Choosing the right structure for your business depends on your goals.
When selecting an entity type, consider the formation requirements, liability protection, tax implications, and how you envision business operations and management.
If you need help deciding what type of business structure is best for your organization, contact a business attorney.
Limited Liability Company (LLC)
An LLC is a hybrid business structure that has some characteristics of a corporation and a partnership.
These entities are favorable among small to medium-sized businesses because they are easy to form and flexible to manage and offer the liability protection of a big corporation.
Formation
To form an LLC, file Articles of Organization with the Florida Department of State and pay a one-time filing fee of $125. Each year you must file an Annual Report and pay a fee to maintain good standing.
Liability Protection
The hallmark of an LLC is the limited liability protection for its owners (also called members) from the liabilities of the LLC and protection of the LLC from the liabilities of the member.
An LLC is a separate legal entity from its members. The members’ personal assets are protected if the LLC is sued or files for bankruptcy, and their liability is limited to what they invest into the LLC.
Also, creditors of a member cannot take control of a member’s interest in a multi-member LLC. However, the Florida Supreme Court has ruled that single-member LLCs may not be completely insulated from the member’s liability.
Taxation
LLCs enjoy the benefit of pass-through taxation, like a partnership. This means that the LLC’s income passes through to the members and they only pay income tax once at the individual level. The members must include all business income and losses on their personal income tax return.
On the other hand, corporations by default are subject to double taxation, where the corporation pays income taxes at the corporate level and again at the individual level when it distributes dividends to shareholders.
You can elect to have your LLC taxed as either a C Corp or an S Corp. If your LLC is taxed as a C Corp, you will not pay the self-employment tax, but the business income is subject to double taxation. If you choose to be taxed as an S Corp, all profits and losses will still flow through to the members, but the profits are not subject to self-employment tax and additional distributions of profits are taxed as passive income.
Another important aspect of taxation is the treatment of members who work for the LLC or are involved in management. By default, the IRS considers these members to be self-employed business owners, and all amounts paid to them are subject to self-employment tax.
Self-employment tax is in addition to federal income tax and is made up of 12.4% Social Security tax and 2.9% Medicare tax. However, you can deduct half of the self-employment tax as a business expense. This self-employment tax treatment can be avoided by making an S Corp election.
Ownership, Management, and Profit/Loss Sharing
LLCs have no ownership restrictions in terms of who can own the LLC or how many members can have an interest in the LLC.
There are two types of management structures in an LLC. One is member-managed where all members participate in the decision-making. The other management structure is manager-managed where a manager handles the business affairs, much like a corporate director, and the members are akin to shareholders and have limited discretion over management.
Members can choose how to share profits and losses. They do not need to correlate to the percentage of ownership.
Advantages and Disadvantages
LLCs are advantageous in many ways. These business structures have simple formation and maintenance requirements. They provide members with liability protection and great flexibility in terms of ownership and management.
By default, LLCs are not subject to double taxation but can elect their own tax treatment. Also, the LLC passes losses through to its members, which can help reduce individual tax liability.
In terms of disadvantages, all LLC profits are subject to self-employment tax. Ownership interests in an LLC are not as freely transferable as, for example, stocks in a corporation.
To some, LLCs may not appear as “official” as a corporation, which may be important if seeking investors.
Lastly, if your LLC is in a unique situation that the Florida Revised Limited Liability Company Act does not address, you will find little guidance or protection in Florida’s case law because LLCs are still relatively new entities.
C Corporation
A C Corp is an independent legal entity that is taxed separately from its shareholders under Chapter C of the Internal Revenue Code (IRC).
Formation
There are strict legal requirements when forming a C Corp in Florida. For example, a Florida C Corp must have at least one director, appoint officers, and hold an organizational meeting.
Liability Protection
Like LLCs, C Corps insulate their shareholders from liability. This is one of the main reasons business owners form corporations, whether LLCs or C Corps—because they want to protect their personal assets.
However, unlike LLCs, C Corps are not protected from control by their owners’ creditors.
