S Corp vs LLC Florida: Everything You Need to Know
S corp vs. LLC Florida corporations each have their own advantages and disadvantages. 3 min read
Updated November 9, 2020:
S Corp vs. LLC Florida
S Corp vs. LLC Florida corporations each have their own advantages and disadvantages. If you are starting a business in Florida or have a business and are thinking about incorporating your business but are unsure how to structure the business, try comparing business entities to determine what is right best for you.
Reasons to Incorporate Your Business
Three main reasons to incorporate:
- Incorporating will limit your personal liability.
- Incorporating can limit tax exposure.
- Incorporating provides the ability to more easily divide ownership of the business.
LLCs and S Corps: Compare and Contrast
A significant advantage of incorporating, be it an LLC or an S corp, is that it protects personal assets from business creditors. Another similarity is that both can help you avoid paying both corporate and personal taxes.
In addition, both types of entities allow for pre-tax expense deductions. Such expenses include:
- Phone bills
- Health care premiums
- Car expenses
The main difference between the two is that in S corps, owners take a salary and receive dividends from profits that the corporation may bring in. LLCs are "pass-through entities," wherein all income and business expenses are reported on the LLC operator's personal income tax return.
Incorporating in Florida
Forming an LLC
Historically, the concept of LLC formation started on a large scale in 1996, when Congress passed the “check-the-box” taxation regulations, thereby granting LLCs limited liability, pass-through taxation, and management flexibility, among other things.
Congress was revising corporation rules that would allow certain entity types corporations that qualified under sub-chapter S requirements to benefit from limited liability protection while obtaining pass-through taxation in the same way as a partnership. Such changes came about because of an outcry from lobbyists and the general public that there needed to be change with respect to the unfair tax scheme faced by small businesses.
In the end, Congress created the Small Business Protection Act of 1996. The act would consist of seventeen amendments to the previous corporation tax regime.
Among the many provisions, the amendments allow for an S corp to own stock in a C corporation, and that stock can be in any percentage, whereas a C corporation or LLC cannot own stock in an S corp. The reason for limiting C corporation and LLC ownership in S corps is because S corps have statutorily strict stock classification and ownership rules.
With that said, there are very real advantages in forming your business as an LLC over an S corp. If you intend, in forming the corporation, to have less than 75 shareholders and you can appreciate the benefits of pass-through taxation then an LLC is probably for you.
Note that under an LLC the tax scheme is “taxation irrespective of distribution,” which means that you are taxed regardless of whether the LLC distributes its earnings to its members. If this is an issue and you otherwise meet the legal requirements for an S corp, an S corp can help make your business more profitable, and it can be attractive to the right investors.
For example, an S corp has many of the same protections as an LLC but is limited to between 75 and 100 shareholders, and no shareholder can be in the form of an IRA or corporation. In contrast, an S corp can have members who are corporations. This makes the idea of a buyback or buyout of stock more limiting for an S corp that wants to convert its status to an LLC.
Furthermore, with the management flexibility afforded by the Operating Agreement of an LLC and the relaxed rules and procedures that are associate with the corporate formalities of an S corp, incorporating as an LLC can often be the better and more attractive option.
If you need help with filing an LLC or S corp in the state of Florida, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.