Business Entities

Starting Or Expanding A Business: Choice Of Business Entity In Florida

When starting a new business, or expanding an existing one, it is important to know and consider the various alternative entities that you can use as a vehicle to operate your business or businesses. The form that is chosen is the starting point for the creation of all the legal relationships the business will have with the rest of the world. The ultimate goal is to utilize a business structure that is efficient in all material respects under the circumstances.

Below is an outline of the most common forms of business entities, and some of their more important features. It is impossible to write an article on such a complex topic that will answer every entrepreneur’s situation. Where you can, you should seek the advice of a qualified attorney who can assist you in your consideration of the various alternatives. Also, keep in mind that laws change, and what may be right today may not be right in the future. So you need to choose a structure that can be changed in the future with as little cost and hassle as possible.

A major consideration for choosing one business vehicle over another is the income tax consequences of the entity selected, both for federal and state income tax purposes. Florida, fortunately, is a low tax jurisdiction, which makes it a very favorable place to do business. Its corporate tax rate is generally 5.5%. Go to http://dor.myflorida.com/dor/taxes/corporate.html for a summary of the filing and paying consequences of the various business entity choices in Florida. Or you can go to http://www.irs.gov/businesses/small/article/0,,id=99336,00.html for a summary of the filing and paying consequences of the various business entity choices for federal income tax purposes.

This article is provided for educational purposes only and should not be relied upon for making any choice of entity decision. While most states have similar laws when it comes to business entities, this article is specifically limited to Florida business entities.

Sole Proprietorship

The sole proprietorship is the simplest and easiest business entity to create and use to engage in business. However, its benefits are often outweighed by the unlimited personal liability for the owner of the sole proprietorship. The individual owner of a sole proprietorship usually manages the day to day operations of the business.

Formation

Sole proprietorships are formed by an individual deploying their own assets and liabilities in the pursuit of a business venture. There are generally no organizational documents, or other formalities required to form a sole proprietorship.

Assets

Assets are generally owned by the individual and deployed in the business venture. For example, a person starting a web site design business may use an office in their home or apartment and computer equipment the individual already owns.

Liabilities

Liabilities, such as for office supplies and the like, are generally owed by the individual business owner. In the event the sole proprietorship shall fail, the individual owner is typically responsible for the unpaid debts of the business.

Fictitious Name

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.Typically sole proprietorships are operated under a business name. In such cases, the individual owner should protect the use of the business name by making a fictitious name filing with the Florida Secretary of State.

Taxation

Generally, there should not be any taxable events on the creation of a new sole proprietorship. The profits and losses from the operations of a sole proprietorship are reported on Schedule C to IRS Form 1040 for federal income tax purposes. The sole proprietor should keep separate books and records for the sole proprietorship’s financial activities. The State of Florida does not impose an income tax on the profits or losses of a sole proprietorship. The owner of a sole proprietorship can use his or her Social Security Number for the business and its related bank accounts. A sole proprietorship may also obtain an Employer Identification Number for use with the business’ bank accounts and employment tax returns. The collection and remittance of sales and use taxes, as well as ad valorem (property) taxes, are generally the same for any type of business entity.

Employees

Sole proprietorships may have employees. Should a sole proprietorship have employees, it will be responsible for federal and state employment taxes.

Real Estate

Sole proprietorships may have real estate associated with their business operations. As with other assets, the individual owner of the sole proprietorship typically owns any real estate used incident to the business operations of the sole proprietorship. If the property is owned by another business entity or third party, the sole proprietorship typically pays rent to the owner for its use of the real property.

Sale Or Exchange

Since sole proprietorships are not considered entities separate from their individual owners, any sale or exchange of the business typically takes the form of a sale or exchange of the assets and liabilities of the business.

Risk Management

Businesses operated as a sole proprietorship need to actively manage their business risks. The assets and liabilities of the business belong to the individual owner. So it is essential that the owner obtain appropriate insurance coverage (hazard, liability, workers’ compensation, and the like). Any unexpected claims that are not covered by insurance will be the responsibility of the individual business owner. This is one of the major problems of using a sole proprietorship as the vehicle to operate a business.

