Florida Corporations & Florida LLC's
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Florida Sub Chapter S Corporation Basics
- S Corporation Income Taxation. Dividends of the S Corporation profits retained until the end of the year are not taxed at the corporate level as a regular corporation is, but instead are passed through to the S corporation's owners. In other words, S corporation profits are allocated and taxed to the shareholders. The Salaries of a corporation may be deducted from corporate income, because the IRS considers reasonable salary payments to be an ordinary and necessary business expense.
--Sales Tax. Businesses are required to collect sales tax on transactions in any state where the company has a sufficient physical presence (such as a store, warehouse, or employees). The degree of presence may very; however, when it is sufficient to justify sales tax, it is referred to as a nexus.
-A Board of directors must be established. The directors are the management team, which meets once each quarter to analyze and project financial performance and review store operations.
-Officers are charged with overseeing day to day business; supervising employees; and generally putting into proactive the goals set by the board.
-S Corporations may have only one class of stock; However, it may have voting and non-voting stock.
-S Corporations may only have 100 owners.
-S Corporations needs to pay only one level of tax when the S corporation is sold or liquidating.
S Corporation compared to LLCs.
-Corporate Formalities. S corporation shareholders, like LLC members, are protected from personal liability for the debts of the business. However, to maintain this limited liability protection, you must follow corporate rules when running the business. This maintenance includes the issuance of stock, holding regular board of directors' and shareholder's meetings; you must elect officers, keep corporate minutes of all your meetings, and follow all mandates found in your particular states corporate statutes. In contrast, with an LLC you only have to make sure the managers are in agreement on important decisions. It is still advisable to keep at least annual minutes.
-Ownership Restrictions. S corporation stock may be owned only by U.S. citizens or residents however a LLC may be owned by any person or business entity.
-Required allocation of profits and losses. The S corporation profits and losses must be distributed to the shareholders in proportion to their stockholdings. As for the LLC, it has more flexibility in its allocations; the losses and profits can be allocated to the investors to meet their needs. Therefore, an LLC can allocate losses and profits to its investors that are larger or smaller than their capital interest.
-Taxes. An S corporation's business debts cannot be passed to its Shareholders unless they have personally cosigned and guaranteed the debt. What this means it that shareholder's tax basis in the business does not increase when the company increases its debt. However, an LLC can pass its debts to the owners and thus their tax basis will increase as the business debt increases. This is important because distributions of profits from the LLC are taxable to their owner only when they exceed the owners tax basis in the company this increase in basis means that, in the long run, each of the LLC owners are less likely to be taxed on their profits, so, if the company will have a lot of debt as in the case of buying real estate, investors who form an s corporation would be at a disadvantage.
Example: An LLC borrows $800,000. The debt is allocated equally to three owners. This means it increases each owner's tax basis in the ownership interest. The basis increase means that each owner can receive $200,000 in distribution of the profits tax free. Again the S corporation does not receive this break.
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