As a NY business owner, if you’re looking for a way to mitigate your self-employment taxes, an S Corp might just be the solution for you. Intimidated by how to get started? This guide walks you through starting a New York S Corp, including requirements, step-by-step instructions, and New York-specific rules and regulations you need to know.
What is an S Corporation
An S Corporation, often referred to as an S Corp, is a type of tax classification available to businesses. It is crucial to understand that it’s not a separate legal entity like a corporation or LLC. Instead, it’s a tax election that small businesses can elect.
As an S Corp, profits and losses pass through to shareholders for federal tax purposes. And shareholders pay federal income taxes on the profits. Because profits are only taxed at the personal level, the S Corp avoids the double taxation often incurred by traditional corporations.
New York state S Corp requirements
A New York state S Corporation must meet the following ownership requirements:
- Number of shareholders: 100 or fewer
- Shareholders: All of the corporation’s shareholders must be private individuals or certain trusts or estates. An S Corp cannot be owned by a partnership or corporation.
- Residency requirements: All shareholders must be U.S. citizens or permanent residents
- Class of stock: The business may only issue one class of stock
- Corporation type: Not an ineligible corporation, such as insurance companies, financial institutions, or domestic or international sales corporations
An S corporation can have both voting and non-voting shares, but there can’t be different classes of investors who are entitled to different dividends or distribution rights.
Benefits of New York S Corp
An S Corp can provide many benefits, including:
- Tax benefits: S Corps don’t pay federal taxes at the corporate level. Shareholders can be treated as employees for payroll and income tax purposes and are paid a reasonable salary via payroll. Shareholders pay payroll taxes on their reasonable salary and S Corp profits are passed through to owners as personal taxable income.
- Maintain limited liability protection from LLC: An S Corp is a tax election for your business structure, like a Limited Liability Company (or LLC). With an LLC, the business is liable for third-party matters like breach of contract, malpractice, or personal injury lawsuits, not the owners. This means that personal assets are protected from creditors.
- Straightforward ownership transfers: Interests can be freely transferred without triggering adverse tax consequences. This can be useful for business succession or bringing in new owners.
- Retirement plan: S Corps owners can contribute money to a solo 401(k) retirement plan both as an employee and employer. Employer contributions are a tax-deductible expense of the business.
How to form an S Corp in New York (Step by step)
The first step to establishing an S Corp in New York state is to form a business structure, like an LLC. Here are the steps to form an LLC in New York.
Choose a business name
New York has the same business naming rules for LLCs filing with the S Corp tax election as it does for LLCs without the election. Your name must:
- Include the phrase “limited liability company” or one of its abbreviations (LLC or L.L.C.)
- Not include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.)
- Be distinguishable from any existing business in the state, including any reserved names
To ensure your chosen name is available, search the New York Department of State’s Business Entity Database. When your preferred business name is confirmed available, you can reserve it for 60 days by filing an Application for Reservation of Name with a required fee.
Select a registered agent
A registered agent serves as your official contact with the state and is responsible for receiving legal and state documents for your S Corp. This can be an individual or a state-approved corporation.
The registered agent needs to have a physical address in New York state and must be available during standard business hours. You can act as your own registered agent or use a professional service. The individual or company you choose should be reliable, as missing important information can have serious legal consequences.
File formation documents
To form an LLC, you must file Articles of Organization with the Division of Corporations of the New York Secretary of State. This document sets out the key details of your business, such as:
- Business name
- Name and address of the Registered Agent
- Management structure
- Intended duration of business
The Articles can be submitted online, mailed, or brought in person to the New York Department of State, Division of Corporations. To file by mail, you can send the completed Articles of Organization and the filing fee to:
New York Department of State, Division of Corporations
One Commerce Plaza
99 Washington Avenue
Albany, NY 12231
There is a filing fee associated with the Articles of Organization, which is $200 for domestic LLCs and $250 for foreign LLCs. Once submitted, expect a processing time of 1 to 2 weeks. If you would like a copy of your filing back, then you’ll also need to pay a $5 copy fee.
