Starting a business is overwhelming. There are many decisions you must make and one of the most important decisions is the type of legal structure you choose for your company. This decision might seem easy but this decision has a big impact on your business so it must be considered very carefully. The type of business entity you choose impacts how much you pay in taxes, the amount of paperwork required, and most importantly the personal liability you face. It is important to have legal counsel assisting you so that you can make an informed decision to fully understand the implications of your decision. Forming a business entity is not as simple as going online to the Department of State website, filling out a form and paying a filing fee. Unfortunately, a lot of people do this as they think it is a low cost and easy way to start their business. However, all too often, these self-formed business entities do not have the correct agreements, do not comply with statutory requirements and formalities required by the state of Florida and their funds are not handled properly. This could leave the owner(s) of the company personally liable, among many other disadvantages.
The 4 most common types of businesses are a sole proprietorship, a partnership, a corporation and a limited liability company. Below is a brief description of each type:
1) A sole proprietorship is an unincorporated business owned and operated by one individual with no distinction between the business and the owner. If a sole proprietorship is not operating under the owner’s name, a fictitious name must be registered with the state and all associated formalities must be followed. The major consequence with running your business this way is that the owner is also personally liable for all financial obligations of the business.
2) A partnership involves two or more people who agree to share in the profits or losses of a business. There are several different types of partnerships. A primary advantage of a partnership is that it does not bear the tax burden of profits or the benefit of losses-profits or losses are "passed through" to partners to report on their individual income tax returns. However, there are generally fewer protections for the owners of a partnership, including a lack of limits on liability.
3) A corporation is a legal entity that is created to conduct business. The corporation becomes a separate legal entity, distinct from the person that formed it. This means that it is considered a separate “person.” A corporation can enter into contracts, pay taxes, transact business, etc. The key advantage of a corporation is the avoidance of personal liability. The primary disadvantage is the cost to form a corporation and the extensive record-keeping that's required.
4) A limited liability company (LLC) is similar to a corporation, but with slight differences. It does not have as many formalities of a corporation but it still provides the advantage of limited personal liability. Other advantages of LLCs are that profits and losses can be passed through to owners without taxation of the business itself while.
This is just a brief overview of the most commonly used types of businesses. Each one has its own advantages and disadvantages and each person’s individual circumstances will dictate which the best entity for their business is. Over the past 13 years, I have heard countless times from business owners who, in hindsight, wish they would have taken the time and money to get advice at the early stages of setting up their business. It is imperative to get legal advice at these early stages so that you start your business with a solid legal foundation.
It is important to contact a Florida licensed attorney if you’d like to discuss the correct type of business entity for your business. You can contact Wheeler Legal PLLC by calling (321) 209-5995 to schedule a consultation and find out how this firm can help you.