Florida Corporations | Specializing in Florida Construction Industry Incorporations

In the past, sole proprietors, officers of corporations, partners and members of LLC's could be exempt for workers compensation insurance.   It was very common practice for owners of corporations to make their "key employee" or two an officer of the company. This saved the business owner several thousand dollars a year in workers compensation premiums.

Effective January 1, 2004, to be able to exempt yourself from the worker's compensation insurance requirement, you MUST be a 10% owner of a corporation or an LLC.

What does that mean exactly....?? Well, it means all you sole proprietors and partnerships must change your entity to a corporation or LLC.   Also, any officer of a company must now become a 10% owner to be exempt.    The States attempt is to have less fraud and non-compliance in the industry which will hopefully drop the amount of claims and furthermore the workers compensation premiums.

If you are currently a:

Sole Proprietor - The easiest is to become an LLC.   As a "single-member LLC" you basically would still file your tax return as a Schedule C and there is no need to obtain a tax identification number for the new LLC.   However, this is NOT the best alternative for tax purposes. As a sole proproprietor or a single member LLC, you pay self employment tax on the net profit of your business.   The self employment tax rate is 15.3% and cannot be avoided or erased with non-business deductions like a house or charity.

If you instead became a corporation you could further elect to be taxed as a S-Corporation by IRS. Yes, there is a little more responsibility like getting a separate bank account, getting a tax ID# and filing a corporate tax return each year. But the cost/hassle of those is far outweighed by the money you could save in self-employment taxes as the net profit of the business is NOT taxed the 15.3% self-employment tax.   Instead, you must take a reasonable (and usually small) salary in which you'd pay the self-employment tax. The remaining money you personally withdrawal are profit distributions and are not taxed for self-employment tax.

For example (in simple terms):   You have a $30,000 profit. As a sole-proprietor you would pay $4,590 in self-employment tax in addition to income tax. As an S-Corporation you could take a $12,000 salary and pay $1,836 in self-employment taxes.   You are still taxed on the full $30,000 for income tax...but you saved $2,754 in self-employment tax. That is HUGE!! Of course, the more you make, the more the savings are.    This savings far exceeds the approximate $600 you'll pay in tax preparation fees each year and the "extra hassle" of having a separate bank account and ID#.

Partnership - Your choice is to become a multi-member LLC or a corporation. As a multi-member LLC, you are taxed the same as a partnership.    You can also elect for that LLC to be taxed as a corporation for tax purposes and can further elect for it to be taxed as an S-Corporation.   Of course, you could just become an S-Corp from the start for simplicity.   The advantage of being an S-Corporation from the start that is it has a perpetual life.   In a partnership or LLC, when one of the partners or members gets out (might be by death or just retirement), the partnership and LLC cease to exist. A new entity must be created. A corporation continues when that partner or member gets out with no changes.