An LLC is a legal structure you form with the state. An S corporation is a tax election you make with the IRS. That's the single most misunderstood point in the LLC vs. S corp debate, because they aren't really opposites. Many of our clients are LLCs that have elected to be taxed as S corporations.
The real question is how your business should be taxed. For most profitable New York owners, it comes down to one trade-off: an S corp election can lower your self-employment tax, but it adds payroll, paperwork, and some New York–specific costs. This guide explains how each option works, when the S corp election pays off, and the state and city rules that national articles usually miss.
A limited liability company (LLC) is a business entity created under state law. It protects your personal assets from business debts and lawsuits. By default, the IRS taxes a single-member LLC like a sole proprietorship and a multi-member LLC like a partnership, so profits pass through to the owners' personal returns. The IRS explains these defaults on its LLC page.
An S corporation is a federal tax status that an eligible corporation or LLC chooses by filing IRS Form 2553. Profits still pass through to the owners, but owners who work in the business are paid a salary through payroll, and the remaining profit can be taken as distributions that aren't subject to self-employment tax. The IRS's S corporation overview covers the eligibility rules, including the limit of 100 shareholders and one class of stock.
LLC (default tax treatment) | LLC or corporation taxed as an S corp | |
How it's created | Articles of Organization filed with NY Department of State | Form 2553 (federal) plus Form CT-6 (New York) |
Owner limits | Unlimited members, any type | Up to 100 shareholders; U.S. individuals and certain trusts only |
How owners are paid | Draws from profit | Reasonable W-2 salary plus distributions |
Self-employment tax | On all net profit | On salary only, through payroll |
Federal return | Schedule C (single-member) or Form 1065 | Form 1120-S |
New York return | Personal return, plus NY's annual LLC filing fee if the LLC has New York income | Form CT-3-S, including NY's fixed dollar minimum tax |
New York City | Unincorporated Business Tax (UBT) | General Corporation Tax (GCT); NYC ignores the S election |
Admin burden | Lower | Higher: payroll, separate return, stricter formalities |
As an LLC owner, you pay self-employment tax of 15.3% on most of your net profit, up to the annual Social Security wage base, on top of income tax. As an S corp owner, you pay those same Social Security and Medicare taxes only on the salary you take through payroll. Distributions above your salary aren't subject to them.
Say your Long Island business earns $150,000 in net profit.
As an LLC: Self-employment tax applies to 92.35% of profit, or $138,525. At 15.3%, that's about $21,194.
As an S corp paying you an $80,000 salary: Combined employer and employee payroll taxes on $80,000 come to about $12,240. The remaining $70,000 is a distribution with no payroll tax.
That's roughly $8,950 in payroll tax savings, before accounting for the costs below. Real results depend on your income tax bracket, the qualified business income deduction, retirement contributions, and where you operate, so treat this as an illustration, not a projection.
An S corp election isn't free. Expect to pay for payroll processing and quarterly payroll filings, a separate business tax return (Form 1120-S and New York's CT-3-S), New York's fixed dollar minimum tax, and more careful bookkeeping. For many owners, these costs run a few thousand dollars a year. That's why an S corp election usually starts to make sense once net profit comfortably exceeds a reasonable salary for your role. For many small businesses, that's somewhere north of $60,000 to $80,000 a year, but the right number is specific to you.
The IRS requires S corp owners who work in the business to pay themselves reasonable compensation before taking distributions. You can't pay yourself $10,000 and call the other $140,000 a distribution. The IRS looks at what similar businesses pay for similar work, your duties, and the time you spend. Its guidance on S corporation compensation explains the factors.
Setting salary too low is one of the most common audit triggers for S corps, and the penalty is reclassification of distributions as wages, plus back taxes and interest. We've written more about this myth in Tackling TikTok, Part 3.
New York doesn't automatically follow your federal S election. You must also file Form CT-6 with the New York State Department of Taxation and Finance, generally by the 15th day of the third month of the tax year (March 15 for calendar-year businesses), the same deadline as the federal Form 2553. Skip it, and New York treats your business as a C corporation for state purposes, with a very different tax bill.
