Law Firm S-Corp Formation In New York

If you're a law firm looking to form an S corp in New York, there are a few things you should know. Firstly, New York State does recognize S corp status, but it doesn't automatically grant it based on federal recognition. To secure this status, you'll need to submit Form NY CT-6 to the New York Department of Taxation and Finance. This formality is crucial for ensuring your business enjoys the benefits of being an S corp, including potential tax savings. S corps are also limited liability entities, which means your personal assets are protected from business debts and obligations. However, it's important to note that S corps must abide by meeting requirements and official regulations, and there are specific rules governing how owners can be compensated.

Pros and cons of S corp status

S-corps are a popular entity type for businesses in New York City. They are a separate legal entity that can enter into contracts and conduct business operations. S-corps offer several benefits, including limited liability protection for shareholders, a familiar business structure, and the potential for reduced self-employment taxes. However, there are also some drawbacks to consider before forming an S-corp in New York.

One of the main advantages of an S-corp is the limited liability protection it offers to shareholders. This means that shareholders' personal assets are generally protected from business debts and obligations. The business itself, rather than its owners, is held liable in most cases involving matters such as breach of contract, malpractice, or personal injury lawsuits. This can provide peace of mind and reduce the personal risk associated with running a business.

Another advantage of S-corps is their familiar structure. S-corps follow a traditional corporate structure with officers such as a president, vice president, secretary, treasurer, and chief operating officer. This structure is well-known and may be preferred by those who want a clear separation of roles and responsibilities. Additionally, S-corps may provide opportunities for reducing self-employment taxes, as they are taxed differently from traditional corporations.

However, there are also some disadvantages to consider. Forming an S-corp in New York can be more complicated and expensive than forming a limited liability company (LLC). S-corps must adhere to meeting requirements and other official regulations, which can be time-consuming and administratively burdensome. Additionally, S-corps may face double taxation in New York City, as they are subject to both corporate taxes and the NYC general corporation tax.

It's important to note that each business is unique, and the decision to form an S-corp should be made based on the specific needs and goals of the business. Factors such as management structure, ownership flexibility, and tax considerations should be carefully weighed before making a decision. Consulting with an experienced New York business lawyer or accountant can help business owners understand the legal and tax implications of each entity type and make an informed choice.

LLC vs S corp

In New York, a law firm can be established as a standard corporation or a limited liability company (LLC) that has elected to be treated as an S corporation for tax purposes. An S corp is a type of business tax filing status that allows corporations to pass corporate income, losses, deductions, and credits to their shareholders.

Ownership

LLCs can have an unlimited number of members, whereas S corps are restricted to a maximum of 100 shareholders. Non-US citizens or residents can be members of LLCs, but S corps cannot have non-US citizens or residents as shareholders. S corps cannot be owned by corporations, LLCs, partnerships, or many trusts, but LLCs are not subject to these restrictions. An S corp can own an LLC, but the reverse is not usually true.

Management

LLC owners can choose to have members (owners) or managers run the business. If the members manage the LLC, the business will operate like a partnership. If the LLC is run by managers, the members will not be involved in daily business decisions, and the business will resemble a corporation. S corps have directors and officers, with the board of directors overseeing corporate affairs and handling major decisions. Shareholders do not manage the business and affairs, and S corps face more extensive internal formalities than LLCs.

Taxation

Both LLCs and S corps are pass-through tax entities, meaning that no income taxes are paid at the business level. Business profit or loss is passed through to the owners' personal tax returns, and any necessary tax is reported and paid at the individual level. However, S corps allow corporate income, losses, deductions, and credits to be passed through to their shareholders, whereas LLCs pass these items through to the owners' personal tax returns. As a result, LLC profits are taxed at the owner's tax rate. LLCs are taxed like partnerships or sole proprietorships, and single-member LLCs are typically taxed as sole proprietorships. S corps can provide substantial savings on self-employment taxes, but they are more complicated to maintain than LLCs, as they require running payroll and paying a reasonable salary. LLCs are also easier and cheaper to set up and administer than S corps.

Liability

Both LLCs and S corps offer limited liability protection, meaning that the business, not the owner, is responsible for its debts and liabilities. However, the LLC will not be subject to a double tax on the increased value of the property when it is sold or liquidated, whereas a corporation would be.

