According to the US Small Business Administration’s 2021 small business profile on the state of New York there are 2.3 million small businesses in New York which makes up 99.8% of all businesses in the state. Additionally, 4.1 million people are employed by small businesses in New York which makes up 49.1% of all employees in the state. Between March of 2019 and the same month in 2020 55,034 establishments in New York opened and 68,692 New York establishments closed. This means there was a net decrease of 13, 658 establishments in New York. Of these openings and closings small businesses accounted for the majority of both.
Despite the somewhat negative statistics New York remains a hub for entrepreneurs and small businesses. Even though there was a net decrease in the number of establishments which opened in the state. Many small business owners choose to obtain S corporation status for their small business because of the tax benefits which this conveys onto them. This article will break down the benefits of an S corporation for entrepreneurs and small business owners in New York.
Why an S Corporation?
An S corporation is a tax classification which was created by the IRS so that small businesses could enjoy some relief from taxation. Many small businesses are subject to the process of double taxation. This is when income from a small business is taxed once at a corporate level and then once again at a personal income level. The S corporation tax status allows small business owners to avoid this through what is known as pass-through taxation. Pass-through taxation allows a business owner to pass through their corporate income onto their personal income tax return and as a result only need to be taxed once on their income.
Despite the name, a company does not need to be a corporation to become an S corporation. In fact it is highly recommended that one use an LLC to create an S corporation. This is because the benefits of a C corporation over an LLC are all negated by the requirements to become an S corporation. These requirements include provisions such as no more than 100 shareholders and only a single class of stock is allowed. These provisions exist so that large companies do not take advantage of the S corporation tax status and use it as a means of tax avoidance.
Entrepreneurs should consider electing S corporation status for their small business because of the tremendous tax benefits. However these benefits will not always be appropriate depending on the income and the size of the small business. There are several time periods which entrepreneurs should be aware of when trying to elect S corporation status for their business. For new businesses, business owners have two and half months in order to elect S corporation status for their business. For existing business owners the time frame is different. Existing business owners wishing to have S corporation status in the following year can elect that any time in the previous year. For owners wanting to get S corporation status in the same year they will need to apply by the end of March of that year.
A business owner can apply for S corporation status when they apply to get their EIN. The EIN or employer Identification Number is like a social security number for a business. When a business is applying for this number they can also fill in Form 2553 to elect to be taxed as an S corporation. For more information, consider this resource on S corporations in New York.
TRUiC or The Really Useful Information Company recommends an S corporation for New York entrepreneurs because of the tax benefits which this can create for a small business. A small business owner can become exempt from double taxation through pass-through taxation. This way they can report their corporate income on their personal income tax and not be forced to pay tax twice on this amount. Additionally, an S corporation can be created from many different types of business entities but the LLC is the recommended business entity and this only gains additional benefits from becoming an S corporation.