LLC vs S-Corp | What Entrepreneurs Need to Know in New York

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LLC vs S-Corp in New York

When starting a small business in the New York, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in New York. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in New York. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in New York

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in New York?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in New York?

Unlike a limited liability company (LLC) or other business structures, New York S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in New York

Creating a business in New York requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming New York Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in New York does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in New York.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in New York

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in New York is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in New York. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in New York are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in New York are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in New York to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in New York with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

New York State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in New York, it costs $4.50, which can be paid to the NC Secretary of State. Of course, before forming the whole LLC, you must pay the initial fee of $200 (by mail and online) to the New York Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in New York have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

New York LLC: An LLC can have any number of owners, called members, from starting New York Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

New York S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

New York LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in New York.

New York S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

New York LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

New York S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

New York LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the New York Operating Agreement.

New York S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

New York LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in New York: LLC or S-Corp?

Filing an LLC or S-Corporation in New York requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Resident Agent. To establish an LLC in New York, you must submit the Articles of Organization to the New York Department of State. Your Articles of Organization must include information about your New York LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the New York S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in New York: LLC or S-Corp?

Taxes for LLCs and S-Corporations in New York depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the New York LLC Cost for detailed information.

New York S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate New York LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in New York?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in New York. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734​ in New York.

FAQs

What is an LLC in New York?
An LLC is a type of business structure in New York that offers personal liability protection to its owners, also known as members.
What is an S-corp in New York?
An S-corp is a type of business structure in New York that offers tax benefits to its shareholders while limiting personal liability.
How do I decide between an LLC and an S-corp in New York?
Your decision will depend on your existing business and financial needs, as well as future plans. Consult with a legal or financial professional in New York who is knowledgeable about both options to determine the best fit for your company.
What are the tax benefits of an S-corp in New York?
S-corp shareholders in New York enjoy more tax savings compared to LLC members, as they are not subject to self-employment taxes on their entire earnings.
How do I form an LLC in New York?
To form an LLC in New York, you need to file Articles of Organization with the New York State Department of State, publish a notice of formation in two newspapers for six weeks, and obtain any necessary permits, licenses, and certifications in New York.
How do I form an S-corp in New York?
To form an S-corp in New York, you need to first establish a traditional corporation, then file Form 2553 with the IRS to request S-corporation status. You need to file both your federal and state tax returns as an S-corp, and meet all other New York-related requirements and guidelines.
Is an LLC or S-corp better for my online business in New York?
Your choice will depend on various factors such as the nature of your business, your financial resources, the type of assets that your business has, and your goals. Consider consulting with a local attorney or financial professional in New York to help you make an informed decision.
What are the filing fees for an LLC in New York?
The filing fee for an LLC in New York is $200.
What are the filing fees for an S-corp in New York?
The filing fee for an S-corp in New York is $125.
What is the annual franchise tax fee for LLCs in New York?
The annual franchise tax fee for LLCs in New York varies based on the amount of net income. The minimum amount is $25.
What is the annual franchise tax fee for S-corps in New York?
The annual franchise tax fee for S-corps in New York is $25, regardless of net income.
What tax forms do LLCs in New York file?
LLCs in New York file federal taxes on their income at the personal level and state taxes on their net income, through a Form IT-204 partnership return.
What tax forms do S-corps in New York file?
S-corps in New York file a federal Form 1120S, U.S. Income Tax Return for an S Corporation, and a New York State Form CT-6 for corporate taxes.
Can an LLC in New York be taxed as an S-corp?
Yes, an LLC in New York can elect to be taxed as an S-corp by filing Form 8832 with the IRS.
How many members can an LLC have in New York?
There are no restrictions on the number of members in an LLC in New York.
How many shareholders can an S-corp have in New York?
An S-corp in New York can have up to 100 shareholders.
What is the process to change an LLC to an S-corp in New York?
To change an LLC to an S-corp in New York, you need to request S-corporation status by filing Form 2553 with the IRS. You will also need to update any applicable state tax forms and obtain any necessary certifications to be an S-corp in New York.
Can a foreign corporation be an S-corp in New York?
No, a foreign corporation cannot become an S-corp in New York.
Do S-corps have to pay payroll taxes in New York?
Yes, S-corps in New York have to pay payroll taxes and follow state payroll laws.
Can non-US residents form an LLC or S-corp in New York?
Yes, non-US residents can form an LLC or S-corp in New York, as long as they meet certain requirements. Working with an experienced lawyer from New York can help in understanding the process and requirements for foreign-owned companies.
What are the personal liability protections for LLC owners in New York?
LLC owners in New York are not personally responsible for business debts or liabilities, and their personal assets are better insulated.
What are the personal liability protections for S-corp shareholders in New York?
S-corp shareholders in New York have limited personal liability if the liability arises from routine business operations.
What is the New York income tax rate applied for LLCs?
LLCs in New York are not individually taxed on their income, and are instead pass-through entities, meaning owners report on their personal taxes.
What is the New York income tax rate applied for S-corps?
