Florida is definitely a “business friendly” state and, as such, Florida is often where business owners choose to incorporate. When it comes to having a favorable tax climate for businesses, Florida ranks 5th so it is no surprise to find that Florida joins Delaware and Nevada as one of the big three states when it comes to business formations.
There is widespread confusion as to exactly when a regular Florida corporation (C Corporation) becomes an S Corporation. It is commonly thought the S Corporation election must be made at the time the corporation is originally formed. That is not correct.
When you form a corporation in Florida, you’ll want to know how and when your Florida C Corporation becomes an S Corporation as well as the differences between the two. And you should also be aware of certain restrictions that apply to S Corporations but not to C Corporations. This guide walks you through a comparison of these two types of corporations in plain language. We recommend you discuss your specific situation with your attorney, accountant or tax advisor when choosing between C Corporation and S Corporation status in Florida.
When a corporation is originally chartered by Florida, it exists as a C Corporation. If you do nothing more after forming your Florida corporation, it will remain a C Corporation. Your Florida Corporation becomes an S Corporation only when, with the consent of all shareholders, special tax treatment (“pass-through taxation”) is sought by filing Form 2553 with the IRS in accordance with Subchapter S of the Internal Revenue Code. You don’t have to choose between a C Corp and S Corp until after forming your corporation
A C-Corporation is taxed as a separate entity and must report profits and losses on a corporate tax return. The C-Corp pays corporate taxes on its profits while the shareholders are not taxed on the corporation’s profits. C-Corp shareholders report and pay income taxes only on what they are paid by the corporation. Now when the corporation chooses to pass along any of its after-tax profits to shareholders in the form of dividends, the shareholders must report those dividends as income on their personal tax returns even though the corporation has already paid corporate taxes. This is commonly referred to as “double taxation”, something that is avoided with an S-Corporation (a pass-through tax entity).
While an S Corporation with more than one shareholder does file an informational K-1 tax return, the corporation itself does not pay any income taxes. Instead, the individual shareholders (owners) must include their share of the corporation’s profits on their personal tax returns, paying tax at their individual tax rate.
S Corporations provide another advantage should the corporation experience losses. Unlike C Corporation shareholders, S Corp shareholders are allowed to offset other income by including their share of the corporation’s losses on their personal tax returns provided, however, they cannot deduct corporate losses in excess of their "basis" in their stock – that being the amount of their investment in the company, with a few adjustments. Keep in mind that no more than 25% of an S Corporation’s gross corporate income may be derived from passive income.
Since the corporate tax rate is typically lower than an individual’s tax rate and profits retained in the corporation will not be double taxed as dividends, a C Corporation can generally accumulate capital more effectively than an S Corporation. Of course an S Corporation could accumulate even more capital if it did not distribute any of its profits to the shareholders – but doing so would create obvious problems for some owners who would have to pay income taxes on this “phantom income” which they did not actually receive.
C Corporations can have multiple classes of stock while S Corporations are limited to one class of stock (voting rights can differ). S Corporations are not allowed to conduct certain kinds of business. Business corporations that are not eligible for S Corp status include banks, insurance companies taxed under Subchapter L, Domestic International Sales Corporations (DISC), and certain affiliated groups of corporations.
C Corporations can choose when their fiscal year ends while an S Corporation’s fiscal year end must be December 31. If a C Corp has been using a fiscal year end other than December 31, it must change to a December 31 fiscal year end if it converts to an S Corp. And if the S Corp status is later revoked, it cannot change from the 12/31 fiscal year.
Both C Corporations and S Corporations are initially the same, regular corporations (C Corporations) created by officially filing what is normally called Articles of Incorporation or a Certificate of Incorporation with a state.
Both C Corporation and S Corporation shareholders (owners) must pay personal income tax on any salary drawn from the corporation as well as any dividends paid or earnings that are distributed.