The New Jersey Law Blog sheds light on the differences between limited liability companies, S corporations and just plain old corporations (i.e. C corporations) and the reasons why corporations are still the entity of choice in some situations. What they have to say is just as true for New York businesses:
Several LLC limitations have resulted in the continued viability of the “S” corporation. In an “S” corporation, a shareholder-employee pays self-employment tax on money received as compensation for services, but not on profits that pass through as a shareholder. Thus an owner can still be paid a salary, and only pay additional self-employment tax on the “reasonable compensation” portion of total distributions. The entire distribution drawn by an LLC’s member-employee is treated as a “guaranteed payment” meaning all payouts are subject to self-employment tax. The second factor is that if it is expected that the business will require institutional investment, most institutional investors will require that the business be a “C” corporation (versus an LLC or “S” corporation). An “S” corporation need only “unelect” their flow-through status to be treated as a “C” corporation to raise institutional investment, while an LLC would have to undergo a cumbersome conversion process.
FYI, an S corporation is a regular corporation that elected a special tax status by filing Form 2553 with the IRS.