Publish Notice of Formation
Within 120 days of filing your Articles of Organization, you’re required by state law to publish a Notice of Formation in two newspapers. These newspapers should be designated by the county clerk of the county listed on your Articles of Organization.
The notice must run once a week for six consecutive weeks. Upon completion, you’ll receive an Affidavit of Publication from each newspaper. You must then submit a Certificate of Publication, along with the Affidavits of Publication, to the Department of State.
The Department of State requires a $50 filing fee for the Certificate of Publication. This crucial step verifies that you have satisfied the legal requirement to publicize your business entity’s formation.
Draft an operating agreement
New York state law requires that all LLCs draft an operating agreement to establish the business’s rules and regulations. You can use a template to draft an operating agreement or hire a lawyer to create one.
Obtain an Employer Identification Number (EIN)
Once the formation process is complete, your New York S Corporation will need an Employer Identification Number (EIN) from the IRS. This number is like a business social security number, used for tax purposes and to hire employees. You can apply for an EIN for free through the IRS website. Be sure to keep this number safe as it is necessary for filing business taxes, opening a business bank account, and other business-related activities.
Federal S Corp election (Form 2553) steps
After your LLC is established, it’s time to elect federal S Corporation status using Form 2553, which you’ll submit to the IRS. To complete the form, provide details about the business like its name, address, tax year details, and the names and addresses of all shareholders. All shareholders must sign the form and there is no fee to file it.
The filing window for Form 2553 depends on when you want your S Corporation election to begin. If you want it to start on January 1st of the current tax year, you need to file it no later than two months and 15 days after the beginning of the tax year. This is typically by March 15th.
If you miss the March 15th window, you can still elect S Corp tax status for the current tax year, but it may only go back 75 days unless you file a late election. This is sometimes referred to as a mid-year election. With a mid-year election, you’ll be taxed as a sole proprietorship for part of the year and taxed as an S Corp for the other part.
State S Corp election (Form NY CT-6) steps
Unlike some states, New York doesn’t automatically recognize federal S Corp tax status. Instead, you’ll need to file Form CT-6 with the New York Department of Taxation and Finance.
What is NY CT-6?
NY CT-6 elects your business as an S Corporation for tax purposes within New York state. Filing this form promptly is key to ensuring your business is taxed correctly.
To complete NY CT-6, provide details like your business’s name, address, EIN, and the tax year you want the election to begin. Also, indicate whether this is your initial or subsequent election.
Download the form from the New York Department of Taxation and Finance’s website, have all shareholders sign it, and then fax it to (518) 435-8605.
If you are unable to send a fax, then you can mail it to:
NYS Tax Department
CT-6 Processing
W A Harriman Campus
Albany, NY 12227
New York S Corp compliance requirements
Biennial reporting
An important step in maintaining your New York S Corp status is completing biennial reporting obligations. These reports should be submitted every two years and provide updated information about your business to the New York Department of State.
Federal tax requirements
New York S Corps must also file a federal income tax return (Form 1120S) and state tax returns, plus pay any state-level taxes. Additionally, a New York S Corp is required to distribute K-1 forms to all shareholders, detailing their share of the business’s income for the tax year.
Recordkeeping
New York S Corporations need to keep detailed records of all business transactions and ensure accurate and timely submission of all tax forms. If you need assistance, don’t hesitate to consult a tax professional or legal advisor. An overlooked requirement or missed deadline could result in penalties or even revocation of your S Corp status, interfering with the smooth operation of your business.
New York S Corporation considerations
Form NY CT-6
While operating as an S Corporation in New York, it’s important to note that New York doesn’t automatically recognize federal S Corp tax status. To have the state recognize your S Corp status, you’ll need to submit Form NY CT-6 to the New York Department of Taxation and Finance.
This extra step, though seemingly minor, is paramount in ensuring your business enjoys all the advantages of being an S Corp in New York, such as potential tax savings.
