LLC vs. S Corp in New York

Small businesses generate most of New York State’s economy. Many entrepreneurs start limited liability companies (LLCs) because they provide personal liability protection with limited formalities. As a new small business owner, you may have heard of the S Corporation. This page will explain the pros and cons of the LLC vs. S Corp in New York. Our business experts will go through the potential benefits and drawbacks of the S Corp and how to form one in New York.

LLC vs. S Corp: Which is better in New York?

When comparing an S Corp vs. LLC in New York, you need to know that the S Corporation isn’t a separate business structure. The S Corp designation is a choice for tax treatment.

Before electing S Corp status, you must form your business with the state. You retain your business organizational structure when making the S Corp election. Thus, it’s possible for an LLC to also be an S Corp. 

The S Corporation election can help you save money on taxes depending on your tax circumstances. Because everyone has different tax liabilities, only an accountant or tax professional can give you personalized advice on which tax treatment is better for you. The next section will explain the differences between S Corporation vs. LLC taxation for LLCs in New York. 

What are the tax differences between LLCs and S Corps in New York?

To understand the different taxation for LLCs and S Corps, start by reviewing the tax requirements of an LLC vs. S Corp vs. C Corp in New York. 

By default, the IRS and New York Department of Taxation and Finance tax corporate business income using “double taxation.” At tax time, corporations will pay a corporate income tax. Shareholders also pay taxes on any distributions they receive from the corporation. The corporation that doesn’t elect S Corp status is called a “C Corp.”

On the other hand, LLCs and S Corps are considered pass-through entities. Pass-through taxation means that the business entities don’t pay federal corporate income taxes. Instead, owners report the business profits and losses on their personal tax returns. Typically, pass-through entities provide the most tax savings. The following section explains the tax benefits of S Corp status at the federal level.

Federal Taxes

When weighing the potential tax benefits of the LLC or S Corp in New York, the first thing you need to know is that the IRS automatically taxes multi-member LLCs as partnerships. As a pass-through entity, LLC owners report their portion of the business income with their personal taxes. Then, each owner must pay the federal self-employment tax, currently at 15.3%, on their individual gross income.

On the other hand, when an LLC elects S Corp tax status, the owners must pay themselves a reasonable salary, on which they pay individual income taxes. When the owners make additional income from the S Corp, they can report it as a share distribution instead of wages. Usually, tax rates on S Corp share distributions are lower than income tax rates.

New York Taxes

You must make a separate New York S election if you want your LLC to be a New York S Corporation. One exception is for S Corporations with investment income that accounts for more than 50% of their federal gross income. In that case, New York assumes the business wants to make the New York S Corp election (called the mandated New York S Corporation election).

While pass-through entities don’t pay federal taxes, New York requires all C corporations, S Corporations, and LLCs to pay an annual franchise tax. The annual corporate tax for an LLC vs. an S Corp in New York varies with their income or investments.

Franchise Tax Rate

• C Corp: The larger of:6.5% of net income;0.025% of business and investment capital minus liabilities up to $5 million; orA fixed minimum based on gross receipts ranging from $25 for businesses with gross receipts of under $100,000 to $200,000 for those with over $1 billion in gross receipts.
• LLC (taxed as a partnership): Filing fees only, based on gross income, ranging from a minimum of $25 for LLCs with gross incomes of less than $100,000 to a maximum of $4,500 for LLCs with gross incomes greater than $25 million.
• S Corp: Calculate taxes using gross receipts method.Slightly lower rates than traditional corporations.

LLCs that don’t elect S Corp status pay only a filing fee and don’t otherwise have a franchise tax on their income. However, if your LLC makes the New York S Corp election, it will be responsible for paying a franchise tax based on gross receipts.

How do New York LLC and S Corp ownership requirements compare?

Both LLCs and S Corporations have limits on ownership. The LLC’s operating agreement has rules on when a member can join or leave the company. In addition, to qualify as a New York S Corporation, the business must:

• Have made the federal S corporation election;
• Be a general business corporation taxable under Article 9-A. (Insurance corporations taxable under Article 33 or any corporation taxable under Article 9 can’t elect to be a New York S corporation.)
• Get consent to the New York S election from all the shareholders.

To qualify for federal S Corp tax treatment, you must meet specific ownership requirements. The business must:

• Be a domestic corporation;
• Have only allowable shareholders, which includes individuals, certain trusts, and estates, but not partnerships, corporations, or non-resident alien shareholders (however, an S corp can own other businesses);
• Have no more than 100 shareholders;
• Have only one class of stock;
• Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

Before making a state or federal S Corporation election, it’s a good idea to check with your professional advisors. The S Corp ownership requirements are extensive and have many exclusions. Your advisor can help you ensure your business meets the requirements before you apply.

How do New York LLCs and S Corps handle liability protection?

The S Corp election doesn’t change the business structure. As such, the business owner retains the personal liability of the LLC structure after electing S Corporation status. As a “limited liability” company, the owner’s personal assets can’t be used to satisfy the business obligations. This is true regardless of the tax treatment they choose.

Which is easier to file in New York: LLCs or S Corps?

The filing requirements for an S Corporation vs. an LLC in New York vary depending on your goals. Before you can make an S Corp election, you must form your business as an LLC or corporation. To form an LLC, you’ll file Articles of Organization with the NYS Department of State, Division of Corporations. Once you’ve created your business, you can choose the default tax treatment or make a tax treatment election. Because the S Corp election is an additional step, it takes longer to file for an S Corporation.

To elect S Corp taxation, you will file two forms with the IRS. When you complete Form 8832, your LLC will be taxed as a corporation. Then, you will need to file Form 2553 to elect S Corporation status. Finally, file Form CT-6, Election by a Federal S Corporation to be Treated As a New York S Corporation for your LLC to be taxed as an S Corporation at the state level.

After forming your LLC, you’ll be required to file annual tax returns and reports to stay in legal compliance. If you don’t pay your taxes and keep up with the paperwork, the state can take remedial action and dissolve your business. To help, we offer our Worry-Free Compliance Service. We’ll send reminders of important deadlines and keep your documents organized so you’re ready for compliance.

Can I convert my New York LLC to an S Corp? 

Yes. Every S Corp was originally a corporation or LLC before the owners elected S Corporation status. You can follow the steps above to have your LLC taxed as an S Corporation for any tax year. Once you make the S Corp election, your business can maintain its S Corporation status until you file to terminate it.

How do I convert my New York LLC to an S Corp? 

After you form your LLC with the state, you can elect to be taxed as an S Corporation by filing Form 8832 and Form 2253 with the IRS.

Do I need to change my designator if I do?

No, continue using “limited liability company” or “LLC” in your name even after filing for S Corp status. The business identifier reflects the owner’s limited liability. The LLC’s liability protection doesn’t change, because the S Corporation is a tax designation, not a separate business structure.

What is the best time for an LLC to elect S corporation status?

Many people think about taxes only at tax time, but you likely consider your tax consequences all year long as a business owner. The best time for your LLC to elect S Corporation status is when you can use the tax benefits. That time will be different for each person. Once you’re ready, you have two months and 15 days to file S Corporation paperwork in the tax year in which you want the status to begin.