Estate Planning

In the event of the sole proprietorship’s owner’s death, the assets and liabilities of the business generally become part of the deceased owner’s probate estate and are distributed in accordance with the terms of the owner’s last will and testament. Depending on the nature and extent of the business’ assets and liabilities, it may be impossible for the heirs of the business to continue the business after the owner’s death. Once the business is up and running, it is very important for the owner to come up with a business succession plan that includes consideration of the death, disability and/or retirement of the business owner.

Termination And Winding Up

As with the formation, there is generally no formal method for terminating and winding up a sole proprietorship. When the owner decides to discontinue the business, they simply do whatever they wish with the remaining assets, and pay any remaining liabilities. The owner should consider the income tax consequences to the termination and winding up before he or she decides to actually end the business operations.

General Partnership

The general partnership is the simplest business entity created by two or more business owners to engage in business. However, its benefits are often outweighed by the costs associated with the general partnership model. Typically, the partners manage the day to day business of the partnership.

Formation

General partnerships are formed by two or more individual owners associating to carry on a business for profit. There are generally no organizational documents, or other formalities required to form a general partnership. It would be a big mistake for two or more individuals to go into business together as partners without a written partnership agreement.

Assets

Assets are typically owned by the general partnership and deployed in the business venture. Problems can arise when business assets are not properly designated as being owned or not being owned by the partnership. Care needs to be given to each asset used by the business to make clear who owns the particular asset in question.

Liabilities

Liabilities, such as for office supplies and the like, are generally owed by the general partnership. In the event the general partnership shall fail, the individual partners are typically responsible for the unpaid debts of the business.

Fictitious Name

Typically a general partnership is operated under the name of the general partnership. The owners may wish to use a business name different from the name of the general partnership and may protect the use of the business name by making a fictitious name filing with the Florida Secretary of State.

Taxation

A new general partnership can generally be created, and assets transferred to it, in a tax-free transaction. The profits and losses from the operations of a general partnership are reported on IRS Form 1065 for federal income tax purposes. The separate share of each partner is reflected in the Schedule K-1s to the partnership’s tax return. The separate share is then reported on each of the partner’s individual income tax return (Typically IRS Form 1040). The general partnership must keep separate books and records for the partnership’s financial activities.

The State of Florida does not impose an income tax on the profits or losses of a general partnership. The partners report and pay their respective shares of partnership profit and losses. If there is a corporate partner, the partnership must file an information return with the Florida Department of Revenue (Form F-1065). A general partnership obtains an Employer Identification Number for use with its business’ bank accounts and employment tax returns. The collection and remittance of sales and use taxes, as well as ad valorem (property) taxes, are generally the same for any type of business entity, including a general partnership.

Employees

General partnerships may have employees. Should a general partnership have employees, it will be responsible for federal and state employment taxes.

Real Estate

A general partnership may have real estate associated with its business operations. As with other assets, the general partnership typically owns any real estate used incident to the business operations of the partnership. If the property is owned by one of the partners, another business entity or a third party, the general partnership typically pays rent to the owner for its use of the real property.

Sale Or Exchange

General partnerships typically own all of the assets used in the business, any sale or exchange of the business can be a sale or exchange of the assets and liabilities of the business or of the general partnership interests.

Risk Management

Businesses operated as a general partnership need to actively manage their business risks. The assets and liabilities of the business belong to the general partnership, but the individual partners can be responsible for any partnership debts. So it is essential that the general partnership obtain appropriate insurance coverage (hazard, liability, workers’ compensation, and the like). Any unexpected claims that are not covered by insurance can be the responsibility of the individual partners. This is one of the major problems of using a general partnership as a vehicle to operate a business.

