A New York S-Corporation (S-Corp) is a standard corporation or a Limited Liability Corporation (LLC) that has elected to be legally viewed as an S-Corp for taxation purposes.

Like corporations, an S-Corp is viewed as a separate entity to the shareholders and provides limited liability. This means that shareholders’ personal assets can not be used to settle business debts.

Pros and Cons of an S-Corp

As with any business structure, S-Corp has certain advantages as well as some disadvantages. Choosing this business structure will depend on the specific needs of the business and its owners.

1. Cost effective

An S-Corp is a more affordable business structure than for example an LLC which most people are familiar with. It might also be possible to save on self-employment tax rates provided that the shareholder earns a reasonable salary and is employed by the S-Corp.

2. Assets are protected

Like many other business structures, S-Corps offer limited liability in terms of personal assets. Effectively this means that an owner’s personal assets (house, car & bank accounts) can not be used to settle any outstanding business debts.

A partnership for example is not seen as a separate entity and does therefore not provide the same liability protection an S-Corp does.

3. Simple transfer of ownership

It is a straightforward process to transfer dividends in an S-Corp as there are no tax related penalties or additional costs. In an LLC for example, transferring 50% or more can mean an end to the entity in its entirety.

Another added benefit is that the transfer of ownership can be done without reconciling property costs or going through difficult accounting processes.

4. Double taxation in New York City

Normally an S-Corp will limit the amount of deductions its shareholders can make on their personal income tax provided that certain requirements are met. Unfortunately, NYC state does not recognise S-Corp status which means that it is subject to double taxation and must pay the city’s general corporation tax.

5. Shareholder limitations

In an S-Corp, there is a limitation to the number and type of shareholders within the business. A maximum of a 100 shareholders are allowed and they must be either US citizens or residents. No special allocations are made which means that all shareholders have equal rights to asset liquidation, distributions and profits. For example, a shareholder with 15% shares in the business is entitled to 15% of the distributions.

Creating a New York S-Corp

Before a selection for an S-Corp can be made, a standard corporation must be registered by filing for a certificate of incorporation with the State Department. The cost is around $195 without all the other legal fees. Filling can be done online or by forwarding the forms to New York Department of State, Division of Corporations, One Commerce Plaza, 99 Washington Avenue, Albany, NY 12231.

The approval documentation should arrive within a few days. These documents must be kept as they will be required when opening a business bank account and other business processes.

An S-Corp in New York must keep record of the following either with a registered appointed agent or at the main business address:

  • All accounting record
  • Meeting minutes from all shareholder, executive or board of director meetings.

A business that has workers or employees must also register for an employer identification number (EIN) with the IRS. A separate state ID is not required, however there might be additional licenses and permits that are needed.

The Verdict

An S-Corp can be selected for tax purposes in New York State and provided limited liability to its shareholders. There are pros and cons to take into consideration and the decision to select an S-Corp will likely depend on the needs of the business and its owners. However, the advantages of an S-Corp outweighs the disadvantages. And it is a popular choice for many businesses due to the cost effectiveness in the formation process.

Each state has it’s own legal requirements and regulations businesses must adhere to. So it is advisable to budget for legal assistance or council when deciding to form a business in New York. This could avoid costly delays in the application process.