LLCs in Florida can elect to be taxed as S corporations or sole proprietorships. each election has its advantages and disadvantages. If you have just launched a business in Florida, you can form a single-member LLC. For tax purposes, the IRS regards this business structure as equal to a sole proprietorship.
Before you can opt for S corp taxation, you should first form your Florida LLC. After that, you can file for a C corporation or an S corporation taxation. While LLCs file a formation agreement, the principal document that corporations file with the secretary of state’s office in Florida is an Articles of Incorporation.
S Corp vs C Corp: What’s the difference?
Upon registration, are considered by the IRS and the state authorities in Florida to be C-Corporations for tax purposes. The shareholders of the corporation can elect it to be taxed as S-Corporation from day 1 of its existence if the Corporation qualifies for S Corp status. For example, if one of the owners is not a US citizen, then this corporation cannot be taxed as S-Corporation.
The primary difference between S-Corp and C-Corp is in the fact that C-Corp can be subject to double taxation. That means C-Corp will first be taxed at the Florida corporate tax rate, and then the after-tax remainder can be distributed to the shareholders, each of whom pays a personal tax on the dividend.
S-Corporation is a pass-through entity, meaning it is not taxed on a corporate level. S-Corporations are not the only pass-through entities in the USA. LLC is also a pass-through entity and is very popular with entrepreneurs who want to start a small business in the US.
S Corp vs LLC Florida
If you already participate in an LLC with several members, the business owners can decide to file a business tax return as an S corporation. While an LLC is a business entity per se, S corp is a tax designation. Here is all you need to know about incorporating your business.
Reasons to Incorporate Your Business as an S Corp
I can think of at least three reasons why you should incorporate your business:
- To limit your personal liability.
- To reduce tax exposure.
- To divide ownership of the business more efficiently
S Corporation Organization and management
An S Corporation is a form of taxation that a business elects to pass its corporate income, losses, deductions, and credits through to its shareholders. The business owners thus avoid double taxation by reporting the gains and losses on their tax returns.
Only LLCs formed in the USA can file for S corp taxation. The only exception is made for insurance companies and international sales corporations. The number of shareholders in an S corp is limited to 100. If there are spouses among the S corp members, they count as one shareholder. S Corporations are also limited to a single stock class. This class can contain both voting and non-voting stock.
S Corp Taxation Advantages
A S Corporation has a tax structure similar to a C Corporation. Unfortunately, relatively few business owners in Florida take advantage of this powerful tool. In fact, before filing to be taxed as an S corp, you should first file a C corporation application. At the same time, an S corporation offers the same degree of liability protection as an LLC.
In an S Corporation, the FICA tax for Social Security and Medicare (also known as self-employment taxes) only applies to wages paid to owner-employees. The remainder passes through as dividends.
When LLCs elect to be taxed as S corps, business owners take a reasonable salary and receive dividends from profits that the corporation may bring in. By contrast, single-member LLCs enjoy “pass-through taxation” wherein all income and expenses of the business entity are filled into the owner’s personal income tax return.
Limited Tax Liability for Self-Employment
Business entities that elect to be taxed as S Corporations enjoy reduced liability for self-employment taxes compared to partnerships. That’s because their shareholders only pay self-employment tax rates on the reasonable salary they receive rather than the profits they have been allocated.
S Corp vs LLC Florida: Advantages of an LLC
Business owners in Florida prefer LLCs to sole proprietorships and partnerships for the taxation and management flexibility that these business entities offer. Unless another tax designation is specified, LLCs are classified as “pass-through entities.”
This means that the business’s profits and losses are “passed through” to its owners or members. Each member reports these profits and losses on their individual tax return and pays taxes at their individual tax rate.
100% Liability Protection
A significant advantage of incorporating your business as an LLC and subsequently electing to be taxed as an S corporation is that your personal assets will be protected from business creditors. An LLC that elects to be taxed as an S corporation can help you avoid paying both corporate and self-employment taxes.
Single-member LLCs also provide 100% liability protection because the business and its members are separate entities. Thus, each member’s personal liability is limited to their individual investment in the LLC. This means that if your business goes under, you don’t have to worry about losing your own personal assets.
Additionally, LLCs require less paperwork to maintain than partnerships or corporations. at the same time, LLC members can handle their earning distributions at their own discretion. LLC members can be subject to self-employment taxes, distributed between social security and medicare.
Tax Benefits of Incorporating in Florida
Tax benefits play a crucial role in attracting new businesses to the Sunshine State. When you register an LLC or a corporation in Florida, you can enjoy the following tax advantages:
- No corporate income tax on subchapter S corporations and Limited Liability Partnerships
- No corporate franchise tax on capital stock
- Business inventory is not subject to property tax
- Goods-in-transit are exempt from property tax for 180 days
- Goods produced or manufactured in Florida for international trade are exempt from Sales and Use tax
QTI and CITC Tax Refund
The Qualified Target Industry Tax Refund (QTI) incentive has been created for businesses that create high-paying jobs in industries with high added value. If your business type falls into this category, you can get considerable refunds on sales, corporate income tax, intangible personal property, self-employment tax, insurance premiums, and other tax benefits.
The QTI guarantees that when you register a new LLC with an S Corporation tax designation in Florida, you can benefit from tax refunds of $3,000 for jobs created in the city and almost $6,000 in refunds for jobs created in a county. You can use the tax refunds to lower your personal tax on net earnings or the FICA tax of your Business.
The Capital Investment Tax Credit (CITC) is an annual credit against corporate income tax, provided to Florida corporations and LLC owners for a period of up to 20 years.
S Corp Disadvantages
As noted above, what is an advantage for a sole proprietorship can be a disadvantage for an LLC and vice versa. Here are some of the challenges of forming an S corp.
Rigid qualification requirements
To qualify for an S corporation election, your business must meet strict requirements on the number and type of shareholders and the types of shares. These rules are regulated by the federal tax law, rather than the Florida corporation law.
Only individuals, certain estates and trusts, and certain tax-exempt organizations can be shareholders in an S corp. There cannot be more than 100 shareholders in an S corp. There can only be one class of stock in an S corporation.
An LLC can be a pass-through entity without being subject to the above restrictions. Both S corporationS and LLCs are pass-through entities, but they are taxed under different sections of the Internal Revenue Code.
Profit and loss allocation requirements
An S corporation is required to allocate profits and losses among the business owners based on the percentage of ownership or number of shares that each of them holds. By contrast, an LLC is allowed to allocate its business profits and losses as the owners desire.
In an LLC, the founding member who transfers 50% of the company ownership to a new member could receive a disproportionate share of the LLC’s income. In an S corporation, the founders’ allocation is reduced from 100 percent to 50 percent.
S Corp VS LLC Florida: Bottom Line
If you have just launched your small business in Florida, you should probably form an LLC. Formation companies like ZenBusiness can prepare the initial paperwork and serve as your registered agent for just $49 a year.
When your business grows stronger, you can check if it meets the S corporation requirements specified above. S corp election is not very suitable for businesses generating passive income and capital gains, as these are not exempt from federal income tax.