Figures from the SBA indicate that the 2.3 million small businesses in New York give it 4th place among all the states for small business creation. In addition, New York accounts for 49.1% of the state’s employees, exceeding the national employment share.
New York remains a small business center with increasing business ownership thanks to its proximity to vast markets, its skilled labor force, and the state’s pro-business approach.
Business owners in the state, like elsewhere, need to consider their business structure and its default taxation carefully if they are to see any profits. Many businesses prefer not to use the default taxation of their chosen legal business structure but prefer the advantages offered by an S corporation. S-corporations are the second most popular form of business after sole proprietorships in the U.S.
New York S Corporation Facts
If an S corporation is not a legal business structure, what is it? An S corp is a tax classification that allows entities to benefit from its unique pass-through tax structure. A business chooses it after forming an LLC or corporation. In most states, the company elects the tax designation by filling in Form 2553 when applying for an EIN from the IRS.
However, not all small businesses benefit from the S Corp tax status in New York. Here are some essential facts to keep in mind before deciding:
S Corporation Limitations
S Corps need to maintain detailed business records, and the state of New York requires a biennial report to prevent the business from losing its good standing. Therefore, the accounting fees are considerably higher.
Furthermore, other limitations include a limit on one class of stock, no more than 100 shareholders, of which all must be individuals that are U.S citizens or aliens with permanent residence. Only certain trusts and estates can own an S Corp; no other partnerships or corporations can hold them.
What is the Best Business Structure for Forming an S Corp?
An LLC is traditionally a low-maintenance legal business structure recommended for businesses wanting to adopt S Corp status. However, in New York, the state’s LLC publication requirements make it quite an expensive option because it is mandatory for an LLC to publish a notice of formation weekly for six weeks.
Significant Tax Savings, Only In Some Cases
The owners and shareholders of an S-corp become employees of the business. Therefore, they must earn a reasonable salary from the business profits, resulting in business deductions. The company, not the owner, pays the Social Security and Medicare taxes for the amount earned. The business owner only pays income tax on the profits of their salary, resulting in a significant tax saving.
The IRS guidelines for what constitutes a reasonable salary say that it must match the market value for the duties carried out by the shareholder, taking their education and experience into consideration.
However, S corps are subject to double taxation in New York City because the city levies an 8.85% business tax above the federal and state taxes. Therefore, depending on the business income, some salaried business owners qualify for income tax savings on their distributions in the city.
S corp owners also pay income tax, not self-employment tax, on their distributions, calculated according to their income tax bracket.
How to Form an S Corp in New York?
TRUiC bases its business information on the experience of its founders. It suggests that before deciding on electing an S Corp New York over a default LLC or corporation, every business owner needs first to determine if it is the best strategy by getting advice from a lawyer or accountant.
Once decided, the legal business formation remains a straightforward process as long as you meet the New York deadlines. First, name your LLC or corporation and choose its registered agent. Once you file this information with the Articles of Organization, you can proceed to create the business operating agreement.
In New York, electing the S corp tax status differs slightly. Besides choosing the class by filing Form 2553 with the IRS when requesting an EIN, you must also file the New York Department of Taxation and Finance Form CT-6.
Final Take
The Empire State has long been where the American dream started for many locals and immigrants. As the American powerhouse state, it has the 10th largest economy globally. As a result, small business owners understand the importance of choosing the best legal structure for their business. Many prefer the S Corp tax designation if it can help them save on taxes, using the savings to grow their enterprises further.
