Like most solopreneurs in Florida, or elsewhere, you’re passionate about your business. After all, you made the switch from a 9 to 5 to pursue your passion, right? But chances are, you’re not quite so in love with the tax and finance part of running your own business – unless, of course, your biz is all about tax and finance!
No matter what your gig is, there will be times when you’ll need to make important decisions around taxation and business entities. For example, you may be wondering whether an S Corp in Florida is the right move for your situation. Or whether you should form an LLC instead. If so, you’ve come to the right place.
In this article, we unpack exactly what an S Corp is, the pros and cons of forming one, and Florida S Corp tax filing requirements. By the end, you’ll be armed with answers to all the questions you’ve ever had about S Corp election – and able to move forward with confidence.
Starting an S Corp in Florida
You may be wondering if opening an S Corp in Florida is even possible. The answer is definitely yes! The state welcomes S Corps like Miami welcomes college kids in spring. In fact, Florida’s beneficial tax laws and business-friendly approach result in many business owners choosing to register an LLC in the state.
The most attractive feature of an S Corp is its pass-through taxation process. This means the income generated by the business passes through to the shareholders to be reported on their individual tax returns. This results in the S Corp paying no Federal income taxes.
Many S Corps start as LLCs, and then have to request to be taxed differently. If you’re wondering what, exactly, an S Corp is, wonder no more. This designation is merely a special subset of classification under the U.S. tax code. How exactly do you convert your LLC into an S Corp? Glad you asked.
Filing an S Corp in Florida
Forming an S Corp in Florida is relatively straightforward. Simply follow the five steps outlined here and you’ll be on your way.
Step 1: Choose a Name
Use the Florida Department of State to find a business name that’s not being used by another entity. Don’t forget to include: Corporation, Company, Incorporated, Corp., Inc. or Co. after you’ve come up with a clever, unique, and unforgettable name for your business.
In addition to your business name, you’ll need to provide:
- Your corporation’s address
- The function of your business
- Its effective date
- The registered agent’s name, address, and signature
- Stock shares
- Information on the director and officer of the corporation
Step 3: Apply for a Business License
Where you’ll apply depends on the type of business you own. There are two main agencies DACS (Department of Agriculture and Consumer Services) and DBPR (Department of Business and Professional Regulation). Your operation doesn’t fall under these categories? Check out these state resources.
Step 4: Get Your EIN
Next, comes your EIN or Employer Identification Number from the IRS. This part is free and easy. You can apply by fax, mail, or online. And yes, fax machines still exist!. A fax will take a few days. Snail mail, a few weeks. So if you have a need for speed, best to get your EIN online, which will yield you an immediate result. Let’s hear it for 21st-century progress!
Step 5: Submit the Form
The fifth and final step. Congratulations, you’re very close to having your beloved biz of one recognized as an S Corp. Submit IRS Form 2553, which is the form that will allow your business to be taxed as an S Corp in Florida.
What’s the Difference Between LLC vs S Corp in Florida?
The complexity around LLCs and S Corps can cause business owners a great deal of confusion – especially if you’re a new Business-of-One. But, before you get yourself tangled up in knots trying to unravel the mystery, read on.
The first thing to know is that LLCs and S Corps, while inextricably linked, are not the same.
An LLC is one of the legal (and most simple) ways to structure your business. This type of entity allows you to separate and protect your personal assets from any business liability that could arise. When you’re a single member LLC, you’re taxed like a sole proprietor.
An S Corp is a tax classification that determines how your business is taxed federally and by the state. Although Floridians don’t pay state income tax! It’s basically asking to be taxed a different way.
S Corp and Taxation: The Whole Story
If you’re considering forming an S Corp in Florida, you should know that there’s no income tax at the state level! In fact, individuals, LLCs and sole proprietorships, also benefit from the Sunshine State’s extreme tax friendliness. C Corporations doing business in the state pay 5.5 percent income tax.
Which is Better for Taxes – LLC or S Corp?
In Florida, LLCs, S Corps, and sole proprietors are exempt from paying state income tax. However, an S Corp provides more tax advantages than an LLC. This is because business owners are allowed to take a salary and can also benefit from any distributions or additional profit the company makes without having to pay additional income tax. S Corp for the win!
How to Convert LLC to S Corp Florida
If you form an LLC and then elect for it to be treated as an S Corp for tax purposes, you get the best of both worlds. The LLC provides liability protection, but the S Corp tax classification allows you to mitigate how much self-employment tax you must pay.
In Florida, there’s no state income tax but you are still subject to federal income tax and federal self-employment tax. With a sole proprietorship or LLC, you pay yourself business profit by transferring those funds from your business bank account to your personal bank account. All of that profit is subject to self-employment tax and income tax.
In contrast, as an S Corp owner who is actively running the business, you receive income in two ways – through a W2 salary payment and through business profit distributions. With the S Corp, only the W2 salary payment is subject to self-employment tax which means there is no longer self-employment tax on business profit. Nonetheless, both W2 salary and business profit are subject to income tax.
Do S Corps have to file a Florida tax return?
Yes, but only the first year after electing to become an S Corp. You’ll need to file the informational part of the F-1120 (the Florida Corporate Income/Franchise Tax Return).
The only caveat: if your S Corp produces taxable income, like certain types of capital gains – but this situation is rare. Depending on the type of business you’re running, you may need to pay state sales tax (retail) or excise tax (alcohol), for example.
S Corp Disadvantages
While the benefits of an S Corp typically outweigh any downside, you should be aware of potential disadvantages:
- Stock ownership restrictions mean you’re limited to one class of stock
- 100 shareholders max, who must be U.S. citizens or legal residents
- You must maintain paying yourself, as the owner, reasonable compensation
- Formation and S Corp election process (the first step toward electing S Corp tax status) can be expensive and time consuming.
Renew an S Corporation in Florida
After you successfully elect to be treated as an S Corp, set a reminder to renew yearly by filing an annual report with the Department of State (DOS). This report keeps your S Corp status active in the DOS records and is required each year – whether or not you made any changes to your business.
Florida S Corp Requirements
And that’s the scoop. You now have all the relevant information and the steps needed to register an S Corp in Florida. The only other thing you need is a small bit of pocket change. The filing fee is $100 and the cost to designate a registered agent is also $25. A small price to pay to gain all the benefits an S Corp can give you and your Business-of-One.
Janie Basile is a freelance content creator from Scotland with 20 years’ experience crafting content for insurance and technology startups and financial services companies. After taking the leap, a few years ago, into the world of freelancing, she is fully immersed in learning all there is to know about financially managing a Business-of-One. She enjoys passing that intel on to other solo entrepreneurs in the form of interesting and informative articles. Her work has appeared in places like TechCrunch, Redfin, TheZebra, and Freedom Financial.