Limited liability and the S corporation are two popular business structures for the modern venture because of their unique benefits compared to traditional entities such as C corporations and partnerships. However, knowing the difference between a Florida S Corp vs LLC can be difficult. Our article addresses these differences to help old and new businesses better understand their choice of entity options.
Florida S Corp vs LLC: Should You Choose an LLC or S Corp in Florida?
An early decision business owners must face during the startup phase of their venture is the type of business entity they want to establish. An LLC and an S Corporation are two common choices because of their various tax, liability protection, and operational structures. Our article addresses their key similarities and differences to help you decide between the different business structures.
This article will not cover sole proprietorship, but if you are interested in that, see our article titled “Florida LLC vs sole proprietorship“.
When deciding between an S Corp and an LLC, it’s important to understand the process for each business structure. If you’re considering forming an S Corp, you’ll first need to know how to get incorporated in Florida. This involves filing the Articles of Incorporation with the Florida Department of State, along with meeting specific requirements for taxation and corporate structure. In contrast, forming an LLC typically requires filing Articles of Organization, which has its own set of legal and tax benefits.
What do LLCs and S Corporations in Florida Have in Common?
Perhaps the most important commonality between LLCs and S Corporations is their owners’ liability protection. The liability protection comes from the fact that both business entities are separate from their owners, unlike a sole proprietorship or general partnership. Business owners with an LLC or S Corp do not have to worry about personal liability for the debts and obligations of the business.
From a tax perspective, LLCs and S Corporations are also similar in that they are not subject to the double taxation that comes with owning a C Corporation. In other words, the IRS does not assess tax at the entity level. Instead, all tax liability flows through to the owners of the business.
A final shared characteristic between the S Corp and the LLC worth mentioning is their state filing requirement (i.e., articles of organization or articles of incorporation). Both must file articles and submit annual reports with the state of Florida that provide basic information about the business. This may include items like an address for the principal place of business, names of managers or directors, and listed registered agent. In this same vein, the steps to dissolve a Florida corporation are comparable to dissolving an LLC.
What’s The Difference Between LLC and S Corp?
While LLCs and S Corps have some similarities in their design, entrepreneurs should understand the features that make them different. These differences will inform which option might be best for your business depending on relevant factors. Primarily, the key differences include tax consequences, ownership structuring, and other organizational distinctions.
Which Is Better for Taxes LLC or S Corp?
The tax benefits of LLC vs S Corp tend to be a small business owner’s primary focus when deciding between the two business entities. Although either option will avoid double taxation, each business structure can provide varying tax benefits depending on the nature of your business and its income.
As a disregarded entity, an LLC’s income passes through to the business’s owners (i.e., its members). In addition to paying income taxes on business profits, the members must also pay self-employment taxes to the IRS. This includes taxes for things like social security and Medicare. The additional self-employment tax can become burdensome for a business with considerable profits.
S Corporations, in contrast, allows business owners to bypass the self-employment tax on some of their income because owners can be employees of their business. S Corps must pay “reasonable salary” to their employees who are also owners (i.e., shareholders) of the business. The S Corp must then withhold FICA taxes, in addition to income taxes, to contribute to social security and Medicare. However, the S Corp can also pay distributions to the shareholders (i.e., dividend income) on top of a reasonable salary, which is not subject to FICA taxes.
Florida LLC vs S Corp for Management Structure
Aside from the potential tax differences between Florida LLCs and S Corps, these entity choices also have entirely different organizational structures.
As briefly mentioned above, the owners of an LLC are known as members, and you can have a single-member LLC or a multi-member LLC. The members are generally responsible for all decision-making responsibilities of the company according to the terms of its Florida operating agreement. Some LLCs also delegate decision-making responsibility to one or more managers, known as a manager-managed LLC.
The owners of an S Corp, in comparison, are known as shareholders. Instead of owning a percentage of the business based on their capital contributions, shareholders own a class of stock. Decision-making authority for the S Corp will depend on Florida corporate bylaws but generally divide authority between the shareholders and its board of directors.
S Corp vs Florida LLC for Future Growth
The different organizational and management structure of S Corps and LLCs also provides different opportunities for future growth. Generally, incorporating as an S Corp may be preferable if the business anticipates additional onboarding of investors or has plans to become a C Corporation. On the other hand, an LLC might make more sense for a small business whose growth will not depend on future capital injections from a larger number of investors.
Additional Requirements to Have an S Corporation in Florida
At first glance, an S Corp, unlike a de facto corporation, may seem like the best option for a growing business because of its federal tax and management structure benefits. However, business owners should be mindful of the additional requirements of the benefits. This includes added administrative burdens such as filing personal tax returns and corporate tax returns with the IRS. Corporations must also follow stricter corporate formalities under Florida law, such as holding annual meetings and compliance with bylaws.
The IRS requirements for operating an S Corp are also more complex and challenging to navigate without professional guidance. Some of these status requirements can even restrict a business from being an S Corp in the first place. They include, amongst other items, that the S Corp:
- be domestic
- have qualifying shareholders (i.e., partnerships, corporations, and non-U.S. citizens cannot participate)
- can’t have more than 100 shareholders
- can only have one class of stock
- not be in a forbidden industry (e.g., certain financial institutions, insurance companies, or international sales corporations).
Recap On the Benefits of S Corp vs LLC
To summarize, the benefits of LLC in Florida vs an S Corp include the following list of pros and cons. Weighing your options will help you choose between an LLC vs Inc and help you decide which would benefit your business the most.
Pros and cons of LLC in Florida
When weighing your options between a Florida S Corp vs LLC, you’ll want to consider both the pros and cons:
Florida LLC benefits
- no double taxation
- simple administration (e.g., an added form on your personal tax return)
- personal liability protection
Disadvantages of LLCs in Florida
- potential for increased tax burden from self-employment tax in addition to income tax
- limitations on future growth (i.e., additional owners or investors) because of organizational structure
Benefits of an S Corp in Florida
- avoids double taxation
- personal liability protection for shareholders
- Avoid self-employment tax by paying dividend income not subject to FICA tax.
Disadvantages of an S Corp in Florida
- Additional compliance with state and IRS rules
- More expensive to administrate because of additional tax returns
Need Help Navigating the Differences Between LLC vs S Corp in Florida Law?
Whether you are a budding entrepreneur or an established Florida business, evaluating your business structure every so often may be worthwhile for tax strategy and operational goals. Cueto Law Group enjoys the practice of helping new businesses and longstanding enterprises alike in navigating the legal complexities of deciding between an LLC vs S Corp structure.
Contact Cueto Law Group today for a consultation about S Corps or LLCs.
FAQs
Below are some brief answers to other common questions when choosing between an LLC or S Corp.
What should a business consider when choosing between an LLC vs S Corp?
Business owners should consider two things when considering an LLC or S Corp: its income history and ownership. Reviewing past and present income with your accountant is essential because of the potential for savings from self-employment tax. Additionally, consideration of ownership and the potential for future investors is also important.
Who should you consult when establishing a business entity?
You may want to consider the professional guidance of those experienced in the rules and advantages of S corps and LLCs to help in your decision. This includes accountants, legal advice from your attorney, and other financial professionals. They will help with the financial and legal aspects of establishing either type of entity structure.
What does the “S” in S Corporation mean?
The “S” in S Corp stands for “subchapter S.” An S Corp is a type of corporation allowed for by the Internal Revenue Code. This is also where the additional requirements for S Corps can be found, including the purpose of limiting personal liability for company debts and obligations.
