LLC vs. S Corporations in New York: What’s the Difference?

Both LLCs and S corporations are effective methods of asset protection, but they differ in four key ways: an LLC may have an unlimited number of members, including foreign owners, and its entire net income is typically subject to self-employment taxes, while an S corporation is capped at 100 shareholders who must be U.S. citizens or resident aliens and pays FICA taxes only on a reasonable salary. This article explains the differences between LLCs and S corps in New York, along with the pros and cons of each, so you can decide which structure will best shield your business.

What Are the Differences Between LLCs and S Corps in New York?

The main differences between LLCs and S corporations in New York concern the number and residency of owners, how income is taxed for self-employment purposes, and the formalities each structure must observe. The table below summarizes them side by side:

Feature	LLC	S Corporation
Number of owners	Any number of members	Up to 100 shareholders
Who can be an owner	Individuals, corporations, partnerships, other LLCs, or any legal entity; U.S. citizenship not required	U.S. citizens or resident aliens, certain trusts, and estates; no partnerships, corporations, or non-resident aliens
Self-employment taxes	Entire net income typically subject to self-employment taxes	FICA taxes paid only on a “reasonable salary”; earnings after salary may be treated as unearned income
Classes of ownership	Flexible membership structure	Only one class of stock permitted
New York formation	Articles of Organization ($200) plus newspaper publication requirement	Existing corporation or LLC, plus IRS Form 2553 and New York Form CT-6
Ongoing formalities	Biennial statement; fewer mandatory formalities	Biennial statement plus stock certificates, bylaws, and regular shareholder and director meetings

In more detail, there are four main differences:

• Number of owners. LLCs can have any number of members, while S corporations are limited to up to 100 shareholders.
• Residency of owners. LLC members do not have to be US citizens or residents, but S corp shareholders must be US citizens or resident aliens.
• Self-employment taxes. An LLC’s entire net income is typically subject to self-employment taxes. On the contrary, S corps only pay FICA taxes on “a reasonable salary,” and corporate earnings after salary may be able to be treated as unearned income that will not be subject to self-employment taxes.
• Reporting requirements. Corporations have more mandatory reporting requirements than LLCs. Both LLCs and corporations must file a biennial statement every two years. However, corporations must also issue stock certificates, adopt bylaws, and hold regular shareholder and director meetings. LLCs, on the other hand, have a newspaper publication requirement.

What Is an LLC in New York?

An LLC, which stands for limited liability company, is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability protection of a corporation. The owners of an LLC are called “members,” and a member can be an individual, corporation, partnership, another LLC, or any other legal entity. LLCs in New York are governed by the New York Limited Liability Company Law.

How Do You Start an LLC in New York?

To start an LLC in New York, you choose a compliant name, file the Articles of Organization with the Department of State, pay the required fees, publish notice of formation in two newspapers, and adopt an operating agreement. The general steps are:

• Choose a name for your LLC. The name must include the words “Limited Liability Company” or the abbreviation “LLC” or “L.L.C.” The name must not already be used by another LLC, corporation, or limited partnership, and it must comply with New York State’s list of prohibited and restricted words. You may submit a name availability inquiry or file an application for reservation of name with the Department of State.
• Complete the Articles of Organization. You must fill out the Articles of Organization for your LLC in accordance with the instructions of the New York Department of State.
• Pay the required fees. In New York, the filing fee is $200. New York also has an annual filing fee that ranges from $25 to $4,500, depending on your LLC’s gross income sourced from New York in the previous year. Every two years, the LLC must also file a biennial statement with the Department of State for $9.
• Publish the notice of formation. In New York, all LLCs must publish notices in two local newspapers for six consecutive weeks within 120 days of formation. Once publication is complete, the LLC must obtain an Affidavit of Publication and submit it with a Certificate of Publication form to the New York Division of Corporations. There is a $50 filing fee for the Certificate of Publication.
• Make an LLC operating agreement. This is required by New York and helps avoid future disputes among members of an LLC. The operating agreement must be entered into within 90 days after the filing of the Articles of Organization.

What Are the Pros and Cons of an LLC in New York?

The main advantages of an LLC are liability protection, lower paperwork, and tax flexibility; the main drawbacks are publication and renewal costs and restrictions on paying yourself wages.

