An S Corp is a corporation that is not subjected to federal taxable income. Instead, S corporations are pass-through entities, similar to LLCs or partnerships. The owners in an S corp are taxed according to their personal income tax bracket. Incorporating as an S-Corp can offer investment opportunities, as well as unlimited lifetimes, and limited liability. Despite this, there are specific requirements in order to qualify as an S corporation.
Florida S Corp vs C Corp
Forming as an S corp requires the corporation to meet various standards. In order to attain S corp status, an S corp must first become a C corp. Once this is complete, the corporation can then file as subchapter s corp status, as long as all of the requirements are met:
- Having less than 100 shareholders
- All shareholders must be individuals, cannot be corporations
- May only have one class of stock
- All shares must be owned by U.S. citizens or residents
C-corporations are more common than S corporations, and S corps are given more tax benefits. This is because they are considered a pass-through tax entity. This means that all the profits and losses of an S-corporation will go through the owner’s personal tax returns.
Florida S-Corp Taxes
All S-corporations are employers automatically. This also means that any owner of an S corp is also automatically an employee of the S-corporation. This means owners will need to file monthly payroll deposits, and follow all regulations that pertain to employers.
Some states have a minimum annual franchise tax for all S-corporations. The state of Florida does have a corporate income tax, there is no franchise or privilege tax.
Annual Income Tax
There is one difference between that of an S-corporation versus a C-corporation. S-corps do not require estimated quarterly tax payments.
Because owners of an S-Corporation are technically self-employed, they will be required to pay self-employment taxes on the salary they receive from the corporation.
How an S-Corp Pays Taxes
Although S-Corps are not subject to double taxation like C-Corps, it is because an S-corp is considered a pass-through entity. Pass-through entities pay taxes by passing on the income to the shareholders, who then pay federal taxes at their own personal income tax rate. This saves an S-corp from double taxation. It is good to note that one mistake in filing can require an s-corp to go back to c-corp status.
Why Choose a Florida S Corporation?
There are advantages of choosing an election as an S corporation. The first is avoiding double taxation. This is a huge upgrade from how a C-corp is required to pay taxes. S-Corporations are also able to benefit from limited liability because a corporation is a separate legal entity. This means that an s-corp can enter into contracts, sue other entities, and be sued.
Choosing an election as an S corporation is best for businesses that have owners who want to protect their personal assets. This can be either from the claims of business creditors or from being sued.
If you are a sole proprietor, then forming as an S-Corporation may not be worth it. There are too many requirements of an S-corp such as having a board of directors, filing annual reports, holding shareholder’s meetings, and operating at a higher level of regulatory compliance. Even if you are the only employee, payroll taxes will need to be filed as well. In the end, this may cost more than it is worth.
Why would an LLC Elect to be Taxed as an S Corporation?
Limited liability companies, known as LLCs, are a type of entity in the United States that allows the owners to choose how they wish to be taxed. LLCs are the most flexible when it comes to taxation, which allows them to be taxed as any form of corporation. Choosing to be taxed as an S-Corp can sometimes provide the best tax savings.
Advantages and Disadvantages of a Florida S Corp
There are a few advantages and disadvantages of creating an S Corporation in Florida.
Advantages of Florida S Corps
- Limited liability: Similar to that of an LLC or standard corporation, all of the company directors, officers, shareholders, and employees in an S corp will avoid personal asset-liability.
- Pass-through taxation: S corps provide shareholders the opportunity to report their own profit or loss on their taxes. The S corp will never suffer from double taxation.
- No double taxation: Income will not be taxed twice as it is done for a C-Corporation.
- Shares of stock: S-Corporations can legally sell shares of stock to the public.
- Unlimited lifetime: Even if an owner dies, the corporation will continue to operate.
- Annual tax filing: Once-a-year tax filing requirement rather than as a C-Corp, which must file quarterly.
- Must be a citizen or resident of the United States: This means that any foreign nationals as owners in the corporation would disqualify the entire corporation from s-corp status. Limited ownership: 100 shareholders is the maximum number that is legally allowed in an S corporation.
- Formation and maintenance: There are many ongoing expenses and formation costs with an S-Corp.
- Tax qualification obligations: Any mistakes made on the taxes on an S corp will put the company into C-Corp status.
Should You Form an S-Corp?
For any company that is looking to obtain limited liability as separate from a company, then an S-corp is a good option. For corporations that want to avoid double taxation and save more profits, as long as they can apply according to the s-corp requirements, then it can be of huge benefit.
Not only will the owners of the company avoid personal liability, but profits will be kept in the corporation. If you can, you should form an S-corp over a C-corp.
Deciding on the type of business you file your company under is a huge decision to make. It impacts the way you can run your company as well the way that it’s taxed. To find out which company can maximize your savings, speak with a trusted business lawyer today!
Contact us to schedule a free consultation.