Estate Planning

In the event of a general partner’s death, disability, bankruptcy, or other withdrawal, the general partnership may have to terminate and wind up its affairs. The partner’s interest in the general partnership generally becomes part of the deceased partner’s probate estate, and are ultimately distributed in accordance with the terms of the partner’s last will and testament. Depending on the nature and extent of the business’ assets and liabilities, it may be impossible for the heirs and other partners of the business to continue the general partnership’s business after a partner’s death. As part of the written general partnership agreement, it is very important for the partners to come up with a business succession plan that includes consideration of the death, disability, bankruptcy, retirement, and or other withdrawal of a partner from the partnership.

Dissolution And Winding Up

A general partnership may continue under certain circumstances even in the event of dissolution The partners should consider the income tax consequences to the termination and winding up before they decide to actually end the business operations.

Tiered Entities

General partnerships can be very useful when the partners are other limited liability entities, such as corporations.

Corporation

A corporation is fairly easy to form and results in the creation of a new entity separate from its owners. As a result, it offers the owners some personal liability protection from the corporation’s business activities. The corporate officers (president, vice president, treasurer and secretary) typically manage the day to day operations of the business.

Formation

A corporation is generally formed by one or more individual owners (shareholders or stockholders) filing articles of incorporation with the Florida Secretary of State. As part of the formation, there are other corporate records that must be created and kept as part of the corporation’s official records (such as by-laws and corporate minutes as well as the corporate stocks). It would be a big mistake for two or more individuals to go into business together as shareholders in a corporation without a written shareholder agreement.

Assets

Assets are typically owned by the corporation and deployed in the business venture. Problems can arise when business assets are not properly designated as being owned or not being owned by the corporation. Care needs to be given to each asset used by the business to make clear who owns the particular asset in question.

Liabilities

Liabilities, such as for office supplies and the like, are generally the responsibility of the corporation, as opposed to the shareholders. In the event a corporation fails, the individual shareholders are typically not responsible for the unpaid debts of the business.

Fictitious Name

Typically a corporation is operated under the legal name of the corporation. The shareholders may wish to use a business name different from the name of the corporation and may protect the use of the business name by making a fictitious name filing with the Florida Secretary of State.

Taxation

A new corporation can usually be created and assets transferred to it in a tax-free transaction. The profits and losses from the operations of a corporation are reported on IRS Form 1120 for federal income tax purposes. The corporation pays taxes on its income, and then the shareholders report and pay taxes on any dividends they receive from the corporation. So there are two levels of taxes on the same income. Once in the hands of the corporation, and once in the hands of the shareholders. This has been the single largest drawback to using a corporation as a business vehicle until the tax laws were changed to allow certain qualified dividends to be taxed at capital gain tax rates. This law is scheduled to expire at the end of the 2010 tax year.

A corporation must keep separate books and records for the corporation’s financial activities. The State of Florida imposes an income tax on the profits or losses of a corporation doing business in the State of Florida. A corporation obtains an Employer Identification Number for use with its business’ bank accounts and tax returns. The collection and remittance of sales and use taxes, as well as ad valorem (property) taxes, are generally the same for any type of business entity, including a corporation.

Employees

Corporations may have employees. Should a corporation have employees, it will be responsible for federal and state employment taxes.

A corporation may have real estate associated with its business operations. As with other assets, the corporation typically owns any real estate used incident to the business operations of the corporation. If the property is owned by one of the shareholders, another business entity or a third party, the corporation typically pays rent to the owner for its use of the real property. Generally speaking, real estate that is used by the corporation for things like its offices or storefront may not cause a problem if owned by the corporation; however, other kinds of real estate, such as rental apartments, should generally not be owned by a corporation. Partnerships and limited liability companies are a more efficient vehicle in such circumstances.

Sale Or Exchange

Corporations typically own all of the assets used in the business, and any sale or exchange of the business can be a sale or exchange of the assets and liabilities of the business or of the stock of the corporation. A sale of the assets can result in gain taxed at ordinary income (usually higher) tax rates, while a sale of stock can result in any gain being taxed at capital gain tax rates.

