Congratulations on making the decision to start a new business! Whether starting a company on your own or with partners, it is important to get ready to make some important decisions. First and foremost, it is essential to choose the right business entity to form.
Sole Proprietorship
A Sole Proprietorship is when the business owner runs the company through the business owner’s individual name. A Sole Proprietorship is easy and low cost. No organizational filing is required. At tax time, a Schedule C is added to the business owner’s 1040 tax return. The business owner and business are one and the same, so the business owner is directly and personally liable for all credit, debts, and lawsuits.
right business entity for the new company. Below are descriptions and features of the different business entities:
Partnership
In Florida, nothing is required to be filed to form a Partnership; however, a registration statement should be filed with the Florida Division of Corporations. Business owners like Partnerships because there is little paperwork needed to get started and few expenses to keep it going. There is no annual expense for renewal with the Division of Corporations like there is with a Limited Liability Company. The Partnership has pass-through taxation, so there is no additional cost of a separate tax return for the company. While a Partnership is a lower cost option with few formalities, it does not provide the partners with the liability protection that is available with other entities. The partners are jointly and severally liable for the debts and liabilities of the Partnership.
In a Partnership, it is essential to have a partnership agreement drafted by a business attorney that sets out the terms and conditions of the relationship between the partners to avoid disagreements and uncertainty with operations. The agreement will cover the percentage of ownership, distribution of profits and losses, powers and duties, the term of the Partnership, and how the Partnership can be terminated or a partner’s interest can be sold.
Limited Liability Company (“LLC”)
This is the most popular entity structure due to its flexibility in taxation and the fact that it requires less formalities than a corporation. To form an LLC, the business must file Articles of Organization with the Florida Division of Corporations. This can be done online or through a business attorney. When formed, it is essential to contact a business attorney to plan and draft your operating agreement. An operating agreement acts as the user manual for the LLC. The agreement details who will manage the LLC, how decisions are made, how the profits and losses will be distributed, and what happens if the owners want to sell part or all of the LLC. The operating agreement information and Articles of Organization filed should be consistent. An LLC that is has more than one member (owner) will have more liability protection than a sole proprietor against creditors of the LLC.
S Corporation
An S Corporation is a regular business corporation that has elected to be taxed under Sub-chapter S of the Internal Revenue Code, i.e., avoiding double taxation from corporate tax. This tax advantage makes this option preferable over a C Corporation for small businesses since there is a single layer of taxation. Articles of Incorporation must be filed with the Florida Division of Corporations. The S Corporation is governed by bylaws that should be drafted by a business attorney. An S Corporation requires more formalities than an LLC or Partnership. These formalities include regular meetings and records of the minutes of the meetings.
There are qualifications for what companies can be S Corporations. The company must fulfill these six requirements:
- Be a United States company;
- Have shareholders who are either individuals, trusts, or estates;
- Not have shareholders who are corporations, partnerships, or nonresident aliens;
- Have fewer than 100 shareholders;
- Have only one class of stock; and
- Not be a financial institution, insurance company, or other ineligible corporation.
Once a company has determined that it qualifies, it may elect S Corporation tax treatment by filing an IRS Form 2553 with the Internal Revenue Service. It is best to consult with a Certified Public Accountant to assist with this submission. The election form must be submitted no more than 2 months and 15 days after the beginning of the tax year in which it wishes to have the election effective. It may make such an election in any year.
C Corporation
A C Corporation is incorporated with the Florida Division of Corporations. A C Corporation business entity will have double taxation, i.e., one tax at the company level and another tax on profits distributed to shareholders, which is why many business owners choose an S Corporation. However, a C Corporation does not have the above referenced limitations of an S Corporation, which can be attractive for business owners who want to be able to have international shareholders, an unlimited number of shareholders, have different classes of shares, and a wider array of allowed IRS deductions.
Like an S Corporation, a C Corporation will be governed by bylaws and will have increased formalities.
Entity structure and taxation are important decisions for starting a business off on the right foot. Make sure to consult with a good Certified Public Accountant and a Florida business attorney on what is best for your new company.
