Difference Between LLC and Corporation in Florida: Everything to Know
Understand the difference between LLC and corporation in Florida if you're planning to start a business in the state.3 min read
- Incorporating provides a measure of liability protection by creating separation between your business and personal assets.
- Incorporating can potentially lower your exposure to tax liability.
- Incorporating makes it easier to divide ownership among multiple members.
What Is Incorporation?
Incorporating your business involves advancing from a sole proprietorship or general partnership structure to a company that is officially registered and recognized in your state of incorporation. This means when you incorporate your business, it becomes its own legal entity, separate from you and any other founding members. When you incorporate your business, it will most likely fall into one of two categories:
- A limited liability company, or LLC
- A corporation, or corp.
The two most popular corporation structures are:
- S corporations
- C corporations
What Is an LLC?
A limited liability company, or LLC, is often considered to be the simplest business structure. "Limited liability" means your personal finances, property, and legal responsibilities are kept separate from those of the company. Thus, an LLC provides you with a measure of protection in the event of legal action or judgment against your company.
This type of business structure has only recently become popular in the United States. LLCs have become popular among small business owners because they:
- Are relatively cheap to set up
- Are easy to maintain
- Offer a good degree of protection in terms of legal responsibility for the company's actions
An LLC is what is known as a "pass-through" structure. That means any profits the company generates pass directly through the company and into the hands of the owners. Rather than the company being established as a separate legal entity and being held liable for taxes, the owners are given a portion of company profits based on the amount of ownership they claim, or their "pro rata" share. The owners then report any profits they receive as income, minus tax-deductible expenses, when filing their personal taxes with the IRS.
Most business owners consider issues related to taxation to be the biggest difference between C corporations and S corporations. Similar to an LLC, an S corporation is a "pass-through" structure. A C corporation is a completely separate legal entity and is taxed accordingly. This can potentially create a "double taxation" scenario in the event that company profits are paid out to owners or shareholders as dividends.
When this happens, a C corporation's profits are first taxed at the company level. The owners are then taxed a second time when they receive profits in the form of dividends. This creates a double tax, which is not financially ideal for many business owners.
What Is an S Corporation?
The best way to describe an S corporation is to think of it as a mix between C corporation and LLC business structures. Similar to an LLC, an S corporation is a "pass-through" structure, meaning any profits or losses pass directly from the company to its owners. However, just a like a C corporation, the company is owned by shareholders.
One of the main advantages of an S corporation structure, when compared to an LLC, is that the owners are able to pay themselves a reasonable salary. Keep in mind, however, that this salary is subject to withholding requirements such as the FICA tax. Remaining net income is able to be paid out as a passive dividend, which is not taxable as self-employment income.
What Is a C Corporation?
C corporations are structured in a similar manner to the large businesses that are listed and traded on public exchange markets such as the New York Stock Exchange. Like S corporations, a C corporation is organized into shares that make it possible to set up a more complicated structure in terms of ownership. The most significant difference between C corporations and S corps or LLCs is that company profits are generally taxed on two levels:
- The corporate level.
- Any profits paid out to owners or shareholders.
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