Types of Business Structures
One of the biggest decisions you will make when forming a business is the type of business structure you want. The business formation you choose has wide-ranging implications, from your daily operation to taxation and liability protection.
Below is a brief overview of the four basic types of business structures available in Florida.
1. Sole Proprietorship
A sole proprietorship is the simplest business structure with very little paperwork needed to form and operate. It is owned by one individual, and there is no legal distinction between the business and the owner. Therefore, the business is not taxed separately, and all business income is reported on the owner’s personal income tax return.
A sole proprietorship does have risks. If the business is sued or has financial difficulties, the owners could be personally liable. The owner’s non-business property could be targeted to fulfill a judgment or lien.
A partnership is when two or more people own a business together and share in the profits and losses. Each partner contributes something, usually money or real property, to the business. The partnership is a distinct legal entity from the partners that own it. Partnerships have “pass-through” status for income tax. The partnership’s profits and losses are reported on the partners’ individual tax returns so they avoid double taxation.
There are two main types of partnerships in Florida—general and limited.
• General Partnership – In a general partnership, the rights and responsibilities are divided equally between the partners. Each partner can act on behalf of all the partners and is responsible for the partnership’s debts and obligations.
• Limited Partnerships – Limited partnerships are formed by filing a certificate of limited partnership with the Florida Department of State. Unlike a general partnership, limited partners are not responsible for the partnership’s actions, debt, and obligations. Partners are given limited liability up to a certain limit based on their capital contribution.
3. Limited Liability Companies
One of the most popular business formations in Florida is the limited liability company (LLC) because they are easy to form and inexpensive to set up while also providing personal liability. To form an LLC, the owner must file Articles of organization with the Florida Department of State. Florida does not require LLCs to create an operating agreement. However, it is advisable. Without an operating agreement, the LLC guidelines and operations will default to Florida law. LLCs are not required to comply with corporate formalities like holding regular stockholder or management meetings. Like partnerships, LLCs have pass-through taxation. LLC members report their share of profit or losses on their personal income tax returns.
LLC members have limited liability. This means the members are not personally responsible for the business’s liabilities and debts.
A corporation is its own independent legal entity. It exists separate from the individuals that own, control, and manage the business. The corporation can enter into contracts, pay taxes, and transact business. It is created when an individual files the Articles of Incorporation with the Florida Department of State.
The owners of the corporations are the shareholders who transfer capital to the corporation in exchange for a proportionate value of the stock. The shareholders can reinvest their profits back into the company to lower their tax burden. The rules and guidelines governing the corporation are laid out in the bylaws. Shareholders have limited liability and are not personally responsible for the corporation’s debts and liabilities.
There are disadvantages to forming a corporation. First, Florida corporations must comply with record-keeping regulations that can be time-consuming and costly. Secondly, corporations have double taxation. Corporate income is taxes at the business level and the shareholder level.
There are various types of corporations available in Florida, including S corporations, C corporations, and nonprofit corporations. A business lawyer can answer your questions about the different types of corporations recognized in Florida.
What Structure Should I Choose for My Naples Business?
The business structure that is right for your business will depend on several factors. A knowledgeable attorney will be able to help you decide which is the best fit for you and your business.
Call A Naples Business Planning Lawyer
If you have questions about the types of business structures recognized in Florida, you should contact Nici Law Firm. James R. Nici is an experienced business attorney with over 25 years of experience. Contact our office today at (239) 449-6150 or use our web form to set up a free consultation.