Risk Management

All businesses need to actively manage their business risks, including corporations. The assets and liabilities of the business belong to the corporation, but the individual shareholders are generally not responsible for any corporate debts. Nevertheless, a corporation must obtain appropriate insurance coverage (hazard, liability, workers’ compensation, and the like). Any unexpected claims that are not covered by insurance can quickly consume any equity the shareholders have in a corporation. One of the major benefits of a corporation is that the shareholders are not generally responsible for the corporation’s debts.

Estate Planning

In the event of a shareholder’s death, disability, or bankruptcy, the corporation may generally continue its business. In the event of death, the shareholder’s interest in the corporation (rather than the corporation’s assets) generally becomes part of the deceased shareholder’s probate estate and is ultimately distributed in accordance with the terms of the shareholder’s last will and testament. Regardless of the nature and extent of the business’ assets and liabilities, it is possible to keep the corporation and its business intact. As part of the formation of a corporation with more than one shareholder, it is very important for the shareholders to come up with a business succession plan that includes consideration of the death, disability, bankruptcy, retirement, and or other withdrawal of a shareholder from the corporation.

Termination And Winding Up

A corporation may be terminated and its affairs wound up. The shareholders should consider the income tax consequences to the termination and winding up before they decide to actually end the business operations.

Tiered Entities

Corporations can be very useful when the shareholders are other limited liability entities, such as other corporations. Proper use of tiered corporate ownership can separate various different business activities and associated risks from each other.

S Corporations

Generally speaking, all of the discussions with respect to corporations hereinabove in section III apply to S corporations. The major difference relates to the taxation of S corporations. Only certain businesses may elect to be taxed as an S corporation. In addition, the business cannot have more than 100 shareholders, have shareholders who are other than individuals, estates, or certain trusts (or certain tax-exempt organizations). There can be a tiered S corporation structure, but the parent S corporation must own 100% of each subsidiary.

Nonresident aliens may not be shareholders, and the business can only have one class of stock (this can be very important when trying to figure out how to compensate two or more shareholders who have contributed differing amounts of capital and services to the corporation).

The income tax result of having a corporation elect to be taxed as an S corporation is similar to the taxation of a partnership. The corporation files an IRS 1120S tax return reporting the profit and loss for the corporation, and the separate corporate items of profit and loss are then allocated among the shareholders on Schedule K-1. The respective shareholders then report their share of the corporation’s profits and losses on their individual tax returns (Form 1040), and pay taxes on the income. The corporation does not pay any corporate income taxes to the federal government; however, an S corporation must pay corporate income taxes to the State of Florida.

The S corporation vehicle is generally most useful when the business is largely engaged in the provision of personal or professional services. The ownership of real estate can present certain tax issues for the S corporation, and this should be considered prior to having an S corporation acquire any real property.

Limited Liability Company

A limited liability company (“LLC”) is fairly easy to form and results in the creation of a new entity separate from its owners. As a result, it offers the owners some personal liability protection from the LLC’s business activities. The members or a manager usually manage the day to day operations of the business. LLCs may also name corporate officers to manage the day to day operations of the business.

Formation

A limited liability company is somewhere in between a corporation and a partnership. The operating rules for a corporation are generally found in the Florida Statutes, while the operating rules for a partnership are generally found in the partnership agreement. A limited liability company finds some of its operating rules in the Florida Statutes and some in its operating agreement. A limited liability company is generally formed by one or more individual owners (members) filing articles of organization with the Florida Secretary of State. As part of the formation, there are other corporate records that must be created and kept as part of the corporation’s official records (such as an operating agreement, minutes and maybe membership certificates). It would be a big mistake for two or more individuals to go into business together as members of an LLC without a written operating agreement.

Assets

Assets are typically owned by the LLC and deployed in the business venture. Problems can arise when business assets are not properly designated as being owned or not being owned by the LLC. Care needs to be given to each asset used by the business to make clear who owns the particular asset in question.

