Small businesses are an important part of the economy and many entrepreneurs have visions of creating successful companies. However, starting and operating a business comes with decisions, including those concerning legal and tax considerations. One option for small business owners to consider is the formation of a subchapter S corporation, which offers tax benefits and limited liability protection. In this post, we will briefly explore what a subchapter S corporation is, how it works, and some benefits and drawbacks.

Subchapter S corporations, also known as S corps, are a popular choice for small business owners. They are a type of corporation that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. This means that S corps do not pay federal income taxes at the corporate level, but instead, the shareholders report or “pass through” the company’s income or losses on their individual tax returns. Regarding limited liability protection offered by S corps, generally there is no personal liability of shareholders, meaning liability is limited to the amount of investment.

To qualify as an S corporation, a corporation must meet certain requirements and file with the Internal Revenue Service (IRS) to choose to be treated as a S corp. Eligibility requirements include having no more than 100 shareholders, only having one class of stock, being a domestic corporation, and shareholders must be US citizens or permanent residents. Once the corporation has met the requirements, it can file Form 2553 with the IRS to elect S corporation status. To form a Florida corporation, you’ll need to file articles of incorporation with the Florida Division of Corporations and pay the required fee.

S corporations in Florida are subject to certain requirements including regarding their governance, such as having a board of directors and holding annual shareholder meetings. Shareholder agreements can be important to ensure that the shareholders understand their rights and obligations. S corporations must also comply with Florida’s business laws, such as obtaining necessary licenses and permits. Every corporation is required to file an annual report to maintain an “active” status in the Florida Division of Corporations’ records.

One of the main benefits of S corporation status is that the corporation’s income is not subject to double taxation (i.e., not federal income tax at both the corporate and personal levels). Instead, the shareholders report the company’s income or losses on their individual tax returns. However, S corporations still have certain tax obligations, such as paying employment taxes and filing an annual tax return. In Florida, there is generally no state-level tax on S corps (unless perhaps the S Corporation recently changed from a C Corporation or it has certain taxable income, for example).

In summary, subchapter S corporations can be a valuable option for small business owners in Florida. They offer tax benefits, limited liability protection, and can be less expensive than a Florida limited liability company (LLC) to establish and maintain. However, there are certain requirements that must be met for a corporation to qualify as a S corporation, and the S corp will need to continue complying with Florida’s business/corporation laws. If you are considering forming an S corporation or need help regarding S corps, contact a Florida corporate attorney to discuss your options. Click here to contact Guala Law Firm for assistance.

1. “An S corporation, sometimes called an S corp, is a special type of corporation that’s designed to avoid the double taxation drawback of regular C corps. S corps allow profits, and some losses, to be passed through directly to owners’ personal income without ever being subject to corporate tax rates.” Small Business Association. Choose a business structure. https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
2. “To qualify for S corporation status, the corporation must meet the following requirements:…” IRS. S Corporations. https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
3. “Unless directors are elected by written consent in lieu of an annual meeting pursuant to s. 607.0704, a corporation shall hold a meeting of shareholders annually, for the election of directors and for the transaction of any proper business, at a time stated in or fixed in accordance with the bylaws.” Section 607.0701(1), Florida Statutes (2022). Annual Meeting. http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0600-0699/0607/Sections/0607.0701.html
4. “Florida is one of only seven states that does not impose a state income tax on individuals or businesses.” Tax Foundation. 2023 State Business Tax Climate Index. https://taxfoundation.org/2023-state-business-tax-climate-index/
5. “S corporations are required to file an annual tax return, but do not pay federal income tax at the corporate level.” IRS. S Corporations. https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations