Setting up an S corp in New York requires some patience and paperwork, but it also has potential tax advantages for a business. The process at the federal level is the same as most states, but the Empire State asks you to take some additional steps for your state taxes. We’ll walk you through it all as we show you how to form an S corp in NY.
For a limited liability company (LLC), filing as an S corp may lower the self-employment taxes the members must pay. For C corporations, it can be a way to avoid double taxation. For a more detailed look at S corps, see our “What Is an S Corporation?” page.
You should understand that an S corporation (S corp) is not a business structure. Rather, it’s a tax classification that either an LLC or a corporation can apply for with the Internal Revenue Service (IRS) if it meets the criteria. We’ll outline those criteria and the steps you would need to take to file as an S corporation if you decide that it’s right for your business.
If you want to form an LLC with S corporation status, our S corp service can help you do just that. Plus, we offer other services to help you run and grow your business and stay in compliance with state and federal laws.
The IRS has a few S corporation filing requirements and limitations you should be aware of before you begin this process. Specifically, to qualify for S corporation election, an entity must:
If your business entity meets these requirements, you can apply for an S corporation election.
Before you can apply to be an S corporation, you’ll need to create either an LLC or a corporation if you haven’t already done so. Then, you’ll file an election form with the IRS.
If you’re ready to learn about starting an S corp in New York, read on and we’ll walk you through it. First, we’ll show you how to form an LLC in New York. If you’d rather form a New York corporation instead, follow the instructions on our New York corporation page. Then, in Step 6, we’ll explain how to file for S corporation status as either an LLC or corporation.
You’ll first need to name your New York LLC. You’ll want to pick a name that’s easy to remember and resonates with your customers, but you also need to comply with New York’s LLC naming rules.
The state has laws for naming an LLC that you can find on the New York Department of State’s website. Here’s a brief rundown of what to know according to New York LLC Law § 204. We’re highlighting the points that may be considered most important:
Make sure your desired business name isn’t taken. You can get some guidance about this on our New York business entity search page. If everything looks good and the name you’ve chosen is available, you may want to claim it while you get your LLC set up. We can help you reserve your business name. That way, you can prevent others from taking it while you finish the business formation process.
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Appoint a registered agent for your LLC. A registered agent is a person or business that receives important legal notices like service of process on behalf of your LLC.
In New York, the Secretary of State acts as the registered agent for every New York LLC by default. This is required by state law. However, you can add an additional registered agent in your Articles of Organization.
Knowing that the state will take care of delivering legal notices to you, why would you want to use a registered agent service instead? Well, there are a few reasons:
State law (NY LLCL § 302) says that if you’re appointing a registered agent, the agent must be one of the following:
The next step is to file Articles of Organization with the state. You do so by filing with the New York Department of State’s Division of Corporations, State Records, and Uniform Commercial Code (not the “New York Secretary of State”; the agency handling business formations is the New York Department of State).
Filing your New York Articles of Organization legally forms your LLC in the state. It provides the government with vital information about your business for the state’s records. It acts as proof that your LLC was formed and exists as a business entity.
In order to do this, you’ll need to create a NY.gov account on New York’s Business Express website and pay a $200 fee (as of this writing). If you’d prefer to do so via mail, that option is also available.
With our business filing service options, we can handle the online filing for you to make sure it’s done quickly and correctly the first time.
Draft an operating agreement to detail how your LLC will be organized and run. A New York LLC operating agreement is a legally binding document that all members of an LLC agree on and sign. New York is one of the few states that legally require an OA to be drafted for an LLC.
According to the state’s LLC laws, your LLC operating agreement can be entered into by members before, at the time of, or within 90 days of your Articles of Organization being filed.
This agreement outlines the rules, regulations, and procedures of your business operations, as well as documenting each member’s ownership percentage and how profits will be divided.
We help you get started on the right foot by offering an easy-to-follow operating agreement template.