Compliance

Both LLCs and S corps are subject to certain obligations imposed by the state, such as appointing and maintaining a registered agent, filing annual reports and paying annual fees, and notifying the state of any changes to the business. However, S corps must also abide by meeting requirements and other official regulations.

Filing requirements

To form an S corporation in New York, you must first form a standard corporation by filing a certificate of incorporation with the Department of State. This can be done by filing online or by mailing in a paper form. The total charge for creating a New York corporation is about $195.

Even if you have already elected S corp status at the federal level, you must make a separate election for New York State. To do this, you must file Form CT-6 with the New York Department of Taxation and Finance. This form can be downloaded from the Department's website and must be signed by all shareholders. It should be accompanied by a copy of your federal S corp approval letter and can be faxed to (518) 435-8605 or mailed.

Following this, you will receive approval paperwork within a few days. New York S Corps must also file a federal income tax return (Form 1120S) and state tax returns, as well as pay any state-level taxes. They are required to distribute K-1 forms to all shareholders, detailing their share of the business's income for the tax year.

To terminate S corp status, file Form CT-6.1 with the New York Department of Taxation and Finance.

Tax implications

When considering the tax implications of forming an S corporation in New York, it is important to understand the unique tax structure of S-corps. As pass-through entities, S-corps offer tax savings through how income distribution and loss limitations work, as well as how and when income and expenses are taxed.

One of the primary advantages of an S-corp structure is payroll and income tax savings. Owners of an S-corp are considered employees, and they pay themselves a "reasonable" salary from business profits, which are subject to income taxes. The business itself pays Social Security and Medicare taxes at the lower employer rate, resulting in tax savings compared to other entity types. Additionally, S-corps allow employee-shareholders to make pre-tax retirement contributions, further reducing their taxable income.

However, there are also disadvantages to consider. S-corps must abide by meeting requirements and official regulations, and they face limitations on the amount of losses that shareholders can deduct on their individual taxes. In New York, S-corps are subject to the city's 8.85% business tax, in addition to state and federal taxes, which can significantly increase their tax bill.

It is also important to note that S-corps in New York must meet certain requirements to be treated as such for tax purposes. Shareholders of eligible federal S-corps who have not elected to be treated as a New York S-corp for the current tax year will be deemed to have made that election if their corporation's investment income exceeds 50% of its federal gross income. Additionally, to qualify for New York S-corp treatment, a corporation must be a general business corporation taxable under Article 9-A of the New York State Tax Law.

When deciding whether to form an S-corp in New York, it is advisable to seek the help of a tax professional familiar with local and state tax obligations to ensure compliance with all applicable laws and regulations.

Ownership and shareholder rules

If you are considering forming an S corporation in New York, there are several ownership and shareholder rules you need to be aware of. Firstly, S corporations are limited in the number and type of shareholders they can have. All shareholders in an S corp have the same rights to asset liquidation, profits, and distributions. For example, a shareholder who owns 25% of the shares can only receive 25% of the distributions. Shareholders who are also employees of the business must pay themselves a "reasonable" salary, from which federal and state taxes, Social Security, Medicare (FICA), and unemployment taxes are withheld. Any profits above this "reasonable" salary can be paid out to shareholders as dividends, which may be taxed at a lower rate than income. Shareholders should be cautious when setting their salaries, as the IRS is increasingly cracking down on S corps that abuse this rule.

Another important aspect of S corp shareholder rules is that shareholders can sell their shares to a third party, unless there is an agreement in place prohibiting such a sale. If there is no agreement in place, the sale of shares to a third party will make that person a co-owner of the business. It is also worth noting that S corps must abide by meeting requirements and other official regulations, which can be a more complicated and time-consuming process than forming an LLC.

In terms of taxation, S corps offer shareholders limited liability protection, meaning that personal assets are protected from business debts and obligations. Shareholders pay taxes on their pro-rata shares of income, gains, losses, and deductions that are included in their federal adjusted gross income. Resident shareholders pay taxes on actual distributions of cash or other property from the corporation, while non-resident shareholders do not. Additionally, S corps must file estimated tax forms and make quarterly payments if they expect to owe more than $1,000 in franchise taxes after credits.

Finally, it is important to note that S corp status is not recognized in New York City, so S corps will be subject to double taxation and must pay the city's general corporation tax. To qualify for New York S corporation treatment, a corporation must be a general business corporation taxable under Article 9-A, be a banking corporation taxable under Article 32, or be the parent of a qualified subchapter S subsidiary.

Frequently asked questions