If your business operates in any of the five boroughs, New York City doesn't recognize federal or state S corporation elections. S corps doing business in NYC pay the city's General Corporation Tax at the entity level. LLCs taxed as partnerships or sole proprietorships face NYC's Unincorporated Business Tax instead. For NYC-based owners, the math between the two can look very different than it does on Long Island.
New LLCs in New York must publish a notice of formation in two newspapers designated by the county clerk, generally within 120 days of forming, and then file a Certificate of Publication with the Department of State. Costs vary widely by county. Corporations don't have this requirement, which occasionally tips the decision for new businesses.
Both LLCs taxed as partnerships and S corporations can elect New York's pass-through entity tax (PTET), which can help owners work around the federal SALT deduction cap. Single-member LLCs taxed as sole proprietorships can't. If PTET savings matter to you, that's another point in the S corp column. See what happens if you miss the PTET election deadline.
To be an S corp for the current year, file federal Form 2553 no more than two months and 15 days after the start of the tax year. For calendar-year businesses, that's March 15. File New York's Form CT-6 by the same date. A new business has two months and 15 days from the date it begins its first tax year.
Missed it? The IRS offers late-election relief in many cases if you have reasonable cause, and New York can retroactively validate a state election. It's fixable, but it's much easier to get right the first time.
Staying a standard LLC usually makes sense if:
Your business is new or profits are still modest or unpredictable.
You want maximum simplicity and the lowest administrative cost.
You have owners who can't be S corp shareholders, like a corporation, partnership, or nonresident alien.
You plan to allocate profits among partners in ways that don't match ownership percentages.
An S corp election usually makes sense if:
Your net profit is consistently well above a reasonable salary for your role.
You're comfortable running payroll and keeping clean, separate books.
You want access to New York's PTET election as a single owner.
Most of your income isn't sourced in New York City, or you've modeled the NYC impact.
Your structure also shapes your personal return. For the bigger picture, read how your business structure affects your personal taxes. If you're still in the formation stage, our new business checklist covers the other first-year decisions.
Yes. An LLC can elect S corporation tax treatment by filing IRS Form 2553, and in New York, Form CT-6 as well. The business keeps its LLC legal structure and liability protection but is taxed like an S corp. This is one of the most common setups for small businesses that have outgrown default LLC taxation.
For a calendar-year business, both the federal Form 2553 and New York's Form CT-6 are due by March 15 for the election to apply that year. A new business has two months and 15 days from the start of its first tax year. Late elections are often fixable, but it's best not to rely on that.
There's no single cutoff. The election starts to pay off when your net profit is comfortably above the reasonable salary you'd pay yourself, enough that the payroll tax savings outweigh the added costs. For many small businesses, that point lands somewhere above $60,000 to $80,000 in annual profit, but your industry, location, and goals all change the math.
No. New York City doesn't recognize federal or New York State S corporation elections. S corps doing business in the five boroughs pay NYC's General Corporation Tax at the entity level, which can reduce or erase the savings an S corp provides elsewhere in the state.
Yes, by revoking the S election, but there are consequences. Generally, a business that revokes its S election can't re-elect for five years without IRS consent. It's another reason to model the decision carefully before you make it.
Choosing between an LLC and an S corp is one of the few tax decisions that affects every return you'll file afterward. Getting it right can save thousands a year; getting it wrong can mean payroll headaches, missed elections, or an unexpected New York City tax bill.
At Heritage Accountants & Advisors, entity selection is a core part of our business consulting services. We'll model your numbers under each option, factor in New York and NYC rules, and handle the elections and filings so nothing slips. For ongoing returns, our tax preparation and planning team keeps your structure working as your business grows.
Schedule your free consultation or call us at (631) 543-7700.
This article is for general information and isn't tax or legal advice. Tax benefits vary based on individual circumstances.