Get an Employer ID Number (EIN) from the IRS. Many LLCs, including those with employees or more than one owner, are legally required to obtain an EIN, also known as a Federal Tax Identification Number. Most banks require an LLC to have an EIN to open a business bank account. This nine-digit number is used for tax purposes and other financial paperwork.
You can get an EIN through the IRS, or we can obtain this number for you with our EIN service.
Publish notice of your LLC’s formation. Once you’ve successfully filed your Articles of Organization, New York LLCs are required to publish a copy of their Articles of Organization or a notice about the LLC’s formation within 120 days of its effective date.
The notices must be published once each week for six successive weeks in two separate newspapers. Newspaper designations are determined by the county clerk.
The publisher of each newspaper will provide an Affidavit of Publication once the notice has been published. You’ll send the affidavits to the New York Division of Corporations with a completed New York Certificate of Publication form and a check to pay for the filing fee.
Publication costs in New York can be quite expensive depending on where your registered agent’s address is. More populous counties such as New York, Bronx, and Queens can have publication costs over $1,000. For more information on the New York publication requirement, check out our New York Publication Service.
Submit the form to apply for S corporation status. Once your LLC or corporation formation is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, to get S corporation status.
The IRS requires that you complete and file your Form 2553 with the IRS:
One caveat for LLCs wishing to file as an S corporation: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail.
Note that all of the shareholders/members must sign the consent statement portion of the form. For more information on when and how to file Form 2553, visit the IRS website.
While S corporation classification does come with benefits for some businesses, making this election might not be right for every company. Carefully weigh the pros and cons before deciding how you want to move forward. Consult a tax professional about whether the S corporation election would be best for your business.
The advantages of filing as an S corporation for an LLC differ from the advantages for C corporations. Let’s look at the advantages for LLCs first.
By default, a traditional LLC already has pass-through taxation, so the benefits of S corp election for an LLC have to do with self-employment taxes. This takes some explanation, but for certain LLCs, it could save a lot in taxes.
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 (Social Security and Medicare, which adds up to about 15.3%) on the profits received from the LLC. This is more than the taxes they’d pay for Social Security and Medicare when working for someone else because their employer would pay part of them.
But when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee of the LLC. Once they do that, they only pay Social Security and Medicare taxes on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members must still pay income tax and all other applicable taxes on their share of the profits.) Money paid out as salary is also a tax-deductible expense for the business.
One caveat to this arrangement 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 $5 and avoid contributing anything to your Social Security and Medicare.
But what is “reasonable compensation” to the IRS? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” While the terms aren’t completely defined, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning for the same work.
If the IRS determines that your salary isn’t reasonable, it has the authority to reclassify your non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases have supported their right to do this.
Having an LLC with S corp status can also have drawbacks over a traditional LLC:
As we listed above, S corps have more qualifications to meet than a standard LLC. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have these limitations.
Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS tends to monitor LLCs filing as S corps more closely. That could mean a greater chance of being audited, even if you follow the law to the letter.
In fact, S corp owners may want to observe many of the same formalities that C corporations do (such as regular meetings and keeping a corporate records book), even if they’re not legally required to so that they’ll be more prepared in the event of an audit.
Having an S corporation generally means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to start doing so. Your taxes will be more complex, as well.
These added complications could mean that you’ll have higher administrative costs. You may find that you need an accountant, bookkeeper, and/or a payroll service or software.
If you have a C corporation (the default form of corporation), filing as an S corp does have its advantages:
One big disadvantage for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the corporate level. But when those profits are distributed to the individual owners (shareholders) as dividends, the profits are taxed a second time on the shareholders’ personal tax returns.
But when a C corporation qualifies to be an S corp, those profits are usually only taxed at the individual level, at least for federal income tax. The business itself usually isn’t taxed on them. This is called “pass-through taxation,” and it’s how business entities like sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation.
We need to add here that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. So, the disadvantages of double taxation aren’t as severe now as they once were.
