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Which Type of Business Entity to Use

which type of business entity to useWe get a lot of people telling us, “I want to start a business in Florida, but i don’t know which type of business entity to use.” We tell them there is not a one-size-fits-all business entity, and there is not any type of company that is restricted to doing business under a certain business entity. We tell people who ask us which type of business entity to use to first consider the different types of entities. Then, after learning the pros and cons of each business entity, start asking questions. Lastly, make the decision based on what goals and outcomes are unique to their business.  This process ensures a customized and personal decision that stays in the complete control of the business owner.

Start with the Big 5 before deciding which type of business entity to use

1. C-Corporation

The C-Corporation acts as an artificial person to carry on a business. It can issue shares of stock and can be sued. This entity is created by a legislative act or (more commonly) by individuals who file articles of incorporation with the Secretary of State. The C-Corporation distributed profits to shareholders. The entity pays taxes, and the shareholders also pay taxes. This is referred to as “double taxation.” This entity can acquire, own, and convey (sell) property. The liability for damages and debts is limited by the corporation’s assets. This means that the owners cannot be sued personally (which means that creditors cannot reach the savings accounts, investment accounts, or other property held by the owners individually). The limited liability of owners and the issuances of different classes of stock are among the top reasons for using a C-Corporation entity.

2. S-Corporation

The S-Corporation is not a separate taxable entity. That is to say, the S-Corporation is not subject to “double taxation.” Instead it passes the corporate income, deductions, and credit through to the shareholders for federal tax purposes. All shareholders of this entity must be a U.S. citizen or resident. The biggest different between the S-Corporation and the C-Corporation is that the S-Corporation cannot have more than 100 shareholders. This entity is often referred to as the “small business corporation.”

3. Limited Liability Company (“LLC”)

This entity is a non-corporate business and is treated as such for tax purposes. The owners (“members”) of an LLC are protected against personal liability for the organization’s debts and obligations. The owners actively participate in the management of the business. It is a little more expensive to create than a partnership or sole proprietorship. An LLC can be dissolved when a member dies, resigns, or files for bankruptcy. [You can read a full article here about the differences between a Florida LLC and a Florida Corporation.]

4. Partnership

A Partnership is an association of two or more people who engage in a business enterprise. The only thing that is required to create a Partnership in Florida is for two or more people to share profits. That’s it. They don’t have to refer to themselves as a Partnership, they don’t have to file any documents with the State, and they can even deny that they are a Partnership. If two or more people are sharing profits, they are likely operating a Partnership and as such, all the Partnership laws apply to them. In a Partnership, all the profits and losses are shared proportionately to the number of partners. Partners’ personal assets are not protected. The Partnership does not pay income tax. Rather, the taxation passes through to the partners on an individual tax basis.

There are also different types of Partnerships and partners. General Partnership—Owners control and manage the partnerships and are liable for all debts and obligations. All partners are equally liable. Limited Partnership—Consists of general partners and limited partners. Limited partners cannot control or participate in the management of the partnership. They are liable only up to the amount of their investment, and they cannot withdraw investment sums without consent of the general partners.

5. Sole Proprietorship

This is by far the more simple entity for form. A sole proprietorship is one person who owns all assets of the business. There are no legal formalities other than appropriate licensing and registration of the business name. Personal liability is unlimited—there is no protection of personal assets. There is also no perpetual existence; the sole proprietorship ends when the person dies, retires, or becomes disabled.

Now that you have a general overview about the different types of business entities, you may have a better idea of which one is right for you.

Here at Boyer Law Firm, we can help you make the right decision by going over the entity you think is right for your business in greater detail and answering any questions you may have.

In addition, we hope that helping you launch your business will create a relationship with us so that we may continue to help you in your future business law needs.

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