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For some small business owners, S Corporations (S Corps) can provide significant tax benefits. S Corps aren’t formal business structures but rather a tax election that you make with the IRS. If you’re a small business owner, you may want to file as a New York S Corp.
For more information about how filing as an S Corp could benefit your business, see our “What Is an S Corporation?” page. Keep reading to learn how to file as an S Corp in New York.
Start by creating either a limited liability company (LLC) or corporation (also known as a C Corporation), and then file an election form or forms with the IRS. An LLC will need to file two forms, while a corporation will file one.
If you’re ready to learn about filing as an S Corp in New York, we’ll walk you through it. First, we’ll show you how to form an LLC in New York. Then, in Step 7, we’ll explain how to file for S Corp status as either an LLC or corporation. If you’d rather form a corporation, follow the instructions on our New York corporation page.
Select a name that reflects either your business product or service. You also need to be sure that the name you want is available and meets the state’s business name requirements.
We can run a name search for you and even reserve the business name while you get the rest of your filing paperwork together.
All states require LLCs and corporations to name a registered agent to receive important documents on behalf of the company, such as notices of lawsuits.
In New York, every LLC and corporation must name the New York Secretary of State as the agent. They can also appoint an additional New York registered agent, which can have some advantages over only relying on the Secretary of State.
To officially create your business, you must file formation paperwork with the New York Department of State, Division of Corporations.
An operating agreement is a legally binding document that all members of an LLC agree on and sign. According to New York law, your operating agreement can be entered into by members before, at the time of, or within 90 days after the filing of your Articles of Organization. This agreement outlines the ownership, rules, and procedures of your LLC.
Most LLCs are legally required to obtain a Federal Employer Identification Number (FEIN) from the IRS. Most banks require an LLC to have an EIN to open a business bank account. This nine-digit number can be used for tax purposes and financial paperwork, including filing taxes and hiring new employees.
In New York, an LLC must publish a copy of its Articles of Organization in two newspapers for six consecutive weeks.
This publication requirement doesn’t apply to corporations.
Now that you have your LLC set up, you need to file two forms to get S Corp status. First, complete Form 8832, Entity Classification Election, which asks the IRS to classify your business as a corporation for federal tax information. Then, file Form 2553, Election by a Small Business Corporation, to be taxed as an S corp.
If you have a corporation, you only need to complete Form 2553.
If you’re federally taxed as an S corp, New York doesn’t automatically treat you as an S corp for state taxes. You need to file Form CT-6, Election by a Federal S Corporation to be Treated As a New York S Corporation. New York also requires that all shareholders agree to the S Corporation election and individually affirm their consent on Form CT-6.
Before setting up an S Corp in New York, your business must meet certain requirements set by the IRS. Your LLC or corporation must:
When to make the S Corp election depends on when you want the S Corp status to take effect. For new businesses with no prior tax year, you must complete and file the form with the IRS no more than two months and 15 days after the beginning of the tax year the election is to be effective.
If your business has been in operation and previously paid taxes, the form can be filed any time during the tax year before the year you want it to take effect.
It’s important to understand the good and the bad that comes with making an S Corp election.
S Corps are favored by C corporations because of the pass-through tax treatment. This means that the S Corporation’s income, losses, deductions, and credits pass through to the shareholders, who report everything on their personal tax returns. Those individuals then pay income tax at their personal tax rate. Not paying federal income tax at the corporate level can result in some serious tax savings.
Even though a traditional LLC already has pass-through taxation, it could still benefit from electing S corp status. It takes a bit of explanation, but it could mean saving thousands of dollars, so bear with us.
The members of a standard LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay part of them.
When the members elect S corp status, though, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay self-employment taxes on their salary and not the profits they receive. This can add up to thousands of dollars. To get a better idea, check out our page for calculating your S corp taxes.
One caveat to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $1 and avoid contributing anything to Social Security and Medicare. The IRS considers “reasonable” to be something similar to what others in your field are earning.
While the tax advantages of S Corporations can be significant, consider the following cons that come with making the election.
Forming and maintaining an S Corporation isn’t a quick and easy thing. It can be expensive and time-consuming. There are also plenty of opportunities to make mistakes along the way as you have to meet the tax qualification obligations. Whether it’s getting unanimous consent from the shareholders or meeting the filing requirements, you have to be meticulous when making the S Corp election.
Another disadvantage to S Corporations is the limitation to one class of stock. One way to attract investors for your corporation is to offer preferred stock, but you don’t have that option in an S corp.
Lastly, the IRS closely monitors S Corporations because they have the power to classify distributions as dividends or salaries. The IRS will scrutinize salary payments and look to determine whether they’re reasonable. In other words, you’re more likely to get audited.
LLCs can make an S Corporation election by first filing Form 8832 to be taxed as a C corporation and then filing Form 2553 to be taxed as an S Corp.
Check out our article on Tax Information for LLCs to learn more.
With our New York LLC Formation Service and New York Corporation Formation Service, we can help you with the first steps of creating a New York S Corp. If you’re forming an LLC and want to file as an S Corp, our S Corp service can help you with that, as well. Check out our S Corporation information page for more information and to get your questions answered.
Once your business is set up, we can help you stay in good standing with the state and meet any filing requirements using our Worry-Free Compliance Service. With all the products and services we offer, you’ll have what you need to run your business successfully.
Let’s get your business started today! With our S Corporation Formation Service, we can help you make your election if you’re forming an LLC. Our team of experts is here to answer your questions and support you throughout the filing process.
With all of the products and services we offer, our aim is to support you in running and growing your business. We can help with anything from incorporating your company to applying for an Employment Identification Number. Let us know what we can do for you!
Disclaimer: The content on this page is for information purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
A New York S Corp offers the following benefits:
Although there are significant advantages to S Corporations, they’re not for every type of business. The IRS imposes strict ownership limitations on S Corps, and they’re more likely to be audited. Consider both the pros and cons before making an S Corp election.
When choosing any business name, it’s important that you follow the state’s guidelines and requirements. Check with the New York Department of State to know what the rules are for naming your business.
You need to weigh the pros and cons of an S Corporation status before making an election. Not all LLCs will meet the IRS’s requirements, and some owners won’t want the extra scrutiny that comes with an S Corporation.
If you need help deciding if an S Corporation election is right for you, consider working with a tax or legal professional.
S Corporations don’t pay federal income taxes but still need to file an informational return with the IRS. Any income, losses, credits, or deductions pass through to the corporate shareholders or LLC members who report everything on their individual returns.
For a detailed explanation, read our article on how to Calculate Your S Corporation Taxes. Don’t hesitate to hire a tax professional to help you correctly calculate your S Corporation’s taxes.