S Corporation vs LLC for Asset Protection in Florida

An S corporation is a federal tax election, not a type of business entity. Florida law does not recognize any entity called an “S corporation.” The primary Florida business entities are corporations formed under Chapter 607 of the Florida Statutes and limited liability companies formed under Chapter 605. Either entity can elect to be taxed under Subchapter S of the Internal Revenue Code.

The legal entity determines asset protection. The Subchapter S election determines only how the business is taxed. Many business owners describe their company as an “S corp” without knowing whether the underlying entity is a corporation or an LLC. For creditor protection purposes, the difference is significant: a judgment creditor can seize corporate stock, but a creditor’s sole remedy against a membership interest in a multi-member Florida LLC is a charging order under Florida Statute § 605.0503.

S Corporation Is a Tax Classification, Not a Business Entity

Subchapter S is a section of the Internal Revenue Code that allows pass-through taxation for qualifying businesses. A business elects S corporation status by filing IRS Form 2553. Once approved, income and losses pass through to the individual owners’ personal tax returns rather than being taxed at the entity level, eliminating the double taxation that applies to C corporations.

Both corporations and LLCs can make the S election. An LLC elects S corporation tax treatment by first filing IRS Form 8832 to be classified as a corporation for tax purposes, then filing Form 2553 to elect Subchapter S status. The LLC remains a limited liability company under Florida law and retains all state-law characteristics of an LLC. Only its federal tax treatment changes.

S corporations have eligibility restrictions that do not apply to LLCs. The company may have no more than 100 shareholders, all of whom must be U.S. citizens or resident aliens. Only one class of stock is permitted. Partnerships, corporations, and most trusts cannot be shareholders. These restrictions limit estate planning and asset protection options that are otherwise available through an LLC.

Corporate Stock Offers No Asset Protection in Florida

A judgment creditor can levy on a debtor’s shares of stock in a Florida corporation regardless of whether the corporation has elected S corporation or C corporation status. The sheriff can seize stock certificates, and the creditor can acquire the debtor’s ownership at a judicial sale. Once the creditor takes the stock, the creditor owns and controls the business, including the authority to access bank accounts, dispose of assets, and make management decisions.

Florida provides no charging order protection for corporate stock. If a business owner’s personal creditor obtains a judgment, the creditor can pursue the owner’s shares directly. There is no statutory mechanism that limits the creditor to a lien on distributions the way Florida Statute § 605.0503 limits remedies against LLC membership interests.

A multi-member LLC receives fundamentally different treatment. Under § 605.0503, a judgment creditor’s sole and exclusive remedy against a debtor’s membership interest in a multi-member LLC is a charging order. The charging order gives the creditor only a lien on distributions. If the LLC does not distribute money, the creditor receives nothing. The creditor cannot foreclose on the membership interest, force a liquidation, vote on company matters, or inspect the LLC’s financial records.

Single-member LLCs provide less protection. Florida law permits creditors to pursue foreclosure and other collection remedies against the sole member’s interest when a charging order alone is unlikely to satisfy the judgment within a reasonable time.

Trusts Can Own LLC Interests but Face Restrictions with S Corporation Stock

An LLC can be owned by individuals, trusts, other LLCs, corporations, partnerships, or foreign entities. There are no statutory restrictions on who may hold a membership interest. This flexibility is essential for asset protection strategies that use irrevocable trusts or family members as second members to establish multi-member status and charging order exclusivity.

S corporations restrict ownership to individuals who are U.S. citizens or resident aliens, estates, and certain qualifying trusts. Partnerships, other corporations, and foreign trusts cannot own S corporation stock under any circumstances. A foreign trust is ineligible even if the trust is treated as a grantor trust for income tax purposes.

A revocable living trust can hold S corporation stock during the grantor’s lifetime because the IRS treats the grantor as the owner for tax purposes. After the grantor’s death, the trust becomes irrevocable and must qualify as either a Qualified Subchapter S Trust (QSST) or an Electing Small Business Trust (ESBT) within two years and 16 days. Failure to make a timely election terminates the corporation’s S status, causing it to revert to C corporation taxation.

A QSST requires that all income be distributed annually to a single beneficiary. An ESBT permits multiple beneficiaries but taxes S corporation income at the highest individual income tax rate regardless of each beneficiary’s actual bracket. Neither restriction applies when a trust owns an LLC membership interest, which is one reason LLCs are generally preferred for estate planning involving business interests.

Tax Treatment of an LLC Taxed as an S Corporation

An LLC that elects S corporation tax treatment and a corporation with an S election are taxed identically for federal income tax purposes. In both cases, business income passes through to individual owners and is reported on their personal returns. Florida does not impose a personal income tax, and both structures avoid the state’s 5.5% corporate income tax that applies only to C corporations.

The primary tax advantage of S corporation treatment over default LLC taxation involves self-employment tax. Active LLC members pay self-employment tax of 15.3% on their share of the company’s net earnings. An S corporation owner who works in the business pays employment taxes only on salary drawn from the company. Profits distributed beyond a reasonable salary are not subject to self-employment tax. For a business generating $200,000 in net profit with a reasonable owner salary of $100,000, electing S corporation status could save approximately $15,300 annually in self-employment tax on the $100,000 in distributions.

An LLC can capture this tax benefit while retaining its state-law asset protection advantages. The LLC files Forms 8832 and 2553 to elect S corporation tax treatment but remains a limited liability company under Florida Statute Chapter 605. The charging order protections of § 605.0503 still apply. This combination of LLC legal structure with S corporation tax treatment is the preferred arrangement for most privately held Florida businesses.

Converting an Existing S Corporation to an LLC

A Florida corporation can convert directly into an LLC under the statutory conversion process in Florida Statutes § 607.11930 through § 607.11935. The conversion transfers assets, liabilities, contracts, and legal relationships automatically to the new LLC without requiring a separate dissolution and formation.

The process requires a board resolution recommending the conversion, shareholder approval of a plan of conversion, and filing a certificate of conversion along with articles of organization with the Florida Department of State. The plan must specify how corporate shares will convert to LLC membership interests and how management responsibilities will transfer.

Converting an S corporation to an LLC can qualify as a tax-free reorganization under IRC § 368(a)(1)(F) when ownership percentages remain identical before and after the conversion. In Letter Ruling 200528021, the IRS confirmed that the basis and holding periods of assets in the new LLC carry over from the prior S corporation, and that the S election does not terminate as a result of the reorganization. The new LLC retains its S corporation tax status by filing Forms 8832 and 2553.

Any change in ownership percentages during the conversion can trigger a taxable event. Business owners should consult a tax advisor before initiating the conversion to confirm the transaction qualifies as a tax-free reorganization.

The Optimal Structure for Florida Business Owners

For most privately held Florida businesses, an LLC that elects S corporation tax treatment is the strongest available structure. It provides charging order protection under § 605.0503 that corporate stock does not receive, pass-through taxation with self-employment tax savings on distributions above the owner’s reasonable salary, unrestricted ownership that accommodates trusts, family members, and other entities as members, and governance flexibility through a customizable operating agreement rather than corporate bylaws and formal meeting requirements.

A corporation may be preferable only when the business plans to go public, needs to attract institutional investors who require a corporate structure, or requires multiple classes of equity. For privately held businesses where asset protection is a priority, the LLC is the superior entity under Florida law.