Liabilities

Liabilities, such as for office supplies and the like, are generally the responsibility of the LLC, as opposed to the members. In the event an LLC fails, the individual members are typically not responsible for the unpaid debts of the business.

Fictitious Name

Typically an LLC is operated under the legal name of the LLC. The members may wish to use a business name different from the name of the LLC, and may protect the use of the business name by making a fictitious name filing with the Florida Secretary of State.

Taxation

A new LLC can usually be created and assets transferred to it in a tax free transaction. The profits and losses from the operations of an LLC can be taxed in a number of ways, and part of the formation process includes identifying the tax status for the entity, and reporting this to the IRS. For example, if there is only one owner of the LLC, it can be ignored as a taxable entity for tax purposes, and its profits and losses reported on the owner’s individual income tax returns. Or the LLC can elect to be taxed as a corporation or S corporation. If there are two or more members, the LLC can elect to be taxed as a partnership, corporation or S corporation. The tax form used to report the profit and losses of an LLC each year depends on the election made by the LLC (Form 1040, 1065, 1120 or 1120S, as the case may be). This flexibility of being able to elect the entity’s tax status and its liability protection for the members has made the LLC a very popular business vehicle.

Whether or not an LLC must file and/or pay Florida income taxes depends on the tax status elected by the LLC for federal income tax purposes. If it is treated as being ignored or a partnership, then there is no income tax obligation (an LLC taxed as a partnership with a corporate type partner must file and information return each year). If the LLC elects to be treated as a corporation or S corporation, it must file and pay Florida income taxes.

A LLC must keep separate books and records for its financial activities. Depending on the tax status election, the State of Florida may impose an income tax on the profits or losses of an LLC doing business in the State of Florida. A LLC obtains an Employer Identification Number for use with its business’ bank accounts and tax returns. The collection and remittance of sales and use taxes, as well as ad valorem (property) taxes, are generally the same for any type of business entity, including an LLC.

Employees

LLCs may have employees. Should an LLC have employees, it will be responsible for federal and state employment taxes.

Real Estate

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pAn LLC may have real estate associated with its business operations. As with other assets, the LLC typically owns any real estate used incident to the business operations of the corporation. If the property is owned by one of the members, another business entity or a third party, the LLC typically pays rent to the owner for its use of the real property. Depending on the tax election, LLCs can be a very effective vehicle to own real property.ulvinar dapibus leo.

Sale Or Exchange

LLCs typically own all of the assets used in the business, and any sale or exchange of the business can be a sale or exchange of the assets and liabilities of the business or of the membership interests of the LLC.

Risk Management

All businesses need to actively manage their business risks, including LLCs. The assets and liabilities of the business belong to the LLC, and the individual members are generally not responsible for any company debts. Nevertheless, an LLC must obtain appropriate insurance coverage (hazard, liability, workers’ compensation, and the like). Any unexpected claims that are not covered by insurance can quickly consume any equity the members have in an LLC. One of the major benefits of an LLC is that the members are not generally responsible for the LLC’s debts. Where there are two or more unrelated members/owners of an LLC, there can also be some potential asset protection for the member’s equity interest in the LLC as it relates to obligations and claims unrelated to the LLC.

Estate Planning

In the event of a member’s death, disability, or bankruptcy, the LLC may generally continue its business. In the event of death, the member’s interest in the LLC (rather than the LLC’s assets) generally becomes part of the deceased member’s probate estate and is ultimately distributed in accordance with the terms of the member’s last will and testament. Regardless of the nature and extent of the business’ assets and liabilities, it is possible to keep the LLC and its business intact. As part of the formation of an LLC with more than one member, it is very important for the members to come up with a business succession plan that includes consideration of the death, disability, bankruptcy, retirement, and or other withdrawal of a member from the LLC.

Termination And Winding Up

An LLC may be terminated and its affairs wound up. The members should consider the income tax consequences to the termination and winding up before they decide to actually end the business operations.

