Choosing the right business structure to minimize tax liability can be daunting. An S corporation can save your money in New York through tax savings.
By the end of this guide, you will understand how these entities work and the benefits they provide. You will learn about the formation requirements, compliance obligations, and operational considerations for S corporations. With this thorough understanding, you can work with an S-corp formation attorney to decide how to incorporate your business.
What Is an S Corporation?
An S corporation is a legal business entity. It limits owners' liability for corporate debts and legal liabilities. It also allows pass-through taxation, thus avoiding the double taxation of C corporations.
To form an S corporation, you must file articles of incorporation to form a corporation, or articles of organization to form a limited liability company, with New York State and inform state and federal tax agencies that you elect treatment as an S corp. The corporation is owned by shareholders or members, and it must follow prescribed formalities to maintain its status.
Advantages of an S Corp for Small Business Owners
The greatest benefit of an S corporation is the tax savings it can provide to New York small businesses. S corps are also limited liability entities. Finally, S corporations have flexibility in how owners distribute profits and transfer ownership shares.
The advantages of an S corporation come from its taxation, limited liability, and flexible ownership. You should consider an S corp and whether it addresses your company's needs and challenges. Contact a lawyer or financial professional to determine whether this entity provides long-term cost savings and improved business operations.
Disadvantages of an S Corp for Small Business Owners
The biggest disadvantage of S corps is the rule that governs how owners can be compensated. Taxing authorities will not set your salary, but they can tell you when you can and cannot take profit distributions (on which you pay no payroll taxes).
Before owners can take profit distributions, the company must pay them a reasonable minimum salary. This requirement ensures that owners cannot reclassify their compensation to evade payroll taxes.
This disadvantage is most burdensome on start-ups with minimal revenue. However, this requirement does not apply to LLCs, which often makes LLCs a better starting point until your business makes enough profit to pay salaries to shareholders.
Other disadvantages of S corporations include an imposed limit on the number of shareholders and the accounting-intensive process for generating tax schedules for each shareholder.
Requirements and Regulations for Forming an S Corp in New York
This table explains the requirements for forming a New York S corporation. Understanding these requirements will ensure you avail yourself of the cost savings provided. Also, by complying with the regulations, you will make informed decisions and maintain your company's legal and tax status.
You form S corps for entities with 100 or fewer shareholders by filing with the state. You elect pass-through treatment by the IRS. You will file an annual tax return. Consult a professional to ensure you fully understand and comply with state law.
Step-by-Step Guide to Converting to NY S Corp
You can get the benefits of an S corp by converting your C corp or sole proprietorship. Make sure you understand the requirements under New York corporation laws.
The following steps provide a comprehensive resource to help small business owners navigate a conversion to an S corp smoothly and cost-effectively.
Step 1. Filing Necessary Forms and Documents for New York S Corporation Status
If you have a limited liability company (LLC), you have two options for receiving the benefits of an S corp: You can either form a new S corporation and move all of your LLC’s assets into it, or you can simply elect S corp status for your new or existing LLC. The second option eliminates the need to move the LLC’s assets and liabilities to a new S corp.
You can exercise the first option by forming a new S corp and shutting down your existing LLC or sole proprietorship. You start by forming a New York S corp by filing articles of organization for a limited liability company (LLC), or articles of incorporation for a corporation, with the New York Department of State.
Once you have your small business corporation or LLC, you file Form CT-6 with the New York State Department of Taxation and Finance for New York S corp status. You file Form 2553 with the Internal Revenue Service for recognition as a federal S corporation.
You can exercise the second option by filing IRS Form 8832 to elect pass-through tax treatment and New York State Form CT-6 to elect S corp treatment for a new or existing LLC.
Step 2. Notifying Stakeholders and Employees
Owners and employees must be involved in the conversion. You must notify corporation shareholders and directors, or members of limited liability companies. You might even need a shareholder or member to vote to approve it since their personal income tax obligations could change. You need to update all your contracts, including employment agreements, to reflect the new entity.
Finally, you will need to review and implement changes in withholdings and payroll deductions for both S corp owners and employees. As an S corp, you must pay a “reasonable minimum salary” to each owner of the S-corp for services provided, before any distributions may be made to that same individual. You should verify with a seasoned business attorney what qualifies as “reasonable” for your operations.
Step 3. Updating Tax Obligations and Filings
Based on which action you take, if you form a new New York S corp, you must get new taxpayer identification numbers and accounts for state and federal taxes. You should work with an accountant to review the company's accounting methods and financial reporting and adjust them if necessary to comply with tax regulations.
Finally, you need to make sure your tax preparers file the S corp's tax return correctly to get all the benefits of a pass-through entity.
Step 4. Transferring Assets and Liabilities
If instead of forming a new New York S Corp, you simply change your corp status, your converted entity already owns all the company's assets and liabilities. But if you change the business structure by forming a new S corporation, you need to move all assets to the new entity, including:
- Accounts receivable
- Accounts payable
- Real estate
- Intellectual property
- Contractual obligations
Review your company's assets, liabilities, and agreements with your legal and financial team to make sure you understand the effects of this transfer.
Tax Implications and Potential Savings of S Corporations
Most S corps exist for tax purposes. C corps are subject to double taxation. A corporation with New York receipts pays corporate tax on its taxable income. You then pay federal income taxes on the dividends or salary paid by the corporation to you.
In contrast, business profits of S corps are only taxed once. S corps do not pay corporate income tax. Instead, the tax obligations pass through the corporation to its owners. For pass-through entities, S corp shareholders only pay taxes on their share of the company's net income for that tax year.
Another tax benefit is that you can save on self-employment tax by paying yourself a reasonable salary rather than receiving ownership distributions. You should consult a tax professional to fully understand the tax savings.
Compliance Obligations for NY S Corporations
An S corp must file documents with both the state and federal government. You must file articles of incorporation for a corporation, or articles of organization for a limited liability company, along with a filing fee, with the New York Department of State and a Form 2553 with the IRS to elect S corp status. New York corporations that file Form 2553 are recognized by the state as S corps.
You will maintain compliance by:
- Holding regular shareholder or member meetings and director meetings;
- Keeping corporate minutes of the meetings;
- Maintaining financial records of all business income;
- Filing tax forms to pay federal and state taxes;
- Paying reasonable minimum salaries to shareholders or members (W-2).
Losing your S corp status could have serious liability and tax effects. You should have a corporate attorney prepare a compliance plan to make sure your corporation satisfies all its regulatory obligations.
Comparison: S Corp vs. Other Business Entities
Before forming an S corporation, you must understand how it can benefit owners of small businesses in New York. The table compares different legal entity types so you can make informed decisions about your company's structure.
S corporations provide an attractive combination of pass-through taxation and limited liability protection. Assess your needs and consult a professional about whether an S corp will meet your needs. You can contact a lawyer or find other resources that can guide you in forming an S corp for your venture.
Take Your Business to the Next Level with Lawyer For Business: Request a Legal Consultation Now!
An S corp can solve problems faced by owners of small businesses. These entities can reduce your corporate and self-employment tax burdens while limiting your liability.
Lawyer For Business provides knowledge and experience as you navigate the process of forming a New York S corp. With legal assistance, you will form your corporation correctly, maintain New York state and federal compliance, and maximize its benefits.
Contact us for personalized legal guidance as you explore how an S corp can save you money and address the challenges your company faces.
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