Just as business profits pass through to the owners of an S corp, so do the losses. Unlike the shareholders of a C corporation, S corporation owners can write off the company’s losses on their personal income statements.
This can help offset their income from other sources and can be helpful if the corporation loses money in the first couple of years. Still, make sure you’re aware of the IRS’s shareholder loss limitations.
Under the aforementioned Tax Cuts and Jobs Act, some S corp shareholders may be able to deduct up to 20% of their qualified business income (QBI). This deduction isn’t available to C corporation shareholders.
QBI is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for more details).
S corporation status also has its downsides:
As we mentioned, an S corp can’t have more than 100 shareholders, while a C corporation has no such restriction. That limitation could be an issue later if the corporation expands and goes public.
All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could limit your ability to expand internationally. You also can’t have partnerships or corporations as shareholders. C corporations don’t have these limitations.
Corporations sometimes attract investors by offering preferred stock. That’s fine for C corporations, but the IRS doesn’t allow it for S corps.
Because of the extra restrictions, the IRS watches corporations with S corp election more closely to see if they’re in compliance. In other words, your corporation is more likely to get audited.
We can’t stress enough how important it is to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, and they may also be able to help you find additional tax savings you were unaware of.
In an S corp, the business itself doesn’t usually pay federal income taxes. But what about state income taxes?
The State of New York does not automatically treat your company as an S corporation for state tax purposes. To make the New York S corporation election, you’ll need to file Form CT-6, Election by a Federal S Corporation to be Treated as a New York S Corporation. But before you do that, you need to make sure that you meet the following requirements:
Even if they make the New York S corporation election, S corps are still responsible for paying the state’s corporation franchise tax. The business pays a fixed dollar minimum tax based on New York receipts.
If your business is in New York City, note that the city doesn’t recognize federal or New York S corp elections. New York City has a general corporation tax (GCT) that all domestic and foreign S corporations and qualified S subsidiaries must pay if they’re doing any of the following in the city:
However, the following kinds of S corporations are exempt from the general corporation tax, including:
The good news for New York City S corporations is that they’re exempt from the city’s Business Corporate Tax.
Setting up an S corp in NY can be challenging, but we’re here to make it as easy for you as possible.
When you’re ready to take the leap, we can help you form a New York LLC with an S corporation designation and provide you with valuable support for all of your business needs moving forward. Click the button below to get started.
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For a corporation, the major advantage is being able to avoid double taxation. Typically, a C corporation’s profits are taxed at both the business and individual shareholder level, while an S corp’s profits are taxed only on the individual level.
For an LLC, when the members elect S corp status, 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 employment taxes (Social Security and Medicare) on their salary and not the profits they receive. For some LLCs, this can add up to substantial tax savings.
The naming process for your corporation or LLC isn’t affected by your S corp status. Whether you file to be taxed as an S corp or not, your business remains an LLC or a corporation and follows the same state business naming rules.
Before formally registering a business name, you should first search the New York business entity records to make sure that you don’t select one that’s already in use by another business. That aside, however, you can typically name your S corporation what you want as long as you comply with state business naming regulations.
S corp election may not be right for all businesses. If you’re not sure whether to identify your LLC as an S corp or keep the default status, be sure to consult with an experienced business law attorney or accountant.
Calculating S corp taxes is best left to professionals, but you can check out our S corp tax guide to learn more about navigating taxes for your S corporation.
Sorry, but our S corp service is only for applying for S corp status when you form your LLC with us. We do offer plenty of other services to support your established business, though.
According to the IRS website, they will notify you as to whether your S corp election is accepted within 60 days of filing Form 2553.
If you’re a new LLC, you must apply for S corp status within 75 days of your LLC’s formation or no more than 75 days after the beginning of the tax year in which the election is to take effect. For an existing business, you would file at any time during the tax year preceding the tax year it is to take effect.
An LLC is a legal business entity, whereas an S corp is a tax filing status. You can read more about the differences on our LLC vs. S Corp page.
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.
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