Pros and Cons of Starting an S-Corp in Florida

December 17, 2023by Brandon Banks

Owning and operating a business in Florida requires you to make complex decisions and judgments about a number of topics, not the smallest of which is the basic structure of your business entity. This is something that both new business owners and seasoned entrepreneurs must consider – should you incorporate? More specifically, is an S-corporation the best option?

As with almost any choice you must make for your business, there are advantages and disadvantages to becoming an S-corp in Florida. Understanding those variables will help you make an informed decision that is ultimately in the best interests of your company.

What is an S-Corporation?

To start, let’s discuss what this classification means in a general sense. Subchapter S of the Internal Revenue Code discusses the tax election that gives corporations their S-Corp status. Essentially, an S-Corp is created in much the same way as any corporation, but the major difference is the election of the S-Corp tax status.

S-corps are corporations that report corporate income and losses on shareholders’ personal tax returns, allowing them to avoid the double taxation that other types of corporations face. It should be noted that there are some gains and income that these companies cannot push through to their shareholders and must be claimed at the entity level.

Not every business qualifies for S-Corp status. The IRS has several criteria for eligibility, including:

  • The business must be domestic.
  • Shareholders must be individuals, estates, or select trusts.
  • Shareholders cannot be non-resident aliens.
  • There must be 100 or less shareholders.
  • Only one class of stock is allowed.

Additionally, some insurance providers, sales companies, and banks are ineligible for s-corp status.

Advantages of S-Corp Status in Florida

If your business qualifies to become an S-corporation, you will likely wonder whether the pros outweigh the cons. The needs of your business will ultimately determine whether any factor is good or bad, but in most circumstances, the advantages include the following.

1. Tax Benefits

This is perhaps the benefit with the most appeal for business owners, as well as the most well-known feature. Electing S-corporation status when incorporating a business provides potential tax benefits in two ways. The first is pass-through taxation, and the second is the way shareholders’ income can be characterized on tax returns.

Pass-through taxation means that S-corps do not pay federal taxes. Instead, losses and income are reported on shareholders’ personal income tax returns. The topic of double taxation comes up here, as pass-through taxation allows corporations to avoid being taxed twice. S-Corp election also allows shareholders to use business losses to counteract or balance other reported income.

In addition to pass-through taxation, s-corps also offer their shareholders the ability to receive a salary and report income as employees while also collecting tax-free dividends and other distributions. This means that if you elect s-corporation status, you could lower your self-employment taxes and create deductions for your business.

It should be noted that some S-corporations in Florida may be required to pay a 5.5% corporate income tax on passive income earned after 2021.

2. Asset Protection

Another popular quality of S-corp election is the separation of personal and business assets. In the majority of circumstances, you are not personally responsible for the debts of your S-corporation. Your personal property and assets are protected from any creditor claims and litigation. For example, if someone files a lawsuit against your S-corporation, the only property at risk is what’s owed by the business, and none of your personal bank accounts, houses, or other property will be subject to the lawsuit.

3. Ownership Transfer

When it’s time to transfer ownership of the business, an S-corporation election makes the process much easier than many other types of businesses. Often, a transfer can be completed without tax consequences. Owners can also avoid the need to make changes to policies, documents, or accounting procedures just because the s-corp is transferred. It is a more seamless transition than what is possible with other types of business entities.

4. Credibility

Customers view incorporation as a sign that a business is legitimate. Incorporating and electing s-corporation status establishes instant credibility with customers, as well as employees, vendors, and business partners. S-corps show consumers that careful thought and effort have gone into this business, and that is seen as a sign that the goods and services will likely reflect that same level of care and attention.

5. Simpler Accounting Methods

As an entrepreneur, you are likely familiar with the business accounting methods of cash-basis and accrual. As an S-corporation, you could take advantage of the simpler cash-basis method, which is a much simpler method than accruals. Some s-corps are still required to use the accrual method, but most are not.

6. Retirement Contributions

Because shareholders of s-corporations can designate themselves as employees of the company, they can also divert a significant amount of their salaries to a simplified employee pension individual retirement account (SEP IRA). If you incorporate and choose s-corp status, you can put up to $66,000 or 25% of your salary in this IRA per year. Whatever you contribute to a SEP IRA can be deducted from your taxable income, as well.

7. Business Capital

Electing S-corp status in Florida can also allow your company to access more capital or raise funds more efficiently. In addition to the added credibility that incorporation brings, s-corps can also issue and sell their stock to prove their interest in the company. This means that companies in earlier stages of development without access to substantial capital may be able to grow their businesses more rapidly by using this benefit of s-corp election.

Disadvantages of S-Corp Status in Florida

Electing an S-corporation designation may seem like the best option, but you cannot know how this choice will impact your business until you are aware of the potential disadvantages. Many business owners find the following to be negative aspects of s-corporation election.

1. Added Expenses and Tasks

As with other business entity formations, incorporation with an S-Corp election requires initial fees in Florida, including filing fees and a registered agent designation. In addition, there are ongoing expenses associated with an S-corporation.

Most of these fees are minimal, such as the Florida filing fee, which is $35. However, it is something to be aware of because even small expenses can add up over time. In addition to the filing fee, incorporation may require fees to be paid for filing an Application for Registered Name ($87.50), Designation of Registered Agent ($35), or any other document required by Florida statute. Ongoing fees can also accumulate for S-corporations. For example, a cost of $35 is assessed whenever a record needs to be amended with the state.

S-Corp election also requires additional steps to complete the filing, making this business entity formation more complex than others.

2. Stringent Obligations

S-corporations require strict compliance with elections, notifications, stocks, and filing requirements. Failure to comply with the multiple regulations could lead to loss of the s-corp status. In these circumstances, all of the advantages that prompted a business owner to complete an S-corp election would be lost.

3. Stock Restrictions

As mentioned previously, the IRS substantially limits the stock ownership of S-corporations. These business entities can only have one class of stock. There must be 101 shareholders. S-corporations must be domestically owned. Some banks, trusts, and other companies are not eligible. Such restrictions are considered disadvantageous for some business owners.

4. Less Income Flexibility

The stock restrictions also limit the income flexibility of shareholders. S-corporations are unable to allocate business income and loss to specific shareholders because it is dictated by stock ownership.

5. More Government Oversight

S-corporations are closely monitored by the IRS due to the dividend and salary distributions for shareholders. Tax audits are an ongoing concern for some S-corporations, but there are ways to mitigate this risk. The increased IRS scrutiny is something to be aware of if you are considering S-corporation election, although careful accounting can create a buffer from any serious concerns.

6. Calendar Year

For business owners who find operating on a fiscal year beneficial, the S-corporation’s calendar year may present a challenge. Unless a business purpose can be established for using a fiscal year, s-corps are required to operate on a calendar year.

Is S-Corp Election the Right Choice?

Which of these pros and cons are actually beneficial or harmful to you and your business is something only you can determine. Do you prefer tax benefits over less IRS oversight? Is the complex startup process a dealbreaker for you? Or does limiting liability make all the potential disadvantages seem more bearable?

Many entrepreneurs find that the pros outweigh the cons when considering s-corporation status. However you decide to proceed with business entity formation, you will be able to make a more informed decision because you are familiar with the pros and cons of s-corporation election in Florida.

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