S-corps in New York pay an income tax rate of 6.5%, along with various other taxes on revenue, payroll, and more.
Can an LLC in New York own an S-corp?
Yes, an LLC in New York can own shares in an S-corp, and thus participate in company ownership based on the shares it owns.
Can an S-corp in New York merge with an LLC?
Yes, though the resulting company may not be an S-corp. At least 50% of the interest in an LLC must be involved when there is a merger or conversion.
How do I transfer ownership in an LLC in New York?
To transfer ownership in an LLC in New York, you need to draft an amendment to the LLC’s operating agreement and change the documents that list the company’s official owners. Care must be taken with language in agreements with regards to what is allowed and any required approvals.
How do I transfer ownership in an S-corp in New York?
Transfer of ownership in an S-corp in New York requires formal processes and approvals and transfer restrictions may be mentioned in shareholder or Share Exchange Agreements among shareholder beneficiaries. It is generally better to obtain an attorney’s assistance to change corporate structure in such cases.
What’s the difference between an LLC and an S-Corp in New York?
An LLC is a flexible entity that offers members liability protection while letting them avoid the restrictions imposed on corporations. But an S-Corp is a type of corporation that enjoys a special taxation status under New York tax law.
What types of businesses do both LLC and S-Corps work best for in New York?
Both LLCs and S-Corps work well for small to large-scale businesses operating across New York industries in various verticals, including catering, manufacturing and retail.
Is it difficult to switch from an LLC to an S-Corp in New York?
No, however, making that decision is a legal and financial commitment for NY taxpayers, one which should not be taken lightly..
Can I have an S Corp in NY if I live in another state?
Yes, by following the legal requirements mandated by law.
What is the start-up cost to form both an LLC and S corporation in New York?
In New York, the initial fees will be dependent on the business location, credit approvals, and size.
Can a non-resident alien own a New York LLC?
Yes, however intricate and specialized knowledge requirements in legal settings and entail the need for legal representation to create inclusive intentions that will prevent future legal conflicts.
How many shareholders may I have in an S corporation in New York?
S Corporations cannot have more than 100 shareholders according to the United States.
What is considered passive income in an S Corporation in New York?
Any income that your company earns from investments or earned interest can be deemed passive income.
Do both LLCs and S-Corps protect personal assets from a lawsuit in New York?
Yes, both entities can offer operating agreements that limit liability exposure for financial investments and shareholder recourse.
What kind of tax structure does an S-Corp have in New York?
S-Corps receive preferential tax laws perks introduced under the Tax Cuts and Jobs Act of 2017..
Is having an LLC or an S-Corp ideal or mandatory for businesses in New York?
White legally not mandatory for businesses, and different rules may apply that determine carrier accordingly.
Can a business created outside of New York operate under an S-Corp in New York?
No, a business must be registered under states standing as an S Corporation.
How often a New York S-Corp pays any state taxes in New York?
S Corporations are one way to prevent additional local taxes yearly with notable advantages that can arise at the close of every fiscal year.
How many years will it take me to apply for an S-Corp or LLC in New York?
It usually takes 3 – 4 weeks, but if any corporation identification number was needful, it would take some much longer to complete.
Are there any requirements to having liability insurance for businesses under the LLC model in New York?
New York State does not mandate liability insurance for LLC owners. However, companies must obtain workers’ insurance liability benefits to all income-generating projects through investment or passive activity.
Which of the two entities is best suited for a smaller business startup in New York?
An LLC’s simpler formation process can variously suit smaller businesses or instances
Can a non-US citizen own more than 50% of an S-Corp in New York?
No, to qualify for the beneficial tax treatment of an S Corporation, owners must comply with various rules and filing & licensing regulations.
What is the perceived tax benefit of an S Corporation over an LLC for New York State business owners?
Single S-Corp shareholders may see tax savings disadvantages specific regulations that can exceed will enable LLC formations.
How long after registering for an LLC should I receive the necessary legal paperwork in New York?
Commonly between two and four weeks after registration.
How is ownership divided among members in an LLC versus S Corporation in New York?
In an LLC, profit allocation is not required. In an S-Corp profits set out every year, based on requirements in the operational bylaws.
Is the LLC or S-Corp better for hiring contract workers as a business in New York?
By law specified will differentiation companies and their working relationships regarding potentially using detailed processes is essential for business owners.
What happens if I accidentally file for an LLC incorrectly in New York?
File S-corporations, amendments can be completed when the realization of an error is found. A wrong filing may go back over past years, bringing liability and exclusive accountability under their district the errata occurred in.
As a foreign resident, can I start either type of business in New York?
For registration with the New York Department of State as a foreign resident precursor, preparation, and filing for permits and analyses is related to legal norms regarding laws in and outside the United States that involve all aspects of the operation. Entities, compliance fixtures, notices included in legal paperwork, etc.
Are there restrictions on which industries can have S-Corporation status in New York such as banking or finance?
Federal tax regulations specify some of these restrictions in the Industry specific Internal Revenue Code Sections, such as investing, regulated utility corporations, domestic or foreign insurance companies, domestic or international benefits plans.
What type of taxes do you have to pay as an LLC in New York?
LLC owners effectively tend to very minimally incomcome-related-related issues from defining LLCs.
What is the process for transferring assets from an LLC to an S-Corp in New York?
Owner can file an election agreement and ask for a return right to operate as an S-Corp at a fixed point without altering the name or underlying structure. The management, itself entailed in revenue taxes, is liable for covered requests.
Does New York allow businesses to incorporate as an S-Corp from the outset?
No, only S-Corporation election is allowed for an entity that exists or will exist in the State. An S-Corporation election classification application Form, filed alongside necessary documents, reveals their wishes to elect for subchapter S-Type metrics under the federal tax scheme..
Question Can I change from single ownership LLC to S Corp in New York state?
Yes, but it will definitely incorporate transforming one’s prior-held entities and rules governing said organization chains for accepting said measures.
Are any fees associated with converting from an LLC to an S-Corp or vice versa in New York?
There may be, based on the entity’s size constraints and the area in which it is registered with the acceptance being subject to compliance standards.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in New York will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in New York and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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