Form CT-3-S
S Corps in New York State are subject to state taxes. While an S Corp is largely exempt from federal income tax, it must still pay the New York State Corporation Tax. If an S Corp has income from New York sources, it must file Form CT-3-S, New York S Corporation Franchise Tax Return.
New York City S Corporation: New York City General Corporation Tax (GCT)
New York City doesn’t recognize the federal S Corp election and treats S Corps like C Corporation. This means a New York City S Corporations that conduct business or derive income from activities in New York City must also pay the General Corporation Tax (GCT). This is important to note as not all cities impose this additional tax on S Corporations. The GCT rate is 8.85% of the corporation’s net income from New York City sources.
To comply with this, S Corps in NYC must submit Form NYC-4S, the New York City General Corporation Tax return. Accurate filing is crucial to avoid any discrepancies that could result in legal complications or fines. It’s highly recommended to consult with a tax professional to ensure proper compliance.
Is a New York S Corp right for me?
If you’re unsure about electing the S Corporation tax status for your LLC, consider if you meet the following:
- You have a well-established business with a solid revenue base.
- Your yearly self-employed profit is $60,000 or more. If your business is established in New York City, this threshold is higher, $80,000, due to the city’s General Corporation Tax.
- You are a U.S citizen or a permanent resident and don’t plan to bring on shareholders from other countries.
Remember, the decision should be based on thorough financial analysis and legal consultations to minimize tax burdens and maximize potential tax savings for corporation shareholders.
Still unsure? Read this: LLC vs S Corp: The Difference and Tax Benefits
New York S Corporation FAQ
Does NYS recognize S Corp?
Yes, New York State recognizes S Corp status, but it doesn’t automatically grant it based on federal S Corp recognition. Businesses must submit Form NY CT-6 to the NY Department of Taxation and Finance to secure state S Corp status.
What are the benefits of an S Corp in NY?
An S Corporation’s pass-through taxation structure allows the business’s income or losses to flow directly to the owners’ personal income tax returns, avoiding double taxation. S Corp owners must pay themselves a reasonable salary, via payroll, which is subject to Social Security and Medicare taxes. S Corp profits are not subject to these taxes, and owners avoid paying self-employment tax on their profits. This structure can lead to potential tax savings.
How much does an S Corp cost in NY?
It costs $200 to file LLC Articles of Organization in New York, which is the first step to obtaining S Corporation status. In addition, there may be additional costs for publishing your Notice of Formation. It’s important to remember that specific tax obligations come with becoming an S Corp, such as filing the Form CT-3-S and potentially paying the General Corporation Tax, if you live in New York City, plus any other state taxes.
How to start an S Corp in NY?
The first step to starting a New York S Corp is to form a legal structure, like an LLC in the state of New York. Once you’ve established your legal structure, you’ll file the federal S Corp election paperwork, Form 2553, with the IRS. New York doesn’t automatically recognize federal S Corp status, so you’ll also need to file Form NY CT-6 with the New York Department of Taxation and Finance. This filing ensures that your business is also taxed as an S Corp on the state level.
How to dissolve an S Corp in NY?
To dissolve an S Corporation in New York, several steps are required. Firstly, a majority of shareholders must consent to the dissolution. Then, Form CT-245, “Dissolution Consent Form,” must be completed and filed with the New York Department of Taxation and Finance. Also, outstanding taxes must be settled, and a “Certificate of Dissolution” must be secured with a $60 filing fee.
Be sure to notify creditors of the dissolution and properly distribute the corporation’s assets among shareholders. It’s strongly recommended to consult with a legal advisor during this process to ensure all requirements are met.
Conclusion
There you go—your comprehensive guide to S Corporations in New York. And while navigating this complex process, you don’t have to go at it alone. Collective specializes in helping entrepreneurs form S Corporations in NYC, and Collective members save an average of $10,000* year in taxes with an S Corp.
*Based on the average 2022 tax savings of active Collective users with an S Corp tax election for the 2022 tax year
Garima Khatri is a freelance writer and content strategist for tech and fintech brands. Outside of work, you can find her exploring quaint coffee shops and binging on sci-fi series.