Start a Florida S Corp

What is an S corp?

An S corp isn’t a separate legal business entity or business structure. Instead, it’s a special tax status that either an LLC or a corporation can apply for with the Internal Revenue Service (IRS) if it meets all the criteria. We’ll outline those criteria and the steps you would need to take to file as an S corp if you decide that it’s right for your business.

If you want to form an LLC with S corp tax status, our S corp service can help you do just that. We also offer more services to help you run and grow your business and stay in compliance with the state.

Florida S Corp Filing Requirements

S corporations have some filing requirements and limitations you should be aware of before you begin this process. Specifically, to qualify for S corporation status, an entity must:

• Be a domestic corporation or LLC
• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations
• Have only one class of stock
• Have no more than 100 shareholders or members (“shareholders” is the term for owners of a corporation, while “members” is the term for owners of an LLC)
• Have only allowable shareholders or members, which includes individuals, certain trusts, and estates. The shareholders may not be partnerships, corporations, or non-resident aliens. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.

If your business entity meets these requirements, read on to learn how to apply for an S corp election. 

Filing as an S Corp in Florida

To create a Florida S corporation, you’ll need to create either an LLC or a C corporation if you haven’t already done so. Then, you’ll file an election form with the IRS.

If you’re ready to learn about filing as an S corporation in Florida, we’ll walk you through it. First, we’ll show you how to form an LLC in Florida. If you’d rather form a corporation, follow the instructions on our incorporate in Florida.

Afterward, in Step 6, we’ll explain how to file for S corp tax status as either an LLC or corporation. We’ll also discuss specific considerations for S corporations in Florida.

S Corp Florida: Pros and Cons

While S corp classification does come with a number of benefits for some businesses, making this election might not be right for every company. Carefully weigh the various pros and cons before deciding how you want to move forward. Consult an experienced tax professional about whether an S corp would be best for your business.

Advantages of S Corp Status for LLCs

The advantages of filing as an S corporation for an LLC aren’t exactly the same as they are for C corporations. First, let’s look at the advantages for LLCs.

A traditional LLC already has pass-through taxation by default, so the benefits of S corp election for an LLC have to do with the taxes for self-employment. This does take some explanation, but it could save certain LLCs a lot in taxes.

Explaining Self-Employment Taxes

The members of a standard LLC are considered self-employed. They’re paid by receiving their share of profits from the LLC, but they can’t be employed by the LLC, meaning that they’re self-employed. Being self-employed means paying taxes for self-employment (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay part of them.

Dividing Salary and Profits

But when the members elect S corp tax status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay Social Security and Medicare taxes on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members will still pay income and all other applicable taxes on their share of the profits.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation

One stipulation to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. If they didn’t, you could pay yourself an annual salary of $3 and avoid contributing anything to Social Security and Medicare. 

So, how is “reasonable compensation” defined by the IRS? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” While the terms aren’t completely defined, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning.

If the IRS determines that the salary you’re paying yourself isn’t reasonable, it has the authority to reclassify your non-wage distributions (which aren’t subject to employment taxes) to wages (which are subject to employment taxes). Various court cases have supported the IRS’s right to do this.

Disadvantages of S Corp Status for LLCs

Having an LLC with S corp status can have some drawbacks over a regular LLC:

Stricter Requirements 

As we listed above, S corps have more qualifications than a standard LLC or corporation. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A standard LLC doesn’t have these limitations.

More Scrutiny from the IRS

Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS tends to monitor LLCs filing as S corps more closely. That could mean a greater chance of being audited, even if you follow the law to the letter. In fact, small business owners in an S corp may want to observe some of the same formalities that C corporations do (such as extensive record keeping), even if they’re not legally required to.

More Accounting and Bookkeeping

Having an LLC with an S corporation election generally means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to do so. Your taxes will be more complex, as well.

With these added complications, you’re likely to have higher administrative costs. You might need an accountant, bookkeeper, and/or a payroll service or software.

Advantages of S Corp Status for C Corporations

If you have a C corporation (the default form of corporation), filing as an S corp has these advantages:

Pass-Through Taxation

One major disadvantage for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the corporate level. But when those profits are ‌distributed to the individual owners (shareholders) as dividends, they’re taxed a second time on the shareholders’ personal tax returns.

But when a C corporation qualifies to be an S corp, those profits are only taxed at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation,” and it’s how business entities like sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation.

Writing Off Losses

Just as business profits pass through to the owners of an S corp, so do the losses. Unlike the shareholders of a C corporation, S corporation shareholders can write off the company’s losses on their personal income statements. 

This can help offset their income from other sources and can be helpful if the corporation loses money in the first couple of years of business. Still, make sure you’re aware of ​​the IRS’s shareholder loss limitations.

Qualified Business Income Deduction

Under the Tax Cuts and Jobs Act, some S corp owners may be able to deduct up to 20% of their qualified business income. This deduction isn’t available to C corporation shareholders.

Qualified business income (QBI) is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details).  

Disadvantages of S Corp Status for C Corporations

S corporation status also has the following minuses:

Limited Number of Shareholders

As mentioned, an S corporation can’t have more than 100 shareholders, while a C corporation has no such restriction. That limitation could be an issue later if the corporation expands and goes public.

Limited Types of Shareholders

All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could limit your ability to expand internationally. You also can’t have partnerships or corporations as shareholders. C corporations don’t have these limitations.

Only One Class of Stock

One way corporations attract investors is to offer preferred stock. That’s okay for C corporations, but the IRS doesn’t allow it for S corporations.

More IRS Scrutiny

With the extra restrictions S corps have, the IRS watches them more closely to see if they’re in compliance. In other words, your corporation’s more likely to get audited.

We can’t stress enough how important it is to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, and they may also be able to help you find additional tax savings.

We need to add here that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. Thus, the disadvantages of double taxation aren’t as severe now as they were. 

Florida-Specific Considerations

In an S corporation, the business itself doesn’t usually pay federal income taxes. But what about Florida state income taxes?

Florida treats businesses that file as an S corp for federal purposes the same way when it comes to Florida state income tax. That is, the same pass-through taxation that applies to federal income taxes applies to state income taxes. The individual business owners will pay state income taxes on their share of the profits, but those profits won’t first be taxed at the business level. So, you shouldn’t need to worry about a separate Florida S corp tax rate. The only S corporations in Florida that would need to pay the state corporate income tax are those that pay federal income tax on Line 22c of Federal Form 1120S.

Some states require an S corporation to make a separate S corp election at the state level, but Florida doesn’t require that. If a company has a valid federal subchapter S corporation election, it will automatically be a Florida S corporation. 

How We Can Help

Forming a business with or without S corporation election can be complicated, but we’d like to make it as easy for you as possible.

When you’re ready to make your move, we can help you form a Florida LLC with an S corporation designation and provide you with valuable support from our team of business experts.