Forming A Corporation In Florida: 3 Tax Tips

If you're a business owner forming a Florida corporation, you know that incorporation isn't only a tax dodge. Incorporation will also reduce your operating risks. And incorporation also often conveys the right image.

But all that said, you do want to harvest every available tax benefit--and sidestep common tax accounting blunders. Fortunately, you can typically enjoy the big benefits and avoid the big blunders by following three tips:

Tip #1: Verify that Forming a Florida Corporation Will Be Tax-free

A first, important tip--make sure that your incorporation qualifies for tax-free status. In other words, make sure that the very act of incorporating your business doesn't trigger income taxes.

Now normally, incorporation doesn't (if done right) cause the incorporators to pay tax. But setting up a corporation can trigger taxes if the people contributing property to the corporation don't control the corporation after the setup. And setting up a corporation can trigger taxes if people contributing stuff to the corporation contribute more liabilities than assets or offload personal liabilities into the corporation.

Note: A one-owner Florida business that incorporates should always meet the "control" requirement for tax-free incorporation if he or she owns 100% of the corporation after setup. Obviously, most business people should be able to avoid contributing personal liabilities (like personal credit card debt) to a corporation simply by exercising care. Accordingly, the real issue to watch during Florida incorporation is contributing fully depreciated assets like a car or equipment on which the business owner still owes debt. In this scenario, the incorporators may want to contribute additional assets or reduce the liabilities offloaded.

Tip #2: Look at the Florida S Corporation Option

Normally, corporations (including Florida corporations) are taxed on their profits. When those profits are later paid out to shareholders as dividends, those dividends are taxed again on the shareholder's individual tax return.

Some small corporations and their owners avoid the double income taxation by withdrawing all of the corporation's profit as shareholder-employee salary. But that gambit also creates another sort of double tax: Paying out corporate profits in the form of shareholder wages means that shareholders both pay income and payroll taxes on the profit.

However, an S corporation (also known as a Sub S corporation or Subchapter S corporation) allows the corporation to avoid income taxes and the shareholder to avoid payroll taxes on the non-salary part of the business profit.

Example: If a regular Florida corporation earns $100,000 in profit after paying the shareholder a fair wage, the corporation will pay roughly $22,000 of income taxes on the $100,000 of profit. When the corporation later distributes the profits by making a now only $78,000 dividend payment, the shareholder will again pay income taxes of about $20,000 on the dividend income. If the corporation opts for Subchapter S status, however, the corporation doesn't pay income taxes on the profits--only the shareholder (shareholders) does (do). The calculations can be a little complicated, but on $100,000 of profit, the tax savings would often be around $10,000.

Tip #3: Consider Getting a Tax Accountant or Tax Attorney's Help

If the stuff discussed in the preceding paragraphs seems a little too complicated to deal with on your own, you might want to get the help of a local, good Florida tax attorney or a small business CPA who specializes in corporate taxation. Either professional can make sure that you avoid the traps and employ all the legal and tax accounting tricks related to incorporating your small business.