Factors to Consider Before Starting an S Corp
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation requirements and restrictions
- Why an LLC is the best structure for the S corp tax status
- Are S corp tax advantages right for you?
Is a New York S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Requirements and Restrictions
The following are IRS S corp requirements and restrictions:
- Limited to one class of stock
- 100 shareholders
- Shareholders must:
- All agree to electing S corp status
- Be U.S. citizens or permanent resident aliens
- May be individuals, certain trusts, and estates
- May not be partnerships, corporations or non-resident alien shareholders
- Must hold meeting minutes with thorough records
- Maintain detailed business records (bank account statements, etc.)
- File biennial report on the month of incorporation and every other year with the Department of State’s Division of Corporations (cost: $9, failure to file may result in loss of good standing status in the state of New York and even dissolution). You may file online.
Why an LLC Is the Best Structure for the S Corp Tax Status
As entrepreneurs, we believe that starting an LLC is the best way for forming an S corporation because any advantages of forming a corporation are negated by S corp restrictions. LLCs are also generally easier to maintain than corporations.
New York is the only state where this may not be true, due to the state’s LLC publication requirements.
S corps are also subject to double taxation in New York City, since they are not recognized, and must pay the city’s 8.85% business tax, in addition to federal and state taxes. This is not the case in most states. However, as a salaried employee and depending on your business's income, you can still qualify for tax savings on distributions in New York City. The distributions only pay income tax and not self-employment taxes.
Are S Corp Tax Advantages Right for You?
You need to know if the S corp tax status versus a default LLC tax status will be better for your business. To fully understand the tax advantages of an S corp, read our S corp vs LLC guide and calculate your potential tax savings.
How to Form an S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the IRS Form 2553 when you request your employee identification number (EIN). You must also file Form CT-6 from the New York Department of Taxation and Finance to officially be taxed as an S corporation.
- By forming a corporation and electing S corp status from the IRS Form 2553. You must also file Form CT-6 from the New York Department of Taxation and Finance to officially be taxed as an S corporation.
There are also specific deadlines when it comes to electing S corp status.
- If you want the S corp status to take effect the following year, you may file at any time in the previous year.
- If you’re filling within the same year, you must submit your application within 2 months and 15 days or before on the same calendar year (ie. March 15).
- For a new business, you must file within 2 months and 15 days after you start your company, based on the date on the Certificate of Incorporation, for the S corp tax status to take effect.
We recommend not starting a corporation with the S corp tax status because the S corp may negate all of the benefits of a corporation.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in New York
Starting a New York LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Collective to do it for you.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Articles of Organization
Step 4: Create an Operating Agreement
Step 5: Get an EIN, File Form 2553 to Elect S Corp Tax Status, and File Form CT-6
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in New York.
Be sure to choose a name that complies with New York naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a New York LLC:
- Your name must include the phrase “limited liability company” or one of its abbreviations (LLC or L.L.C.).
- Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
- You must receive approval and/or meet certain conditions to include certain restricted or prohibited words.
- Your name must be distinguishable from any existing business in the state. This includes New York reserved names.
You can also read the New York state statute about LLC naming guidelines for more information.
2. Is the name available in New York? Make sure the name you want is available by searching the business entity database on the New York Department of State website.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Find a Domain Now
Step 2: Choose Your New York Registered Agent
The New York Secretary of State acts as the statutory agent for service of process, or registered agent, for all businesses by default, but you can elect a registered agent for your New York LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Hire a professional service provider like Collective for all your S corporation needs, including:
- S corp formation or to convert an existing business
- Registered agent services and obtaining an EIN
- Managing your monthly accounting (payroll, bookkeeping)
- Personalized service with a back office team
- Keeping your business compliant with regulatory obligations
- Helping you find potential business tax savings, and more.
Connect with Collective to learn more!
Step 3: File the New York LLC Articles of Organization
The New York Articles of Organization is used to officially register an LLC.
OPTION 1: File Online With the New York Department of State
- OR -
OPTION 2: File Form DOS 1336 by Mail, by Fax, or In Person
State Filing Cost: $200, payable to the Department of State (Nonrefundable)
Department of State Division of Corporations
State Records and Uniform Commercial Code
One Commerce Plaza
99 Washington Ave.
Albany, NY 12231
Fax: (518) 474-1418
Note: Faxed filings must include a Credit Card/Debit Card Authorization form.
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our New York LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN, Complete Form 2553 on the IRS Website, File Form CT-6
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
File Form CT-6
Form CT-6 is required for your New York LLC or corporation to be taxed as an S corp after electing an S corp tax status. You can complete and file Form CT-6 with the New York Department of Taxation and Finance.
Start an S Corp FAQ
What is an S corp?
An S corporation (S corp) is a tax designation for which an LLC or a corporation can apply.
Is an S corp an LLC?
No. An S corp is a tax designation for which an LLC or a corporation can elect.
How do you form an S corp?
You can form an S corp by filing Form 2553 with the Internal Revenue Service (IRS).
What are the requirements for an S corp?
S corps must meet four requirements:
- They can have no more than 100 shareholders.
- All shareholders must be private individuals (not other business entities).
- Shareholders cannot be nonresident aliens.
- The business may only issue one class of stock-this means all members must have the same distribution amount.
What are the benefits of an S corp?
Owners of S corps are considered employees of their company and can save thousands of dollars on self-employment taxes as a result.
Are taxes for LLCs and S corps the same?
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
Both LLCs and S corps benefit from a provision in the Tax Cuts and Jobs Act of 2017 that allows qualifying owners of pass-through entities to deduct 20% of qualified business income (QBI) from their tax returns. However, for S corps, the deduction doesn’t apply to profits paid out as wages.
What is a reasonable salary for an S corp?
Unlike the default LLC business structure, in which owners must pay self-employment tax on all of the company’s profits, owners of S corps are considered employees of the business and only have to pay self-employment tax on a salary they receive. Any other money they take from the company’s profits in the form of disbursements isn’t subject to self-employment tax.
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
What is a distribution?
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
What is pass-through taxation?
Pass-through taxation is a system of taxation that generally applies to sole proprietorships, partnerships, LLCs, and S corps. In this system, the profits or losses of the business are not taxed at the business level. Instead, they pass through to the owners’ personal tax returns and are taxed at each owners’ personal income tax rate.
What is the S corp tax rate?
There’s no corporate tax rate for S corps. Instead, owners of S corps pay personal income tax on the company’s profits. This rate depends on each owner’s personal income tax bracket.
Can I still use my DBA name if I elect to be an S corp?
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.