Incorporating your business as a S Corp or C Corp or using an LLC can allow you to protect assets, alter how your business is taxed, attract investors and improve your management. However, it’s far from an easy task and you should take care when deciding upon which type of corporation you go for – each type has key differences.
We advise you to consult a Florida business lawyer before committing. You can contact our experienced legal team today for a free consultation.
Disclaimer: This blog is for introductory purposes and should not be used as a substitute for professional legal or tax advice. Always consult a business lawyer and tax specialist before making important business decisions.
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What is a S Corp?
A S Corp is a ‘pass-through’ business structure that allows a business’s profits, credits, deductions and losses to pass through to the owner – including to the owner’s personal tax returns. It is only available for small businesses (with 100 or less shareholders).Benefits of a S Corp:
- Corporate Tax Savings: The business does not pay federal taxes, at a business level.
- Personal Tax Savings: You can lower your personal income taxes as an S Corp owner, as the money you receive from the business can be a salary or dividends. The S Corp then generates deductions for expenses and wages. There may also be tax benefits for pass-through entities that apply to S Corp owners.
- Corporate Dividends: Shareholders can be business employees, earning salaries and dividends that are tax-free (if it doesn’t exceed their stock basis).
- Simplified Asset Transfers: You can transfer interests or adjust property bases without facing negative tax consequences or complex accounting regulations.
- Gain Credibility: S Corps are great at building credibility to gain investors, customers and other business relations.
Negatives of an S Corp:
- IRS Scrutiny: The IRS carefully regulates how S Corps pay employees, due to the potential for hiding salaries as corporate distributes to avoid taxes. Therefore, shareholder-employee salaries must be reasonable for their services.
- Distribution Restrictions: S Corps must also allocate profits and losses, based on the percentage of ownership or shares held, when making distributions to stakeholders.
- Cost Time: S Corps are time-consuming to set up. You must submit various articles of incorporation with the Secretary of State in Florida and obtain a registered agent for the business.
- Fees: There are also various associated fees, including incorporating the business, annual report fees, franchise taxes and miscellaneous fees.
- Growth Limits: Shareholder numbers are limited, which can be significantly limiting to a business looking to grow rapidly or attract investors.
What Is a C Corp?
A C Corp is a ‘pass through’ business structure, where the owners (or shareholders) are taxed separately from the business. Taxing of profits occurs at both corporate and personal levels. C Corps are the most common type of corporation.Benefits of a C Corp:
- Limits Personal Liability: Directors, shareholders, officers and employees cannot face personal debt or liabilities, as the corporation takes it on instead.
- You Can Sell and Share Stocks: You can offer shares of stocks to attempt to gain a large amount of capital, allowing for easier growth and new project funding.
- Attractive to Investors: Owning shares is usually more appealing to investors than LLC membership interests.
Negatives of an C Corp:
- Expensive Set-Up: Filing articles of incorporation of a C Corp are usually more expensive than other business structures, with higher legal fees.
- High scrutiny: Regulatory scrutiny is very high, which can add additional stress and legal expenses.
- Tax Considerations: C Corp profits are effectively taxed twice:
- Firstly, when the company files its income taxes.
- Secondly, when the profits are distributed as dividends.
- Shareholders in a C Corp cannot deduct business losses on their tax returns.
What Is an LLC?
A Limited Liability Company (LLC) is a business structure that protects owners from personal liability and debts. LLCs are a hybrid of entities, combining the characteristics of both corporations and sole ownership (or partnerships).Benefits of a LLC:
- Limits Personal Liability: Owners, partners and investors are protected from debts and liability.
- The Qualities of a Partnership: Very similar to a partnership, with straightforward business agreements providing liability protection.
- Less Paperwork: No annual meetings, annual reports or extensive book keeping is required.
- Pass Through Taxation: Owners benefit from pass-through taxation, without limits on the number of shareholders.
- Flexible Profit Distributions
Negatives of a LLC:
- Not Suitable for Public Trading: If your goal is to eventually launch a publicly traded company, then an LLC may not be optimal.
- Self-Employment Tax: The IRS treats LLCs as partnerships for tax.
- Member Turnover Consequences: If a member leaves, declares bankruptcy or passes away, then the LLC may have to be dissolved – leaving surviving members liable for the business’s debts and liabilities until a new LLC is formed.
- Role Confusion: LLCs do not have specified roles, which can make it challenging for members and inventors to understand roles of authority. However, an LLC operating agreement can help significantly.
How to Choose Between an S Corp, C Corp or LLC?
As you can see the type of incorporation you go for will have different impacts on you and your business. Please consult an experienced Florida business lawyer to get an opinion specific for your business.- S Corps are common with small businesses due to the potential of tax savings.
- C Cors are popular with larger businesses due to the greater ability to raise capital.
- LLCs are common for very small businesses, such as those with one or two employees, looking for personal liability protection.
How Big Do You Want Your Business to Grow?
If you plan to grow your business into a large corporation, sell stock globally or you have a large start-up capital then it is wise to consider a C Corp due to its flexibility. If you plan to remain small, or know that realistically you need to focus on the qualities of a small incorporation, then consider a S Corp or an LLC.Would You Sell Your Business?
Buying out a C Corp is much easier than an S Corp, as there are minimal restrictions on who can buy shares. However, S Corps allow for a smaller number of shareholders and investors must pay income taxes on their shares. Consider how that affects your priorities, such as if you want to sell a business.Do You Want Shareholder Freedom?
If you want to allow for shareholder influence, then you can consider an S Corp. S Corps are capped at 100 shareholders and are more involved than C Corp Shareholders – however, they are harder to buy into. LLCs on the other hand are wise if you are not concerned about shareholders.Are You Suitable for Double Taxation?
Depending on your income tax rate, you can return a lot more revenue through your incorporation choice.- C Corps apply a double taxation on corporate profits and personal income.
- S Corps impose just one round of taxes, due to its pass-through taxation.
- LLCs also use pass-through taxation, with members claiming profits and losses as part of their personal taxes.
