The Differences Between an S Corporation and a C Corporation
According to the Florida Division of Corporations, Florida had a record number of C Corporation filings in 2021 compared to the previous ten years at 104,625. The state also recorded its highest number of LLC entity filings ever, at 533,137. Figures released from the state indicate 3,178,025 active business entities.
Looking at the figures presented by this booming state, you may wonder what the difference between S Corps and C Corps is since there is no mention of S Corps in these figures. The reason is that an S Corp is not a formal business structure but a tax designation. Any legal business entity can file for S Corp designation, including a C Corp and LLC.
S Corp vs. C Corp
S Corps and C Corps might have similar-sounding names, but there are considerable differences between the two. The main differences between them are their formation, operation, and taxation.
S-Corp is a Tax Designation
Most new businesses prefer the formal structure and protection offered by a corporation or LLC. LLCs are the simplest legal structure since they don’t require a lot of paperwork, compliance requirements, or increased overheads. Hence, small businesses prefer it.
The two business formations also have different taxation since an LLC has pass-through taxation, and corporation owners pay a double tax on the business income and the distributions. Besides taxation, several considerations are needed before a business owner decides on the business structure.
Once a company owner has decided on one of the two business structures, they can either go with the default tax or choose the tax designation known as an S corporation. They do this by electing to be taxed under the International Revenue Code Subchapter S. The process requires filling in Form 2553 when the owner applies for an EIN.
Filing for an S Corp in Florida
Starting an S Corp in Florida to reduce the business tax burden requires that you first choose a business structure.
TRUiC provides all the business information and forms needed to start a business in every state. It suggests that business owners consider several factors before following the Florida S Corp filing requirements.
When is an S Corp a Good Strategy?
An S Corp needs to pay its owner or shareholders a salary that matches the market demands and must have substantial annual distributions of at least $10,000. Anything less than these amounts render the S Corp designation pointless because of the increased accounting fees required to maintain payroll.
Like an LLC, an S Corp has pass-through taxation. However, unlike the LLC owner, who pays FICA and income tax on the profit and distributions, the S Corp owners pay these taxes on their salary only. S Corp owners then pay income tax according to their tax bracket on their distributions.
S Corp Restrictions
A few restrictions could prevent a business from choosing the S Corp designation. These include the limit of up to 100 shareholders and that they can only issue one type of stock. Furthermore, no other business entity can own an S Corp. Finally, it can only be a domestic entity and cannot have foreign shareholders.
Which is the Best Structure for an S Corp
The LLC is the best way to form an S corporation because the S Corp restrictions negate many advantages C corporations hold. These include attracting investors, unlimited shareholders, no ownership restrictions, and carrying profits over. It is also far more manageable and inexpensive to maintain an LLC than a corporation.
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S Corp Advantages
One of the main advantages of an S Corp is the tax savings, particularly the double-taxation of a C Corp and self-employment taxes.
Most businesses electing S Corp status in Florida do it after forming an LLC. In addition, the steps for creating an LLC and electing S Corp taxation in Florida are as easy as elsewhere. Once the business chooses a name and registered agent, it must file the business Articles of Organization to form the business. The company is now ready to draw up an Operating Agreement and get its EIN and file form 2553, which shows it elects S Corp status.
Florida continues to boom as many businesses choose the state to form their companies there. The main variance between an S Corp and C Corp is that first is a tax designation, and the second is a legal business structure. From the Florida business formation statistics seen above, LLCs remain the most popular legal business structure. Once completing the business formation, with whatever form of taxation the owner deems best, the business is ready to start operations in the popular Sunshine State.
