Business entity type overview

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After deciding to start a business, the first, and arguably the most important choice you will be confronted with is how to organize the business. There are various entity choices and non-choices out there. In the state of Florida, a business can be organized as a Sole Proprietorship, Partnership, Corporation, or Limited Liability Company (LLC).

Sole Proprietorship

The simplest manner to organize a business is to operate it as a Sole Proprietorship. Generally, Sole Proprietorships do not have to file any documents with state or federal authorities. That said, some choose to file DBAs (Doing Business as) filings with the state to reserve their name and choose to obtain an Employer Identification Numbers (EINs) by filing with the IRS. However, this simplicity comes with a price, as an unincorporated business owned by an individual does not limit any personal liability and can limit the deductions you can take on losses and business expenses. The Sole Proprietor will be personally liable for any business actions and debts, this is the case even when a DBA is filed, since that filing does not at all serve to limit liability. However, because of the large exposure risk posed by the lack of liability protection, this way of organizing a business is not recommended.

Partnership

Partnerships are another simple way to organize a business, in its simplest terms, a Partnership is the natural relationship that exists between two or more people when they engage in a trade or business. While Florida law requires that partnerships register with the state, a simple partnership has some of the same drawbacks as a sole proprietorship as all the partners are liable for any partnership debt and actions. However, the state of Florida allows you to form more complex entities, such as limited partnerships or limited liability limited partnerships which can limit the liability of one or more of the partners. Additionally, you may have to file certain tax documents with the IRS depending on the partnership you have.

Corporation

Corporations are what most people think of when they think of a business. Generally, a Corporation has executives such as a President and Secretary. These are generally appointed by the members of the Board, which are in turn appointed by the shareholders. Corporations offer the shareholders (the owners) and the executives limited liability. In the case of a small business, all of these positions can be occupied by the same person. However, Corporations in the state of Florida are required to keep certain records, and to hold annual meetings.

To form a Corporation, you need to file articles of incorporation with the state. Additionally, you will have to make certain tax elections. Corporations are governed by Bylaws, which spell out certain formalities necessary to comply with Florida law. If the Bylaws do not address a particular issue, then the These formalities, along with the fact that some actions require board resolutions usually make Corporations a substandard choice for most clients.

LLC

Limited Liability Companies are a fairly new type of entity. LLCs were first introduced as an entity choice in the late 1980s and did not become popular until the 2000s. As the name implies, LLCs offer owners and executives limited liability coverage, meaning that these individuals will generally not be liable for the debts and actions of the entity. LLCs are governed by an operating agreement, which is similar to a partnership agreement it’s flexibility. There is no requirement that an LLC have executive officers, as is the case with Corporations as the LLC can be either manager managed, or owner managed. However, the Operating Agreement can allow for the creation of such offices, and grant those executive titles and power. In order to form an LLC you will need to file articles of organization with the state, as well as make certain tax elections, if you so choose.

LLCs can provide all the benefits of Corporations without the formalities that come with a Corporation. The LLC can be entirely managed by a manager, who does not have to be the owner, and this individual can make all decisions, without having to get a resolution passed by a board. The flexibility of this type of entity is why LLCs make sense for the vast majority of clients.

Michael J. Faehner

Michael J. Faehner is the founder of Faehner PLLC in Oldsmar, Florida. Michael focuses his practice on estate planning, corporate,…

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