Taxation
A C Corp’s income is subject to double taxation. This means that the corporation’s profits are subject to corporate income tax and then subject to personal income tax when the shareholders receive dividends.
However, C Corps can avoid this double taxation by electing S Corp status.
Ownership, Management, and Profit/Loss Sharing
C Corps, just like LLCs, have no restrictions on the number of owners/shareholders or the type of owners/shareholders.
The management of a C Corp is not as flexible as with an LLC. A corporation must appoint a board of directors to manage business affairs. There are also extensive management requirements for C Corps, such as holding annual shareholder meetings and board of directors meetings.
Shareholders of C Corps have financial rights (i.e. rights to profits) based on their stock ownership. Unlike an LLC, where certain members can receive larger distributions of profits, a C Corp shareholder will receive profits in proportion to the number of shares they own.
Advantages and Disadvantages
Some advantages of C Corps are personal liability protection and unrestricted ownership. C Corps can also be more attractive to investors because they have stricter management requirements, as opposed to LLCs, where the members can organize and manage however they want.
Another advantage is that C Corp shareholders are not subject to self-employment tax on the corporation’s profits like LLC members. Lastly, since C Corp earnings pass through to shareholders only through dividends, it is easier to reinvest earnings into the C Corp and accumulate more capital.
Disadvantages of C Corps are double taxation, formation requirements, and the corporate formalities to maintain a C Corp.
When comparing an LLC vs. corporation in Florida, the best choice for your business depends on your goals for the company.
S Corporation
An S Corp is not necessarily a separate business structure, but rather a tax election under Chapter S of the IRC. S Corps have many benefits of both an LLC and a C Corp.
Formation
To form an S Corp, select “S” status on the IRS Form 2553 within two-and-a-half months of filing your corporation’s articles of incorporation with the Florida Department of State.
Liability Protection
S Corps provide limited liability protection like LLCs and C Corps.
Taxation
S Corp profits and losses pass through to the shareholders. Unlike LLCs, S Corp shareholders can receive a “reasonable” salary (subject to applicable employment taxes), and any additional distributions to shareholders are considered dividends, which are taxed at a lower rate.
This differs from an LLC where the entire amount of LLC profits are subject to self-employment tax. Strictly from a tax perspective, an S corp. vs. an LLC in Florida is more advantageous.
Ownership, Management, and Profit/Loss Sharing
To be eligible to make an S Corp election, there are several requirements under federal law.
First, S Corps can have no more than 100 shareholders. Second, only U.S. citizens or residents and certain entities can be shareholders of an S Corp. Third, there can be only one class of stock in an S Corp.
S Corps are subject to the management requirements of the underlying entity, whether that be a partnership, LLC, or C Corp.
S Corporation shareholders receive profits and losses according to their percentage of ownership, like a C Corp.
Advantages and Disadvantages
The main advantage of an S Corp is the pass-through taxation. When comparing an LLC vs. an S Corp in Florida, there are more tax advantages for S Corps because of the salary payment allowance and distribution of dividends.
However, if an LLC elects S Corp status, the company enjoys the easy formation and flexible management of an LLC with the tax benefits of an S Corp.
One disadvantage of an S Corp is the strict ownership requirements.
LLC vs Corporation In Florida
Choosing between an LLC and a Corporation in Florida hinges on your business objectives, risk preferences, and future plans. LLCs are favored for their operational flexibility, straightforward management, and beneficial pass-through taxation, making them ideal for small to medium-sized enterprises seeking simplicity. On the other hand, Corporations are distinguished by their ability to bolster credibility, facilitate easier access to capital markets, and establish a clear organizational structure, which may be advantageous for businesses with ambitious growth targets or those planning to go public.
Contact an Attorney
There are many factors that go into deciding between a Florida LLC vs. S Corp. vs. C Corp.
Our experienced business law attorneys will walk you through your options and make recommendations based on your goals. The choice you make now can be very impactful later.
Over the last 13 years, BrewerLong has helped hundreds of clients with their business needs. Contact BrewerLong today!
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