Whether you are a new entrepreneur or industry titan, one of the first questions you are likely facing when starting a new business is what type of business entity is right for me and for the goals I have set for my business? When you are starting your business, it is important to have a general overview of the different types of Florida business entities. In particular, Florida has four (4) general types of business entities:
- 1. Sole Proprietorships;
- 2. Partnerships;
- 3. Corporations; and
- 4. Limited Liability Companies (LLC).
Sole Proprietorships are formed by having one single owner and are among the simplest business entities to form. One of the main advantages of a sole proprietorship is the way they are taxed. In particular, the income generated by the business passes directly to the owner, and the income avoids double taxation (i.e., where the income is taxed once as the business and then a second time when it passes to the owner). However, one of the main drawbacks to a sole proprietorship is that both the individual owner and the business are considered to be the same, and there is no protection that isolates the owner from the business. In essence, the owner is likely personably liable for the business’s action.
Partnerships are similar to sole proprietorships in terms of their ease of formation and relatively inexpensive cost to form. A partnership is owned by two or more individuals who share in the responsibility. However, while sharing responsibility may be beneficial, the actions of one partner may put the entire partnership in jeopardy and may result in shared personal liability as well.
One of the most well-known types of business entities is the corporation. A corporation is considered to be a separate legal entity that is separate from the owners. In particular, if a judgment is levied against a corporation, the owners are typically protected from personal liability, except in certain situations where the “corporate veil” may be pierced. This is commonly referred to as “piercing the corporate veil.”
Additionally, there are two types of corporations, an “S” corporation, and a “C” corporation. Some notable differences between “S” and “C” corporations include the way the corporation is taxed and the number of shareholders within the corporation. For example, in an “S” corporation, the income and losses are split amount the shareholders and are said to “pass-through” to their personal taxes. However, in a “C” corporation, the corporation is considered a separate taxable entity by the Internal Revenue Service (IRS). As a result, a “C” corporation is taxed once at the corporate rate and then a second time at the personal income rate of the individual shareholders once the funds are distributed from the corporation to the shareholders. Another notable difference between an “S” and “C” corporations is the number of shareholders each is permitted to have. In particular, an “S” corporation is limited in the number of shareholders, while a “C” corporation may have an unlimited number.
Limited Liability Company (LLC)
Undoubtedly one of the most popular types of business entities is also the newest—the Limited Liability Company. In essence, an LLC seeks to combine the limited liability and increased protection that shareholders of corporations are entitled, with beneficial tax treatment and ease of operation that is found in a partnership.
Some of the notable advantages to consider when deciding to form a Florida LLC is that the LLC business entity permits “pass-through” taxation, flexibility in its operations, unlimited membership, and fewer formalities. However, there are several disadvantages that should also be considered as well. These disadvantages include the LLC’s high cost to form, difficulty in transferring ownership, and less developed legal status are a result of a limited amount of case law.
In the end, it is essential to carefully review and understand the advantages and disadvantages of each type of Florida business entity. An experienced business attorney can help you navigate the numerous possibilities and situations that may arise when forming your business.