New York S Corporation Formation Guide: Advantages, Disadvantages & Complete Process
Bottom Line Up Front: S Corporation election in New York offers significant self-employment tax savings for businesses earning over $60,000 annually, but comes with stricter compliance requirements and potential double taxation from New York City's 8.85% business tax.
What is a New York S Corporation?
An S Corporation is a tax classification, not a separate legal entity. You first form a legal structure like an LLC or corporation in New York, then elect S Corp tax status with the IRS using Form 2553. New York State requires a separate S Corp election via Form CT-6, which must be filed within 75 days of the beginning of the tax year when S Corp status should start.
Key Requirement
New York State does not automatically recognize federal S Corp status unless mandated under Tax Law § 660(i).
Primary Advantages of New York S Corporations
Self-Employment Tax Savings
S Corporation owners pay themselves a reasonable salary (subject to payroll taxes) and take additional profits as distributions, which are exempt from the 15.3% self-employment tax that LLC members pay on all profits. This advantage becomes substantial for businesses with profits exceeding $60,000 annually.
Example: Business earning $100,000 in profit
- LLC Owner: Pays 15.3% self-employment tax on entire $100,000 = $15,300
- S Corp Owner: Pays reasonable salary of $60,000 (with payroll taxes) + $40,000 distribution (no self-employment tax) = Significant savings
Pass-Through Taxation
S Corporations are pass-through entities, meaning business profits and losses flow through to shareholders' personal tax returns, avoiding the double taxation faced by C Corporations.
Limited Liability Protection
S Corporation shareholders are not personally liable for the company's debts and obligations, protecting personal assets from business liabilities.
Enhanced Credibility and Structure
S Corporations provide enhanced credibility with potential customers, partners, and suppliers due to their formal corporate structure.
Retirement Contribution Benefits
Employee-shareholders of S Corps can reduce taxable income by investing in 401(k) or other qualified retirement accounts, leading to considerable long-term tax savings.
Major Disadvantages of New York S Corporations
New York City Double Taxation
New York City does not recognize S Corporation status, subjecting entities to the city's 8.85% business tax on top of state and federal taxes, potentially wiping out other tax advantages.
Strict Ownership Restrictions
S Corps cannot have more than 100 shareholders, and shareholders must be U.S. citizens or residents. Other corporations, partnerships, and non-resident aliens cannot hold shares.
Reasonable Salary Requirement
The IRS requires S Corp owners to pay themselves "reasonable compensation." If the IRS determines your salary is too low, it can reclassify distributions as wages subject to employment tax.
Complex Administrative Requirements
S Corps must hold regular meetings, maintain meeting minutes, follow corporate formalities, and file more complex tax returns than LLCs.
Reduced Borrowing Capacity
Traditional lenders factor in earned salary rather than business cash flow, potentially limiting borrowing capacity if you pay yourself a modest salary.
New York Tax Implications
Fixed Dollar Minimum Tax
New York S Corporations pay a Fixed Dollar Minimum (FDM) tax based on New York State receipts, ranging from $25 to $4,500 annually:
No MTA Surcharge
The Metropolitan Transportation Business Tax (MTA surcharge) does not apply to New York S Corporations, unlike C Corporations.
Mandated S Election Rule
New York automatically applies S Corp election if an IRS-designated S Corp has investment income exceeding 50% of its gross federal income.
S Corp vs LLC in New York: Detailed Comparison
When to Choose S Corp:
- Annual profits exceed $60,000
- Want to minimize self-employment taxes
- Can comply with ownership restrictions
- Comfortable with corporate formalities
When to Choose LLC:
- Want maximum flexibility in management and ownership
- Have foreign investors or plan to attract them
- Prefer simpler tax reporting
- Want to avoid corporate formalities
When to Choose C Corp:
- Planning to seek venture capital or go public
- Want to retain earnings in the business
- Need multiple classes of stock
- Planning significant reinvestment of profits
Ongoing Compliance Requirements
Annual Filings
S Corporations must file Form CT-3-S (New York S Corporation Franchise Tax Return) by the 15th day of the 4th month following the close of the tax year (April 15 for calendar-year filers).
Biennial Statements
File Biennial Statements with the Department of State every two years, providing updated information about chief executive officer and principal office address. Current filing fee is $9.
Corporate Formalities
Maintain corporate bylaws, hold annual shareholder meetings, keep meeting minutes, and maintain proper corporate records.
Payroll Requirements
If you have employee-shareholders, you must:
- Process payroll and withhold taxes
- File quarterly payroll tax returns
- Maintain worker's compensation and disability insurance
Frequently Asked Questions
Can I convert my existing LLC to S Corp tax status?
Yes, an existing LLC can elect S Corp taxation by filing Form 2553 with the IRS and Form CT-6 with New York State, typically within 75 days of the desired effective date.
What constitutes "reasonable salary" for S Corp owners?
The IRS doesn't clearly define "reasonable," but generally it should be comparable to what other businesses pay for similar services. You can adjust based on your business's unique circumstances and the profits directly attributable to your efforts.
Do I need a lawyer to form an S Corp in New York?
While not required, businesses should consult an attorney or accountant for help with filing requirements, especially given the complexity of New York's tax requirements and publication mandates.
How does the New York publication requirement work?
You must publish in two newspapers designated by the county clerk (one daily, one weekly) for six consecutive weeks within 120 days of filing. After publication, submit the Certificate of Publication with affidavits from both newspapers to the Department of State.
What happens if I miss the S Corp election deadline?
For LLCs past the 75-day deadline, you'll also need to file Form 8832 (Entity Classification Election) along with Form 2553, submitted together via USPS-certified mail.
Are there industry restrictions for New York S Corps?
Certain professions like attorneys, accountants, architects, and engineers must form a Professional Corporation (PC) or Professional Service Corporation (PSC) instead of a standard corporation.
How much can I save in taxes with S Corp election?
Savings depend on your profit level and reasonable salary. For businesses with profits exceeding $60,000 annually, the tax savings can be substantial by reducing self-employment tax obligations.
Can my S Corp have subsidiaries?
LLCs can have subsidiaries without restriction, but S Corporations have limitations on subsidiary ownership structures.
Professional Guidance Recommended
Consulting with professionals focused on New York business formation can help entrepreneurs make informed decisions aligned with their goals. Given the complexity of New York's tax system and the potential for significant savings or costs, professional advice is particularly valuable for:
Optimal Business Structure
Determining the best entity type for your specific business goals and tax situation
Publication Requirements
Ensuring compliance with New York's unique newspaper publication requirements
Ongoing Tax Obligations
Managing complex federal and state tax filing requirements and deadlines
NYC Tax Requirements
Navigating New York City's separate business tax system and compliance needs
Action Steps to Get Started
Evaluate Your Business Needs
Assess annual profit projections, ownership structure preferences, and tolerance for administrative requirements
Consult Professionals
Speak with a business attorney and CPA familiar with New York requirements
Choose Your Path
Decide between LLC with S Corp election or direct corporation formation
Begin Formation Process
Start with name reservation and Certificate of Incorporation filing
Plan for Publication
Budget for newspaper publication costs and identify county-designated newspapers
Set Up Systems
Establish payroll processing and corporate record-keeping systems
Ready to form your New York S Corporation?
Consider the advantages and disadvantages outlined above, and ensure you understand both the federal and New York State requirements before proceeding.
Disclaimer: This guide provides general information and should not be considered legal, tax, or accounting advice. Consult qualified professionals for guidance specific to your situation.