Entity Selection & Structuring
Forming a business is an exciting and daunting experience. There are many laws and regulations on how to do such a thing. This may at times prove to be discouraging, but once the process is accomplished, it is highly rewarding. If you are ready to take this step, there are a few things you should be aware of. The first step, of course, is choosing a name for your company. Though this may seem simple, it is actually vitally important because the name of the company creates the potential customer’s first impression on your business. Once you make this decision, you will then have to decide what type of structure your company will follow. After this is determined, you can register your company.
Types of Businesses
When you begin a business in the state of Florida, there are four different structures that you can choose from. The type of structure that you choose will determine how your business is formed, what kind of requirements you must meet, and how you must subsequently operate the company. The four entity types include:
- Sole Proprietorship
- Limited Liability Company (LLC)
A sole proprietorship is essentially an unincorporated business. There is only one owner (or husband and wife team) and the actual business entity has no legal existence separate from the owner. You are not required to carry out any state filings and there is no separate tax return—you pay taxes on the profits on your personal tax return. This type of entity is easy to begin and easy to dissolve. If you choose to take this route, you do not have to carry out any of the corporate formalities, provide payroll for yourself and you are not tied to anyone else. You are required to obtain a business license before you begin though.
A partnership can come in two forms: general and limited. As the name indicates, there is more than one owner of the business. All partnerships must register with the Florida Department of State. In this structure, the management is decentralized as each partner is allowed to participate in the management process. In a general partnership, there is unlimited personal liability for debts and obligations. If you choose to take this route, it is important that you enter into a buy-sell agreement with your partner(s) to deal with the problems that will arise should one partner decide to pull out of the company. If you do not have a plan for handling this, the business will most likely end. In a limited partnership, some partners carry limited liability and therefore limited management participation. They can only participate as far as their investment goes.
Corporations are the third type of business structure available to you. The two most common types include Subchapter C-Corporations and Subchapter S-Corporations. A corporation has centralized management and is controlled by a small group of individuals. A shareholder in a corporation has limited liability and therefore with not be held accountable to the debts of the company. A C-Corporation is far more complex in its structuring that a partnership.
In Florida, it is common practice for a shareholder to choose a representative called a Director that will manage their interest. A C-Corp is taxed as a separate business entity. This leads to the problem of double taxation because each individual shareholder must also pay taxes on the profit that they gain. A Subchapter S-Corporation is commonly used for small businesses. It is similar to a C-Corp but not necessarily as complex. In this structure, profits are only taxed once. There are limits though, such as how many shareholders can be involved.
A Limited Liability Company (LLC) is the fourth entity type available to you. This structure is the best of both worlds. It contains the benefits of both a partnership and a corporation. The partners involved in the company have the ability to be involved in the management process without the liability that a general partnership presents.
What else should I know?
When you are making all the initial decisions for forming your business, you must consider how you want the management structured, what role you want investors to have, and how much personal liability you want to hold. You will have to determine where revenue will come from and set up an exit plan. Once you have made these decisions, you will have a better idea of the type of business entity you want to set up. A few other details that you must obtain include a federal identification number if you plan on hiring employees or filing a business return, an occupational and state license, a sales tax registration, and a payroll registration.
It is advisable that you hire an attorney to go through this process with you. This will ensure that you meet all state requirements and regulations for your new company. A legal professional will be able to answer any questions you may have and counsel you concerning what is the best path for your organization. When you are ready to make this step, work with Crary Buchanan. Our law firm has been established in Stuart, Florida since 1927. Our associates have a broad knowledge of the law as well as a highly detailed understanding of each individual statute. We will be able to analyze your plans and advise on which entity to choose and the best way to go about setting up your business. Call today to find out more.