S-Corp, LLC or C-Corp: Choosing the Right Entity for a New York Business

Choosing between an S-Corp, an LLC, and a C-Corp for a New York business depends on your tax situation, your growth plans, and whether you will have outside investors. For most owner-led New York businesses between $1M and $50M in revenue, an LLC taxed as an S-Corp is the most common answer, but the New York pass-through entity tax and the NYC unincorporated business tax change the math in ways that matter.

The worst choice is the one made once and never revisited. The entity that was right at $500K in revenue may be wrong at $5M. This article explains the New York-specific considerations so you can make the call with the full picture.

What Is the Difference Between an LLC, S-Corp, and C-Corp?

An LLC is a legal structure, not a tax classification. By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC is taxed as a partnership. An LLC can elect to be taxed as an S-Corp or a C-Corp. The legal structure (LLC) and the tax election (S-Corp) are separate decisions.

An S-Corp is a tax election that passes income through to the owners' personal returns and avoids corporate-level tax. It requires reasonable owner compensation and has ownership restrictions (no more than 100 shareholders, US residents only, one class of stock).

A C-Corp pays tax at the corporate level and again when profits are distributed as dividends. It has no ownership restrictions, can have multiple classes of stock, and is the structure venture investors require. For most small New York businesses, the double taxation makes a C-Corp the wrong choice unless outside investment is planned.

How Does the New York Pass-Through Entity Tax Affect This?

New York has a pass-through entity tax (PTET) that allows eligible partnerships and S-Corps to pay state tax at the entity level, which the owners then credit on their personal returns. This was designed as a workaround for the federal SALT deduction cap.

For New York businesses, the PTET can reduce the overall tax burden for owners in high personal brackets. The election is optional and annual. If your business is an eligible partnership or S-Corp, the PTET is usually worth electing. If you are a C-Corp, the PTET does not apply because you already pay tax at the corporate level.

The decision to elect S-Corp treatment in New York is now more favorable than it was before the PTET, because the entity-level tax reduces the owner's personal state tax exposure. This is a New York-specific reason to prefer the S-Corp election over a default LLC taxation.

What About the NYC Unincorporated Business Tax?

New York City imposes an unincorporated business tax (UBT) on unincorporated businesses, including partnerships and LLCs, operating in NYC. The UBT is 4 percent of taxable income above a threshold. An S-Corp is generally exempt from the UBT, which makes the S-Corp election more attractive for businesses operating in NYC.

If your business is based in Westchester, Rockland, or northern New Jersey and does not have a NYC presence, the UBT may not apply. If you have employees, an office, or significant activity in NYC, the UBT exposure is real and the S-Corp election may save you money.

This is the kind of detail that gets missed when an entity is chosen once and never reviewed. The UBT alone can change the right answer for a business that operates across the NYC border.

What Are the Payroll Implications?

An S-Corp requires reasonable owner compensation. If you are the owner and you work in the business, you must pay yourself a salary that the IRS would consider reasonable for the work you do. The salary is subject to payroll tax. The remaining profit passes through as a distribution, which is not subject to payroll tax.

This is the primary tax benefit of the S-Corp election: the owner takes a reasonable salary and the rest of the profit avoids payroll tax. The savings can be significant at higher profit levels. The risk is setting the salary too low, which the IRS will challenge.

An LLC taxed as a default partnership does not require owner salary. All profit passes through as self-employment income, subject to self-employment tax. For a profitable business, the S-Corp election usually reduces total tax. For a business with little profit, the savings may not justify the payroll administration cost.

When Should You Re-Elect Your Entity?

You should review your entity when your revenue crosses a threshold (typically $1M, then $5M), when you add owners or investors, when you begin operating in a new state, when you are preparing for a sale, or when the tax law changes. The PTET and the SALT cap changed the math for New York businesses, and an entity chosen before 2018 may no longer be optimal.

If you are not sure whether your current entity is still the right one, the call is free. We will look at your revenue, your ownership, and your geography and tell you whether a change is worth the cost.