What’s the Best Structure for Your Florida Business?

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Tax Attorney

Choosing a business structure is one of the most important decisions you will make as an entrepreneur. Whether you’re just starting out, purchasing someone else’s company, or changing from a sole proprietorship to a different entity as your bottom line grows, it’s crucial to consider your long-term objectives. Each type of business structure can impact your daily operations, taxes, personal liability, and various other issues. These factors should all be carefully evaluated with the guidance of a Florida business attorney to determine the entity that is best to help you protect your interests and reach your goals.

Is a Sole Proprietorship Right for My Company?

Many companies begin as sole proprietorships. This is an informal business structure that is owned and operated by one person. With this type of entity, there is no separation between the owner and the business. This means that as the owner, you are entitled to all profits and responsible for all liabilities. Specifically, because the business is not taxed separately, any income generated is reported on your personal income tax return.

Sole proprietorships are generally simple to set up and easy to manage. In fact, if you own a company and did not take any action to form another entity type, you may already have a sole proprietorship. However, it’s important to understand that you might still need to file a trade name with the state if you are conducting business under a name other than your own.

What is a General Partnership?

A general partnership is similar to a sole proprietorship in that no paperwork is filed with the state to form a formal business structure. Instead, a partnership is a business co-owned by two or more people who share liability for all debts and obligations of the business. It is not a separate tax entity from the owners and is referred to as a “pass-through” entity by the IRS. Partners are required to report their share of profits or losses on their individual income tax returns in addition to filing an informational return to the IRS each year.

Informal business structures such as general partnerships and sole proprietorships are usually best for businesses that have a low risk of financial loss, a smaller customer base, and those that have started as hobbies. But it’s crucial to consider the potential drawbacks that come with these types of entities — there are no tax benefits and limited branding opportunities. When a business becomes successful, it’s typically a good idea to change to another structure that offers tax benefits and liability protection.

At Waugh Grant, our Florida business attorneys work with entrepreneurs and business owners in Florida for a wide variety of business and tax planning matters, including strategic entity formation.

What is a Limited Liability Company (LLC)?

A Limited Liability Company (LLC) is typically the best business structure for many types of small businesses since they are easy to form and inexpensive to set up. They also offer flexibility concerning tax strategies and can help a company gain credibility among customers. Unlike with a sole proprietorship, an LLC is a separate entity from its owners and limits their personal liability. For federal income tax purposes, an LLC is treated as a pass-through entity in which LLC members report their share of profit or loss on their personal income tax returns.

From an administrative perspective, there are few requirements. This makes an LLC relatively simple to manage. But while corporate resolutions and minutes are not required, it is still a good idea to hold yearly shareholder meetings and document crucial business decisions. Critically, LLCs in Florida can select varying types of profit distribution and are not limited to a 50-50 split.

What are the Benefits of Forming a Corporation?

A corporation is a separate legal entity from those who own, control, and manage it. In other words, the company is considered a separate “person” who can enter into contracts, conduct business, and pay taxes. The owners of a corporation are its shareholders and can reinvest their profits back into the company to lower their tax burdens. Corporations can also offer a variety of tax-deductible benefits to attract and retain talent, such as stock options.

Like in an LLC, the liability of shareholders is limited in a corporation. However, there are several disadvantages associated with corporations. One of the major cons of forming a corporation is double taxation — corporate income is taxed both at the entity level and the shareholder level. Corporations also must comply with record-keeping regulations that can be costly and burdensome.

Are S-Corporations Recognized in Florida?

An S-Corporation, also known as an “S-Corp,” is not a different business structure. Rather, it is a tax designation that can be applied to LLCs or corporations to help avoid double taxation. Paperwork must be submitted to the IRS specifically requesting the designation. Not only is the S-Corp designation recognized by the IRS, but it is also accepted by the state of Florida — a separate form does not need to be filed.

S-Corps benefit from pass-through taxation and provide additional protections from liability for shareholders in the event the company faces litigation or bankruptcy. But there are also a number of drawbacks to be aware of. For instance, an S-Corp is limited to issuing one class of stock and may only have up to 100 shareholders. This can make these types of companies less attractive to potential investors.

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