Frequently Asked Questions About LLC vs S Corp in New York
Launching a business is an exciting venture, and if you’re considering doing so it’s important you understand all available options3 min read
Launching a business is an exciting venture, and if you’re considering doing so it’s important you understand all available options. Two popular entities are LLCs (Limited Liability Companies) and S Corps, each with different advantages and disadvantages. With a growing number of startups in New York, many entrepreneurs are looking for counsel that understands local regulations. New York follows both federal and state law, so it’s important to understand the complex legal landscape and consult with experienced New York business attorneys.
To get you started, here are some of the frequently asked questions regarding LLC and S Corp in New York:
1. What is an LLC?
A Limited Liability Company, or LLC, is a hybrid business entity, combining aspects of both a corporation and a partnership. Members of an LLC have limited personal liability, meaning their personal assets cannot be subject to the debts and obligations of the LLC. As the name suggests, LLCs offer the limited liability you’d receive from a corporation, but with the benefit of pass-through taxation like a partnership, where the members report business income or losses on their individual tax returns.
2. What is an S Corp?
An S Corporation is a type of corporation that has chosen to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. In such entity, LLC taxes are not calculated at the corporate level, meaning shareholders only pay income tax on profits distributed to them. The upside of S Corps is that profits are only taxed once, and not at the business level. The downside is that S Corps impose stricter regulations like the requirement to maintain certain records, and they come with additional tax filing requirements.
3. What is the Difference Between an LLC and an S Corp?
The most significant difference between the two is how the entities are taxed. An LLC is a pass-through entity, meaning business income and losses are passed directly to the business owners and reported on their personal tax returns. S Corps, on the other hand, allow profits and losses to be reported only on the corporate tax return, meaning profits and losses are only subject to one level of taxation.
Additional differences include S Corps have limits on the number of shareholders, who must be US citizens or permanent residents. LLC owners can be foreign investors, and the number of members is unlimited. S Corps also come with annual filing requirements to the IRS, as well as more restrictive guidelines that restrict how profits can be distributed. LLCs have more flexible profit distributions.
4. Which Entity is Right For Me?
The type of business entity you choose depends on the operational needs of your specific business, as well as state and federal taxation regulations. For businesses that anticipate significant increases in income, the pass-through taxation and flexible profit distributions of the LLC can offer significant tax benefits. For businesses that are expecting increased revenues over the long-term, the single-level taxation of an S Corp can be advantageous.
It’s important to consult with experienced business lawyers in order to find the right legal structure that suits all of your needs. UpCounsel’s network of knowledgeable business attorneys can advise you on which structure is most advantageous for your business, ensuring you best take advantage of the complex licensing, tax, and legal regulations available in New York.
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