Florida S-Corporation compared to Florida LLC
-Corporate Formalities. S corporation shareholders, like LLC members, are protected from personal liability for the debts for 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 the Florida state corporate statutes. In contrast, with an Florida LLC you only have to make sure the managers are in agreement on important decisions. However, 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 foreign 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 is less likely to be taxed on their profits, So, if the company will carry 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 four 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.
-Taxes. An LLC may also be taxed like an S-corporation. This may be a wise move if the company is going to be service oriented rather than an investment type of entity.
-Taxes. An LLC that is taxed like a partnership must deal with the phantom income issue. This is usually addressed in the operating agreement, which will provide for an annual payment to each owner that is sufficient to pay the taxes each owes on the profits. The provision usually will include a formula allowing each member to receive a percentage of their allocated profits equal to the highest federal and stat tax rates combined.
-Taxes. Individuals may generally deduct any state income taxes they had to pay on their federal income tax return.
-Taxes. Individuals may use other deductions, personal exemptions, and credits to further reduce the tax they owe.
-When an LLC Losses members. An LLC will continue business as usual even with the loss of a member, provided that the LLC deals with this problem so to keep it from dissolving. However, their could be a change is taxes if the LLC is not taxed like a corporation. For instance if the LLC is taxed like a partnership and only one member remains, then the LLC would be taxed like a sole proprietorship.
-Sales Tax. Businesses are required to collect sales tax on transactions 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.