Pros of an LLC

• Liability protection. An LLC protects members and managers: the owner’s personal assets are shielded from lawsuits brought by clients or customers with whom they have done business. All external business-related lawsuits are held against the company rather than the individual owner.
• Less paperwork and lower costs. LLCs generally require less paperwork and lower filing costs than corporations.
• Easier to maintain. LLCs allow easier movement of income to business members while avoiding unnecessary taxes.
• Tax flexibility. At any point, an LLC may choose to be taxed as an S corp or a C corp by filing a document called an election with the IRS.

Cons of an LLC

• Publication and renewal costs. The renewal fees and newspaper publication requirements can be pricey.
• No wages for members. Even if you are a member of your own company, you cannot pay yourself wages.
• Additional taxes in some states. LLCs are subject to franchise and capital values taxes in select states, and ownership of the LLC needs to be distributed among all company members (which can also be a pro).

Here is an example that demonstrates the pros and cons of an LLC: suppose you start a record label and sign an artist, and for every gig the artist books, you receive $1,000. In a turn of events, the artist claims that you have actually been getting paid $1,500 and wants to file legal action. An LLC would protect all income made during that period and all assets you hold outside of the contract. However, you would not be able to pay yourself as a manager — the $1,000 you make is the artist’s payment to you, and you would not be able to claim any other money from the artist.

What Is an S Corporation in New York?

An S corporation, also known as an S corp, is a closely held corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. This election allows the corporation to avoid double taxation because it is not required to pay corporate income taxes on the company’s profits: all profits and losses are passed directly to the shareholders, which is called pass-through taxation. To form an S corp in New York, you need to have a corporation or LLC, then file for federal S election using IRS Form 2553, then file for New York’s S election using Form CT-6.

The IRS has requirements for a corporation or LLC to qualify for S corporation status:

• The corporation must be a domestic corporation.
• Shareholders may be individuals, certain trusts, and estates.
• Shareholders may not be partnerships, corporations, or non-resident aliens.
• S corporations are limited to 100 shareholders.
• S corporations may have only one class of stock.
• Certain financial institutions, insurance companies, and domestic international sales corporations are not eligible for S corporation status.

What Are the Pros and Cons of an S Corporation in New York?

The main advantages of an S corporation are liability protection, the ability to sell stock, and start-up loss write-offs; the main drawbacks are IRS scrutiny and the 100-shareholder cap.

Pros of an S Corporation

• Liability protection. Like LLCs, owners of S corps are protected from legal liability: the owner’s personal assets are shielded from lawsuits brought by clients or customers with whom they have done business.
• Stock options. An S corp can sell stock and has the option to purchase stock at a fixed price.
• Start-up loss write-offs. Opening an S corp allows the owner(s) of the business to write off eligible start-up losses from their chargeable taxes.

Cons of an S Corporation

• IRS scrutiny. S corporations are highly scrutinized by the IRS, since tax treatment changes with the way payments are distributed to owners (salaries or dividends).
• Shareholder cap. Ownership of an S corporation is capped at 100 shareholders, and owners risk losing S corp status if the IRS learns that a greater number of people are running the company.

Frequently Asked Questions

What is an example of a court case involving an LLC’s liability protection?

In Naples v. Keystone Building and Development Corp., a family entered into a contract with Keystone to have a new home built for $620,500 and discovered major problems with the property shortly after moving in. While Keystone did send multiple crews to make repairs, the problems persisted. The Naples family filed a lawsuit asking for $129,330 in repairs, but because Keystone was an LLC, its assets remained protected, and the court awarded the family a total of $59,140 after trial — roughly half of the alleged damages. In this situation, an LLC and an S corporation would have served the same legal purpose, as both offer limited liability protection.

Is an S corporation an LLC?

No. In the eyes of the IRS, the terms LLC and S corporation essentially refer to the way in which a company is taxed. A multi-owner LLC is taxed like a business partnership by default, though LLCs can choose to be taxed as S corps by filing an election. Even though an LLC can technically choose to be taxed as an S corp, the two business structures are inherently different: LLCs are known to be less expensive and require less paperwork, while S corps tend to be more complex to legally form.

Can an S corp be a member in an LLC?

Yes. An S corp may own up to 100% of an LLC. However, LLCs are not permitted to have any ownership stake in S corporations. Single-owner LLCs, called “disregarded entities” by the IRS, are the only exception and are allowed to own and receive profits from S corps in which they hold a position.

What type of company should I open?

Both LLCs and S corporations are great tools for asset protection: each protects your personal assets and comes with multiple tax advantages. Before settling on one option for your business, consult with a licensed asset protection attorney who can help you decide which type of company will benefit you in the long run.