover the costs, but the price of hiring a lawyer was going to be more than the amount the client owed Perry’s constituent. The client, meanwhile, was allowed to represent themselves without shelling out the money for an attorney. Perry said he along with the bill’s other sponsors just didn’t want somebody to be penalized and be on unequal footing. 

Senator Lazzara explains that under something called a Subchapter S designation, S corps are not allowed to represent themselves and must hire an attorney, thus making it difficult on small claims. “For example, if the dispute is $600, then it would not be cost effective to hire an attorney and continue the claim. This restriction puts S corp owners on unequal footing,” he says. “This bill levels the playing field for small business owners who elect to be an S corp rather than being a sole proprietor,” said Senator Lazzara. “When this bill becomes law, the owner of an S corp will be able to represent the business in court just like a sole proprietor, without having to hire an attorney.”