How To Decide Which Business Structure Is Right For You
Congratulations - you’ve made the decision to start your own business! What was once a dream is now turning into reality as you navigate through the many questions of being an entrepreneur.
One of the very first things you have to do is decide on how you want to structure your business. Your business structure is not a decision to take lightly, as the legal structure you select will impact your tax liability, personal liability and day-to-day operations, including the required paperwork you’ll need to file with the State of Florida.
As exciting of a time as this is, it can be overwhelming, too. Read on to learn the differences between the types of business structures so you can decide on the one that is best for you and your unique business situation.
In a sole proprietorship, you and your business are one and the same. This means that in the eyes of the state, there is no legal distinction between you and your business.
Structuring your business as a sole proprietorship means you are a single owner of an unincorporated business, and therefore, your personal tax return also accounts for your business’s losses and profits as your own income and expenses.
Because there isn’t a distinction between the business and its owner (you), you will also be responsible for all liabilities of the business. Legal claims made against the business are made against you as an individual and owner of the business.
However, sole proprietorship is uncomplicated and simpler to form than the other business structures available to you. This can be an ideal selection for very small businesses without employees. There is not a cost associated with doing business as a sole proprietor.
If you decide to go the route of sole proprietorship, many establish a D.B.A. (“doing business as”) or trade name by registering such name as a “Fictitious Name” with the Florida Secretary of State. This will allow you to operate as a business with a business name unique to your company. This will also allow you to open bank accounts and perform other operations in the name of your business, rather than your personal name.
A general partnership is a business structure that may be right for you if you’re going into business with another person and both of you agree to share in all the assets and profits, and financial and legal liabilities of your business. Similar to sole proprietorships, general partnerships do not offer liability protection, so the owners of these types of businesses can be held personally liable for any business debts or legal judgments against the business.
A general partnership tends to be more flexible, allowing you to actually maintain more control over your business than a corporation, however, partners will still benefit from having a partnership agreement. While a general partnership does not require you to file paperwork with the State of Florida, a partnership agreement will outline each partner’s rights and responsibilities in the business, and it’s a great document to have in the event of conflict or questions on how to continue operation of your joint business.
Limited Liability Partnership (LLP)
An LLP could be right for your business if your business has multiple owners. Unlike a general partnership, each owner has limited liability, is not responsible for partnership debts, and is separate from the actions of their co-owners. Additionally, registration with the State of Florida is required for this type of business structure.
A C corporation or conventional corporation (C-Corp) is a legal entity that’s separate from its owners. There is a higher cost associated with forming a corporation, however, the trade-off is your personal liability is the most protected. Unlike other business structures, corporations will pay income tax on their profits.
Corporations can raise money for their business through stock. Corporations have stock that can be sold and purchased. Different from a partnership, corporations can continue even if a shareholder sells shares or leaves the company entirely for some reason.
An S-Corp, also known as the subchapter or small business corporation, was created to encourage and support the creation of small businesses, while eliminating the double taxation that C-Corps were subjected to.
S-Corps are similar to C-Corps in that there are also profits and losses. However, the main difference between these two types of corporations is that an S-Corp, unlike a C-Corp, is not subject to corporate income taxes. Instead, S-Corps receive different treatment for tax purposes that is generally more favorable to the business owner. An S-Corp is a pass-through entity for tax purposes, similar to the LLC (discussed below). This means that the income generated by an S-Corp will flow through to the personal income tax returns of the shareholders, and the S-Corp itself generally does not owe any tax liability.
Structuring your business as an S-Corp also gives you certain flexibility for managing the ownership of the company. The stock in an S-Corp is freely transferable, while the interest (ownership) of LLCs is not. This means that the shareholders of an S-Corp can sell their ownership interest without obtaining the approval of the other shareholders, absent an agreement by the shareholders to the contrary.
A benefit corporation (B-Corp) is a for-profit business with a mission. B-Corps operate at a financial profit while also contributing to the public good.
Limited Liability Company (LLC)
An LLC is a very common, flexible and relatively simple business structure. LLCs are member-owned, but unlike a sole proprietorship, members of an LLC are not personally responsible for any liabilities of the business entity. A member’s liability is directly related to their investment in the company. LLCs provide a structure that combines the benefits of a partnership with the benefits of being a corporation.
Additionally, ownership in an LLC can range anywhere from a single-member to an infinite number of members (there is no limit on the number of members who can own an LLC). Members also do not necessarily have to be individuals. Corporations, other LLCs, and other entities may be members in an LLC.
However, unlike a sole proprietorship, there is a cost associated with forming and maintaining an LLC, and registration with the State of Florida is required.
The flexibility of an LLC is shown in the several ways this type of business entity can be taxed. If you are the sole owner/member of an LLC, you may choose to have that entity “disregarded” on your annual income tax forms. This just means that you will file your regular personal income tax return each year and include on it any income you brought into your LLC business, no separate tax return is required to be filed. If the LLC is owned by multiple members or partners, the LLC will file a partnership tax return to show its distribution of profits, losses, and credit; however, the owners would still be taxed as if the income to the business was their own personal income.
An LLC can also be taxed as a corporation, if the members choose to elect to do so. If the members make such an election, the LLC will file a separate annual income tax return, as if it was any other kind of corporation.
These entity structures are just some of the options available to a new business owner. A knowledgeable attorney, like the ones at Kira Doyle Law, can make sure you’re forming a business that works for your situation as a business owner and as an individual. All the while, helping to guide you in filing any necessary documents with the county clerk’s office and the State of Florida to ensure your business is set up properly and you are protected.
Ask a Florida Business Attorney for Assistance
If you have recently started a business or are thinking of doing so, the best time to hire a lawyer is before you need one. Having a business attorney that understands the individual needs and unique circumstances of your company is key to helping your business thrive and prosper. If you are interested in learning more about legal protection strategies for your business and how we work with you as a partner in protecting your company, contact our St. Petersburg office at 727-537-6818 to schedule an appointment with one of our experienced business attorneys today!