When forming a new business or subsidiary in Florida, you have no shortage of business structures to choose from. However, while Florida law recognizes numerous types of business entities (and Florida-based businesses can form entities in other states as well), the corporate structure remains a popular choice for a variety of different reasons.
But, if you evaluate your options and settle on forming a corporation, there is still one more question you need to answer: Should you form a C corporation or an S corporation?
The Difference Between C Corporations and S Corporations
While corporations are formed at the state level (in Florida, the business’s organizers must file Articles of Incorporation with the Division of Corporations), it is the federal tax treatment that dictates a corporation’s “C” or “S” status—the “C” and “S” are references to chapters of the Internal Revenue Code (IRC). By default, all corporations are C corporations. In order to form an S corporation, the shareholders must submit Form 2553 (Election by a Small Business Corporation) to the Internal Revenue Service (IRS).
Electing S corporation status means that the entity receives pass-through tax treatment. This is the primary difference between S corporations and C corporations. While C-corporation status triggers “double taxation” (tax at the entity and shareholder levels), with an S corporation, only the shareholders pay federal income tax. While this will provide an overall tax benefit in most cases, there are scenarios in which C-corporation tax treatment can actually be the less-expensive option.
Aside from the limited circumstances in which a C corporation provides the greatest tax savings, why else would a company choose “C” over “S” status? In order to make the election to be taxed as an S corporation, a business must:
- Only have individual shareholders (as opposed to shareholders that are for-profit corporations or partnerships);
- Only have shareholders who are U.S. residents or citizens;
- Have no more than 100 shareholders;
- Have only one class of stock;
- Allocate profits and losses in proportion to the shareholders’ ownership interests; and,
- Not be an “ineligible corporation” (i.e. an insurance company or financial institution).
In addition, all shareholders must consent to the election. While this may not be an issue for a small, closely-held business, if the company has multiple shareholders, it may take work to convince everyone that electing “S” status is in their own best interests.
Should I Just Form a Limited Liability Company (LLC)?
Instead of dealing with the formalities of the corporate structure and deciding between “C” and “S” status, should you just form an LLC? While LLCs offer certain benefits, like all entity structures, the LLC has certain limitations as well. Furthermore, if you form an LLC (which receives pass-through tax treatment by default), there is the option to elect for C-corporation tax treatment as well.
Speak With a Fort Lauderdale Corporate Lawyer at Saavedra | Goodwin
Our attorneys have decades of experience helping business owners with entity selection, federal income tax elections and other corporate matters. To schedule a confidential initial consultation, please call 954-767-6333 or request an appointment online today.