S-Corp Election for FL Businesses
An S-Corp election is a process that changes your tax status with the Internal Revenue Service (IRS). It does not change the actual entity structure of your company. An S-Corp election can be made by either a Florida corporation or a Florida LLC. An S-Corp election can have significant impact on how your Florida business is taxed.
Who Can Be an S-Corp:
Not every company is eligible for S-Corp election. The IRS has specific requirements in order for a business to be able to make the election at all.
IRS S-Corp Requirements:
- Be a domestic entity (not a company located in another country)
- Have allowable shareholders/members
- Have no more than 100 shareholders/members
- Have only one class of stock
- Not be an ineligible corporation (financial institutions, insurance companies, domestic international sales corporations)
The IRS sets specific requirements for who can be a shareholder or member of an S-Corp. Shareholders or members must be individuals, certain trusts, or estates. An S-Corp cannot have a shareholder or member that is a partnership, corporation or non-resident alien.
Advantages of an S-Corp
An S-Corp election will change your Florida business’s tax status with the IRS and alter the manner in which your company pays taxes. It is critical that you meet with a tax specialist before you make an S-Corp election so that you can determine whether or not an S-Corp is the right tax election for your company. In many cases, a Florida corporation or Florida LLC will be better off by not electing as an S-Corp. Every business is different.
An S-Corp is taxed similarly to an LLC. An S-Corp does not pay an entity tax (except in certain states), and thus avoids the double-taxation of a standard corporation.
Unlike an LLC, however, which pays tax on the entire net income of the business, an S-Corp is taxed only upon the wages of shareholders who are also employees. Any additional income (above and beyond wages) is allocated to members/shareholders as a distribution. Distributions are taxed at a much lower rate than employment taxes.
Disadvantages of an S-Corp
An S-Corp must meet the IRS formal administrative standards, which include regular director and shareholder meetings (complete with records), adopted bylaws, financial records maintenance, etc. For LLC owners considering an S-Corp election, this will mean a loss of the informal advantages offered by an LLC.
An S-Corp must also pay its shareholder/member employees a competitive salary. This requirement is designed to prevent an S-Corp from underpaying a member’s salary and supplementing this with higher distributions (which are subject to lower taxes). This means an S-Corp must carefully balance salaries and distributions in order to avoid costly audits by the IRS.
How to Apply
To apply for an S-Corp election, you must file a Form 2553 Election by a Small Business Corporation. The same form can be used by Florida corporations and Florida LLCs. The Form 2553 requires you to enter an EIN for your company. If you have not applied for an EIN, you must do so.
The IRS provides Form 2553 Instructions that should be read carefully and fully understood.
You must submit the filing no more than two months and 15 days after the beginning of your tax year (in order for the election to be applied that year). Or you can file any time during your tax year for the election to take effect for the following year.
You must mail or fax the Form 2553 tot he proper IRS Service Center. The center for the state of Florida is located at:
Department of Treasury
IRS Service Center
Cincinnati, OH 45999
Or fax to: 859-669-5748
There is no filing fee.
Can an S-Corp Election Be Reversed?
Yes. But only after the election has been in place for one year. In other words, you cannot make an S-Corp election in 2016 and then, midway through the year, change it back. You must wait for the following tax year before refiling with the IRS.
Do You File S-Corp Elections?
No. As your Florida registered agent, we will receive tax notifications and documents only for your state taxes. We do not process federal tax election paperwork.