Explaining The S-Corp

C-Corporation v. S-Corporation

While starting a new business venture, many entrepreneurs will consider operating their business as a corporation. Incorporating offers many substantive benefits to business owners in addition to providing a more professional appearance to customers, vendors and competitors.

The two most popular types of corporations in Florida are C-Corporations and S-Corporations. Corporations are, by default, C-corporations with the letter “C” referring to the applicable subchapter of the Internal Revenue Code (IRC) that governs corporate taxation.  For some businesses that meet the requirements under subchapter S of the IRC, it may make sense to elect “S-corporation” status with the IRS instead of operating as a C-Corporation.

C-Corporation and S-Corporation Basics

In many respects, C-corporations and S-corporations are the same. In Florida, both types of corporations are formed by filing Articles of Organization with the Florida Division of Corporations. In both cases, the corporate business entity is a separate legal entity from its owners (shareholders) and the entity enjoys a perpetual existence.

Both C-corporations and S-corporations issue shares of stock to investors/owners and must adhere to certain corporate formalities required by Chapter 607, Florida Statutes.  For example, Chapter 607 requires the corporation to hold an annual meeting of its shareholders (Florida Statute § 607.0701), keep minutes of all meetings of its shareholders and board of directors (Florida Statute § 607.1601), and file an annual report with the Florida Division of Corporation (Florida Statute § 607.1622).

The shareholders of both C-corporations and S-corporation also enjoy limited liability. This means that a shareholder, even if he or she is the sole or majority shareholder of the entity, is generally not personally liable for the business’ financial obligations.  So, if the company is sued by a customer, vendor, or other party, the shareholder may lose her investment in the corporation, but his or her personal assets will generally not be at risk.

Key Difference Between C-Corporations and S-Corporations: Taxation

C-corporations differ from S-corporations in one major way – tax treatment.

When a C-corporation earns a profit, those earnings are reported on a corporate tax return, and the business itself pays taxes at the applicable corporate income tax rate.  Shareholders who are also employees of the company receive regular paychecks and the company is responsible for withholding and remitting all applicable federal income tax, state income tax (if applicable), and FICA withholding for Medicare and Social Security related to those employees. If the company distributes profits in the form of dividends to shareholders, each shareholder is responsible for paying taxes on their share of earnings, at their personal income tax rates.

S-corporation tax treatment is different. Instead of taxing profits at the corporate level, S-corporations pass profits and losses through to the individual shareholders, in proportion to their ownership interest in the corporation.  In this way, S-corporations are like partnerships in that they are a “pass-through entity”. Each shareholder must report those profits and losses on their own individual tax returns and pay income taxes at their individual tax rates.

The major advantage of electing S-corporation status is to avoid the “double taxation” that comes with C-corporation earnings which is taxed at both the corporate and individual levels.

Electing S-Corporation Status

If you want to establish a S-corporation in Florida, you must first create a Florida C-corporation by filing Articles of Organization with the Florida Division of Corporations.

After your corporation has been established and registered the Florida Division of Corporations, you will need to file for S-corporation treatment by completing and submitting IRS form 2553 within 75 days from the date your corporation was formed.

However, be aware that not every corporation is eligible to become an S-corporation; the provision was designed for small businesses.  Your company needs to meet the following requirements in order to qualify:

  • Fewer than 100 shareholders
  • Shareholders must be individuals or trusts (not other corporations or multi-member LLCs)
  • Only one class of stock
  • Shareholders must be U.S. citizens or resident aliens
  • Certain types of corporations are ineligible, including insurance companies, certain financial institutions, and domestic international sales corporations

Recommendations

S-corporation status does not make sense for every small business, but it can be beneficial in many cases. You should consult with your tax and legal professionals who can help you make an informed decision about whether a S-corporation election is best for you.

LegalStandard.com’s experienced attorneys can help you establish a new Florida C-corporation or S-corporation for as little as $700.00 or perform annual maintenance on your existing Florida corporation for $600.00.  Additionally, LegalStandard.com offers consultations with its attorneys to assist you in selecting the right entity structure for your business.  One-hour consultations are available for $295.00.