The Small Business Administration “SBA” states that “an S corporation (sometimes referred to as an S Corp) is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation.”
A Florida S corporation is a corporation that has elected and has been granted the Subchapter S designation from the IRS. To be considered an S corporation, you must first register your business as a corporation in the State of Florida. An S corporations is considered by law to be a unique entity, separate and apart from those who own it. This limits the financial liability for which the owners of the business (the shareholder) are responsible. Yet the owners still may be liable for some actions, for protection is limited. For example, S corps do not necessarily shield you from all litigation such as a business employee’s tort actions as a result of a workplace incident.
An S corporation is different from a traditional C corporation in the manner that its profits and losses can pass through to the shareholders/owners tax return. Consequently, the business is not taxed, only the shareholders are taxed on the distributions or wages they receive from the company. However, any shareholder who works for the company must pay him or herself “reasonable compensation.” Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as “wages.”
Forming an S Corporation
Before you form an S Corporation, you must first determine if your business will qualify under the IRS stipulations or rules required to be a Sub Chapter S corporation.
To file as an S Corporation, you must first file with the Florida Department of State Division of Corporation as a corporation. Prior to filing for the corporation in Florida you will need to establish your business name and register your legal name with The Florida Department of State Division of Corporations. Prior to registering your name, you should ensure that the name you choose is not being used by another or that it will infringe another’s trademark or trade name, or you shall run the risk of being sued by another. If you choose to operate under a name different than the officially registered name, you’ll most likely have to file a fictitious name. In Florida your corporation must include a corporate designation (Corporation, Incorporated, Limited) at the end of its business name.
After you have registered your corporation in Florida, all shareholders of the corporation must sign and file Form 2553 with the IRS in order to be classified as an S Corporation. In addition, after registering your business, you will be required to obtain all Federal, State and Local licenses to operate your business in Florida. Regulations may vary by industry, state and locality.
Combining the Benefits of an LLC with an S Corp
If you initially filed as a Florida LLC, there is always the possibility of requesting S Corp status for your Florida LLC. In order to have your LLC treated as an S Corporation, you will have to have your company make a special election with the IRS to have the LLC taxed as an S corporation using Form 2553. And you must file it before the first two months and fifteen days of the beginning of the tax year in which the election is to take effect. Your Florida LLC remains a limited liability company from a legal standpoint, but for tax purposes it shall be treated as an S corporation.
Most businesses need to register with the IRS to be classified as an S-corporation, and they will have to register with the State of Florida and local revenue agencies, and obtain a tax ID number or permit. All states do not tax S corps equally. A Florida S Corporation must file an income tax return in Florida.
Advantages of an S Corporation
The SBA states that the following are the advantages of forming an S-Corporation:• Tax Savings of the owners and business. One of the best features of the S Corp is the tax savings for you and your business. While members of an LLC are subject to employment tax on the entire net income of the business, only the wages of the S Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a “distribution,” which is taxed at a lower rate, if at all.
Business Expense Tax Credits. Some expenses that shareholder/employees incur can be written off as business expenses. Nevertheless, if such an employee owns 2% or more shares, then benefits like health and life insurance are deemed taxable income.
Independent Life, it is its own legal entity
An S corp. designation also allows a business to have an independent life, separate from its shareholders. If a shareholder leaves the company, or sells his or her shares, the S corp can continue doing business relatively undisturbed. Maintaining the business as a distinct corporate entity defines clear lines between the shareholders and the business that improve the protection of the shareholders.
Disadvantages of an S Corporation
The SBA states that the following are the disadvantages of forming an S-Corporation:
• Stricter Operational Processes. As a separate structure, S corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and records maintenance. The meetings can be seen as a disadvantage, yet in reality they are advantageous to the shareholders, for they allow the shareholders to see how the company is being operated by its directors and officers.
* Shareholder Compensation Requirements. A shareholder must receive reasonable compensation. The IRS takes notice of shareholder red flags like low salary/high distribution combinations, and may reclassify your distributions as wages. You could pay a higher employment tax because of an audit with these results.