Tax planning
LLC vs. S-Corp vs. C-Corp: Choosing the Right Entity in New York
How each structure is taxed, what investors expect and the New York specifics most founders miss.
Published: 2 min read
Your choice of entity affects how much tax you pay, how you pay yourself, whether you can raise venture capital and how a future sale is taxed. It is one of the few early decisions that is expensive to undo. Here is how we explain the options to founders.
The LLC: flexible and simple
A limited liability company protects your personal assets and, by default, is taxed as a pass-through. A single-member LLC reports income on Schedule C; a multi-member LLC files a partnership return and issues K-1s.
Good fit for: service businesses, real estate holdings, early-stage side projects and companies not planning to raise institutional capital.
Watch out for: self-employment tax of 15.3% on all net earnings, and New York's publication requirement, which can cost over $1,000 in Manhattan if not handled carefully.
The S-corp: an election, not an entity
An S-corp is a tax status that an LLC or corporation can elect with IRS Form 2553. Owners who work in the business must take a reasonable salary, but profits above that salary are not subject to self-employment tax.
Good fit for: profitable owner-operated businesses, usually once net profit is consistently above $80,000 to $100,000.
Watch out for: ownership limits (no more than 100 shareholders, U.S. individuals only, one class of stock) and New York City, which does not recognize S-corp status and taxes the entity under the General Corporation Tax.
The C-corp: built for investors
A C-corporation pays corporate tax at a flat 21% federal rate, and shareholders pay tax again on dividends. That double taxation sounds bad, but it is often irrelevant for growth companies that reinvest profits.
Good fit for: venture-backed startups (investors expect a Delaware C-corp), companies planning to retain earnings and founders who may qualify for the Section 1202 qualified small business stock exclusion.
Watch out for: Delaware franchise tax notices, which can show alarming amounts until recalculated using the assumed par value method.
A quick comparison
| LLC | S-corp | C-corp | |
|---|---|---|---|
| Federal tax | Pass-through | Pass-through | 21% entity tax |
| Self-employment tax | On all profit | On salary only | Not applicable |
| Venture capital friendly | Rarely | No | Yes |
| QSBS exclusion | No | No | Possible |
| NYC entity tax | UBT | GCT | BCT |
How we decide with clients
We model three to five years of projected income under each structure, including federal, state and city taxes and payroll costs. Then we weigh the non-tax factors: fundraising plans, exit horizon and administrative burden.
The right answer for year one is not always the right answer for year five. An LLC can elect S-corp status later, or convert to a C-corp before a priced funding round.
If you are forming a company or questioning your current structure, our business formation service includes this analysis.
