What is the best type of legal entity for my new business in Florida?
Determining the kind of legal structure you select to conduct business will affect, among other things, the kinds of taxes you will pay, individual verses business liability, and what state and IRS forms to file. There are four basic formats to select from, with each having a number of variations too detailed to discuss here:
1. Sole Proprietorship: A sole proprietorship is easy to set up and easy to dissolve. Profits are taxed at the owner’s individual federal tax rate, with the amount reported on Schedule C or Schedule C-EZ. Sole proprietorships do not pay Florida state corporate taxes and are not required to file state corporate income tax returns; however, the owner is personally liable for all the debts of the business.
2. Partnership: Partnerships can be formed as easily as sole proprietorships. These unincorporated businesses allow two or more people to share liability and provide capital. Business income is reported on partners’ individual tax returns, with the partners being individually and jointly liable for all of the debts of the business. (Limited partnerships are a slightly different form of partnership and must file with the Florida Department of State, Division of Corporations, but only the general partner is liable for all of the debts for the limited partnership.)
3. Limited Liability Company: Limited liability companies (LLCs) are a hybrid form of business that combines elements of partnerships and corporations. In Florida, LLCs may elect whether to be taxed as partnerships or corporations. On the federal level, LLCs with more than one member file a partnership return with the IRS, unless they elect to be classified as a corporation for tax purposes. LLCs, like corporations and limited partnerships, must also file with the Florida Department of State, Division of Corporations. An LLC shares many of the same advantages as an S-Corp., but there are significant differences that affect taxation and share-ownership. When properly organized and run, the owners of an LLC are protected from personal liability for the debts of the business.
4. Corporation: Corporations are separate legal entities that must be incorporated with the Florida Department of State, Division of Corporations. The two types of corporations are the C-Corporation (C-Corp.) and the S-Corporation (S-Corp.). With a C-Corp., the corporation, rather than individual share-holders, pays taxes and assumes liabilities. But a C-Corp’s shareholders pay separate taxes on dividends as they are paid out. An S-Corp. allows a limited number of shareholders to share income and expenses and to report them on their individual income tax returns. However, there are certain additional restrictions on share-ownership and taxation that must be taken into consideration as well. When properly organized and run, the owners of a C-Corp. or an S-Corp. are protected from personal liability for the debts of the business.
Conclusion: Determining which type of entity to select could make differences that may be minor for some, and major for others. In some cases the differences may not even matter if some other overriding factors cause you to choose one entity over another. The important consideration is that before you select the form of the entity, you make the choice based on specific circumstances related to your business or business plan. Consult both your accountant and an attorney to get the best advice. Every business is different, and you should carefully examine the particular facts and circumstances of your business plans and needs before deciding which entity to choose.