You have decided to invest working capital and incorporate your business with several shareholders. Congratulations! Before you make it official with the Florida Department of State Division of Corporations, consider becoming an S corporation. This Internal Revenue Service (IRS) designation has special rules that avoid double taxation.
All corporations have a life separate from their owners. They can sue and be sued, incur debt, amass assets, and pay taxes. However, S corporations are structured to pass profits down to shareholders, much like a limited liability company. As an experienced attorney can explain, profits and losses are declared on shareholders’ individual tax returns while the company does not pay taxes. Consult a Florida S corporations lawyer to discuss whether this subchapter is right for your business.
Profits and losses at the company’s fiscal year-end are allocated to shareholders, depending on the percentage of the business they own. They can declare their losses up to their cost basis when filing personal income returns, with adjustments in some situations. A Florida S corporations attorney could offer advice on incurred losses at tax time.
A C corporation is the default designation when a company is chartered. The incorporator must elect the S designation and subsequently submit paperwork to the IRS. Not every corporation will qualify as a subchapter S. Requirements for Florida S corporations include the following:
C corporations can engage in any lawful business, but S corporations are restricted to earning 25 percent of their gross income in passive endeavors. Passive income is generated with little or no effort, such as from rental property and limited partnerships, which are governed by unique IRS rules. A local attorney can review companies’ operations and goals to determine if they are good candidates for S corporation designation.
An S corporation offers protection to shareholders and management if the company is sued or incurs debt. The Court will allow a plaintiff to pierce the corporate veil and sue principals if there is evidence that they acted in bad faith to manufacture the problem. For instance, Directors who funnel corporate profits into a sham company would likely be held responsible to shareholders for bankrupting the S corporation.
Shareholders lose their initial investments when a corporation goes bankrupt. Still, their personal assets are not at risk of being seized as they would be with sole proprietorships and some partnerships. When shareholders sell their stock or pass away, the corporation lives on, unlike sole proprietorships and some partnerships without a succession plan.
Corporations have additional duties after formation. They must adopt bylaws in Florida that define how the company will be managed. Shareholder meetings should be conducted yearly, according to Florida statutes. The Board of Directors should meet as often as needed to guide operations while the corporate secretary records the meetings as minutes for the corporate records.
Florida entities file annual reports and pay a yearly fee beginning each January. Failure to do so prompts the State to administratively dissolve the company. Other state taxes, such as sales tax, should be remitted quarterly. A lawyer experienced in working with S corporations can oversee State and federal filing duties.
If you are in the process of founding a business and wish to discuss the merits of a Subchapter S corporation, call us. We can explain the restrictions and why this designation could be a perfect fit for you.
At Sparks Law, our Florida S corporations lawyers have your business interests at heart. Whether you are considering incorporating or changing designations, give us a call today for help.