Starting your own business means making smart choices early on. One of the most significant decisions is selecting the right structure. Many people ask whether an S-Corp might be a better option than a basic LLC. If you’re starting in New York, it’s important to understand the differences between these two options and how they can complement each other.
Understanding LLCs and S-Corps
An LLC, or Limited Liability Company, protects your personal assets from business debts. It also offers flexible management and tax options. By default, an LLC is taxed as a sole proprietorship or partnership; however, you can ask the IRS to treat your LLC like an S-Corp. An S-Corp is not a business type under New York law but a tax classification. You still have an LLC under state law, but for federal tax purposes, it gets different treatment.
Benefits of choosing S-Corp taxation
Electing S-Corp status can save you money on self-employment taxes. With a standard LLC, all your profits are subject to these taxes. When taxed as an S-Corp, you pay yourself a “reasonable salary,” which is subject to payroll taxes. Any leftover profits get taxed at a lower rate. This setup can lower your overall tax bill. In New York, you must also file Form CT-6 to have your S-Corp election recognized for state taxes.
When an LLC should elect S-Corp status
If your business consistently earns steady profits and you are actively involved in it, electing S-Corp status may make sense. High profits without this election can result in substantial self-employment taxes. However, if your business is new or not yet generating significant revenue, opting for standard LLC taxation may be simpler and more cost-effective. New York also imposes its own filing fees and publication rules for LLCs, so make sure you meet these requirements.
How to decide what works best for you
Choosing between an LLC and electing S-Corp taxation depends on your income, goals, and how much paperwork you want to manage. Both options offer strong liability protection. However, S-Corp taxation can offer significant tax advantages if your business experiences rapid growth and generates substantial profits.
