What is an S Corporation?
Written on December 5, 2019
If you’re considering starting up a company in Florida, you’ve probably already done some research on the wide range of potential business formations available under state law. You may even be committed to organizing as a corporation, because of the numerous advantages it offers for both owners and the entity itself. However, what you may not realize is that there are different types of corporations – not for purposes of state statutes, but in terms of federal income tax treatment.
You should always trust specific, important legal issues to a Clearwater, FL business law attorney, but some general information may help you understand the basics.
General Overview of Corporations:
Regardless of the specific type, there are certain characteristics that make corporations an attractive option for business owners. The key is liability, since a corporation is a separate, distinct entity for the owners. All stakeholders have the right to profits, but they won’t be liable for debts, judgments, lawsuits, and other financial or legal obligations of the company. This means you can protect your own personal interests and assets in most situations, though there are exceptions when misconduct is involved.
S Corporations and Federal Income Tax Implications:
Once you organize your business as a corporation in Florida, you have options for how you’d like the company treated for federal income tax purposes. The S corporation is a structure specifically created under the Internal Revenue Code as a “pass-through” entity. In other words, the shareholders of an S corporation are only taxed on income, not the entity. Plus, they can deduct their share of losses on their individual income tax returns. Both of these factors are in contrast to C corporations, in which stakeholders AND the company pay taxes on income – and only the entity can offset operating losses.
However, there are strict requirements you must follow when opting for S corporation status. They include:
- Your corporation must be domestic, instead of organized in a foreign country;
- Your company cannot have more than 100 shareholders;
- You can issue only one class of stock;
- Shareholders must be individuals, as opposed to other corporations, LLCs, partnerships, or other entities;
- Nonresident aliens cannot own shares; and,
- You must file the S corporation election with the Internal Revenue Service, otherwise, your company will be treated as a C corporation by default. It’s difficult to switch over to S corporation treatment once you’ve already begun operations, so you should make the decision as early on as possible.
Discuss S Corporations with a Knowledgeable Clearwater, FL Business Law Attorney
While this summary of S corporations may be useful, there are many other details and subtleties you should note before you make the decision. Our team at Clearwater Business Law can advise you on the laws and legal concepts that apply to your unique situation, just as we have been for years for clients throughout Pinellas County, FL. For more information on S corporations in Florida, please call (727) 785-5100 today to set up a consultation. Once we review your circumstances, we can assist with essential tasks and help you navigate the filing process.