Choosing the right structure for a business is fundamental, as each business structure has particular characteristics, such as distinct formation requirements, tax implications, and liability protection.
In this context, what is the best choice – an S corporation, a C corporation, or a limited liability company (LLC)? Keep reading to discover the answer.
S Corp vs. C Corp – An Overview
In essence, a C corporation is a corporation by default. The first requirement to form a C corporation is to file Articles of Incorporation, as it is the standard structure in terms of organization and taxation for corporations in Florida.
However, it is possible to transform a C corporation into an S corporation. In fact, an S corporation is not a separate business structure, but a tax election done under Chapter S of the Internal Revenue Code (IRC).
The main advantages of forming a C corporation in Florida are protected against personal liability and unrestricted ownership. As corporations are considered separate legal entities from their owners, they are not personally liable for the company’s debt(s) or liabilities.
The majority of global companies are structured as C corporations, as they are more attractive to investors due to stricter management formalities and thorough accountability. Plus, shareholders in a C corp are not subject to self-employment tax on the company’s profits.
However, C corps are exposed to double taxation, meaning that the corporation’s profits are exposed to corporate income tax, and, subsequently, personal income tax once the shareholders receive dividends.
In this sense, S corporations are better choices in terms of taxation. S corps have pass-through taxation, which means the company’s income passes through it to the shareholders. Hence, they only pay income tax at the individual level, avoiding double taxation.
Although S corps can only issue one class of stocks, they have fewer formalities than C corps – which can issue unlimited stocks while being more less flexible in terms of management and administrative requirements.
Still, S corps have stricter ownership requirements, as no S corp can have more than one hundred shareholders. Plus, only US citizens, permanent residents, or specific entities may be eligible to be shareholders of an S corp.
Limited Liability Company (LLC) – An Overview
Limited liability companies are hybrid business structures, as they reunite the limited liability of corporations with the tax advantages and flexibility of partnerships. In an LLC, the business’s owners are referred to as “members.”
In Florida, an LLC may have a single member or multiple members. Unlike shareholders in a C corp, LLC members enjoy pass-through taxation. This way, all the company’s profits, and losses pass through the business entity to each member.
Similar to a partnership, LLC members use their personal tax returns to report profits and losses. Plus, LLC members have protection against personal liability for business-related issues (and vice-versa).
Consequently, if an LLC incurs debt or becomes a defendant in a lawsuit, all members – and their personal assets – are exempt from liability. Operating and managing an LLC in Florida requires less paperwork and expenses, and there are fewer restrictions in terms of profit-sharing.
Still, LLC members are exposed to self-employment taxation. Other disadvantages include the hardship of transferring ownership interest (e.g., shares) and finding investors (considering LLCs may not appear as “serious” as traditional corporate businesses).
S Corp vs. C Corp vs. LLC in Florida – Work with a Business Attorney to Determine the Best Structure for Your Company
Choosing the ideal business structure for a company may be the difference between success and failure. Waste no time – call Attorney Romy B. Jurado today at (305) 921-0976 or email [email protected] to schedule a consultation.