Tiered Entities

A tiered LLC business structure can be very useful. Proper use of tiered LLC ownership can separate various different business activities and associated risks and costs from each other.

Limited Partnership

A limited partnership is a business entity created by two or more owners to engage in business. There must be at least one general partner and one limited partner. The general partner manages the partnership and is generally liable for the debts of the partnership. The limited partners have limited say over the management and operations of the business, and are not generally liable for the debts of the partnership.

Formation

Limited partnerships are formed by two or more individual owners associating to carry on a business for profit, and filing a certificate of limited partnership and affidavit of capital contributions. It would be a big mistake for two or more individuals to go into business together as partners without a written partnership agreement.

Assets

Assets are typically owned by the limited partnership and deployed in the business venture. Problems can arise when business assets are not properly designated as being owned or not being owned by the partnership. Care needs to be given to each asset used by the business to make clear who owns the particular asset in question.

Liabilities

Liabilities, such as for office supplies and the like, are generally owed by the limited partnership. In the event the limited partnership shall fail, the general partners are typically responsible for the unpaid debts of the business, the limited partners as typically not responsible for any unpaid debts.

Fictitious Name

A limited partnership is operated under the name of the limited partnership. The owners may wish to use a business name different from the name of the limited partnership and may protect the use of the business name by making a fictitious name filing with the Florida Secretary of State.

Taxation

A new limited partnership can generally be created, and assets transferred to it, in a tax-free transaction. The profits and losses from the operations of a limited partnership are reported on IRS Form 1065 for federal income tax purposes. The separate share of each partner is reflected on the Schedule K-1s to the partnership’s tax return. The separate share is then reported on each of the partner’s individual income tax return (Typically IRS Form 1040). The limited partnership must keep separate books and records for the partnership’s financial activities. The State of Florida does not impose an income tax on the profits or losses of a limited partnership. The partners report and pay their respective shares of partnership profit and losses. If there is a corporate partner, the partnership must file an information return with the Florida Department of Revenue (Form F-1065). A limited partnership obtains an Employer Identification Number for use with its business’ bank accounts and employment tax returns. The collection and remittance of sales and use taxes, as well as ad valorem (property) taxes, are generally the same for any type of business entity, including a limited partnership.

Employees

Limited partnerships may have employees. Should a limited partnership have employees, it will be responsible for federal and state employment taxes.

Real Estate

A limited partnership may have real estate associated with its business operations. As with other assets, the limited partnership typically owns any real estate used incident to the business operations of the partnership. If the property is owned by one of the partners, another business entity or a third party, the limited partnership typically pays rent to the owner for its use of the real property.

Sale Or Exchange

Limited partnerships typically own all of the assets used in the business, any sale or exchange of the business can be a sale or exchange of the assets and liabilities of the business or of the partnership interests.

Risk Management

Businesses operated as a limited partnership need to actively manage their business risks. The assets and liabilities of the business belong to the limited partnership, but the general partners can be responsible for any partnership debts. So it is essential that the limited partnership obtain appropriate insurance coverage (hazard, liability, workers’ compensation, and the like). Any unexpected claims that are not covered by insurance can be the responsibility of the general partners.

Estate Planning

The partner’s interest in the limited partnership generally becomes part of the deceased partner’s probate estate, and are ultimately distributed in accordance with the terms of the partner’s last will and testament. Depending on the nature and extent of the business’ assets and liabilities, it may be impossible for the heirs and other partners of the business to continue the limited partnership’s business after a partner’s death. As part of the written limited partnership agreement, it is very important for the partners to come up with a business succession plan that includes consideration of the death, disability, bankruptcy, retirement, and or other withdrawal of a partner from the partnership.

Dissolution And Winding Up

A limited partnership may continue under certain circumstances even in the event of dissolution. The partners should consider the income tax consequences to the termination and winding up before they decide to actually end the business operations.

Tiered Entities

Limited partnerships are generally used as the parent company in tiered business structures.

Business Entities