Limited Liability Companies (LLCs) and S-Corps are business entities which are treated by the IRS as partnerships for tax purposes. They differ with respect to their corporate formalities, but both entities have their income taxed as "passing through" to their owners. What this means is that there is no C-Corp double taxation issue -- where C-Corp income is taxed once at the corporate level and then taxed again when it is distributed to its shareholders. LLC and S-Corp income is taxed only once as income of their respective owners.
LLCs and S-Corps are most useful for small business owners or sole proprietors who want to receive the limited liability of corporate structure but who are small enough to be able avoid dealing with the double taxation of the traditional C-Corp (among the requirements for S-Corp election is that the entity has no more than 100 shareholders). Aside from certain tax considerations, LLC and S-Corp treatment is virtually identical on the Federal and at most state levels.
The New York Problem
- If you have researched forming an LLC in New York, you probably ran into the state's little extortion scheme. New York requires all LLCs to file a Certificate of Publication within 120 days of formation or else lose said formation.
- To get a Certificate of Publication, the LLCs must publish their Articles of Organization in two local county newspapers. Costs vary by county, but businesses operating out of New York City can end up paying up to $1,500 for such mandatory "advertisement" in addition to the filing fees.
- Gaming the system is unfortunately not an option. Those who decide to form their LLCs out of state (like in Delaware) will still have to pay the publishing fee if they intend to do business in New York: A Certificate of Authority to do business in New York carries the same Certificate of Publication requirement for out-of-state LLCs.
The S-Corp Option
- A cheaper option, depending on your needs, could run the way of the S-Corp.
- An S-Corp, just like an LLC, affords its owners the same limited-liability protections and passes-through income by percentage ownership. (The last part means that the S-Corp does not pay its own Federal income taxes -- the owners just pay taxes on the profits and income they earn through the corporation).
- The S-Corp, does not require a Certificate of Publication. The cost to file an S-Corp is the same as filing a C-Corp. The only additional steps needed are to file a Federal (Form 2553) and local (Form CT-6) S-Corp elections -- which are free to file with the IRS and state respectively (plus whatever your lawyer charges you for the hour it takes him to file them -- if you don't want to do it yourself).
- It should be noted that S-Corps, unlike LLCs, have certain strict qualifications. Most notably, shareholders must be U.S. citizens or residents and S-Corps cannot have more than 100 shareholders.