S-corporations are a form of business entity in the United States. To qualify for S corporation status, there are various requirements. These include being a Florida corporation with resident shareholders, having no more than 100 shareholders, one class of stock, and not being a financial institution, insurance company, or international sales corporation.
Operating as an s-corporation means you will keep more money from the corporation, while still being protected from the personal liability of the company. Although c-corps are subject to double taxation, s-corps are not. Instead, s-corporations are pass-through entities. This means that the corporation will not be required to pay federal income tax. Instead, the shareholders (owners) will be taxed based on their personal dividends (profits).
What is the Difference Between an S Corp and a C Corporation?
S-corporations differ from C-corporations in a few main ways. Not only do s corps receive more tax benefits due to being considered a flow-through tax entity, but they allow the profits and losses to flow through to their shareholders. This is similar to a sole proprietorship, partnership, or LLC, and known as “pass-through taxation.”
C-corporations are one of the most common forms of business entity structure in the United States. Although c corps allow business assets to be separated from personal liability, there are more benefits to s corps.
The benefits of a c-corporation include:
- Limited personal liability
- The ability to sell stock without permission from other stakeholders
- Unlimited number of shareholders
- The ability to deduct tax-exempt business expenses
It is important to note that a C-corporation is a separate taxpayer. This means that the income of the business, along with expenses, are taxed once for the corporation, and again on the dividends paid out to shareholders. Because of this, C-corporations suffer from what is called double taxation.
Double taxation is the main disadvantage of C-corporations, which is why many c-corps choose to elect “S-corporation” status should they meet the requirements. Overall, S-corporations receive more tax benefits than c corps due to being a flow-through tax entity. Overall, S-corporations receive more tax benefits than c corps due to being a flow-through tax entity.
How is an S Corp Taxed in Florida?
S-Corps are pass-through entities. This means the company does not file and pay taxes. Instead, the shareholders (owners) show all earnings on their personal tax returns. This is similar to that of a sole proprietorship, partnership, or LLC.
S Corp Taxation
- Payroll taxes: Because S-corporations are employers by default, they will be required to file monthly payroll deposits. In the state of Florida, payroll taxes include Medicare tax and social security tax. Medicare tax is at a tax rate of 1.45% on the first $200,000, while the Social Security tax is at a rate of 6.2% on the first $132,900.
- Franchise taxes: Some states require a minimum annual franchise tax, while Florida does not. Franchise taxes are also referred to as personal income tax.
Why Choose an S Corporation?
There are various reasons why you may choose to incorporate as an S corporation, but the most common reason is avoiding double taxation. If corporate regulations are followed, they can also offer a high level of liability protection, and overall flexibility.
S corporations are great for companies with a smaller number of domestic shareholders. If you are looking to reduce personal liability, and want to avoid double taxation, it is definitely a better option than a c corp.
Why Would an LLC elect to be taxed as an S Corporation?
There are several forms of taxation, and an LLC is one of them. LLCs are the most flexible when it comes to electing taxation. This means that LLCs can choose to be taxed as any of the various entities, including an s corporation. Filing as an S-Corp can provide tax savings, which is why an LLC would elect to be taxed as such.
Advantages and Disadvantages of an S Corp in Florida
- Limited liability: All the directors, shareholders, officers, and employees cannot be chased after for their personal assets should something happen to the business.
- Pass-through taxation: Because the shareholders pass on their share of profit and loss, they will be required to pay tax solely on their own dividends, through personal income tax returns.
- Elimination of double taxation: C corps are taxed once on the corporate income, and again on personal income, S corporations avoid this.
- Investment opportunities: It is easy to attract investors through selling shares of stock meaning growth is more probable.
- Unlimited life: Even if shareholders die, leave, or go to jail, the corporation will continue to exist.
- Once-a-year tax filing requirement. C corps must file quarterly.
- No foreign investments: The shareholders may only be U.S. citizens and permanent residents.
- Limited ownership: No more than 100 shareholders are allowed or your s corp will be dissolved.
- Formation and management fees: There are various regulations and fees that must be paid in order to maintain s corp status.
- Tax qualification obligations: If you make mistakes, you may no longer hold s corp status and be taxed as a c corp.