How to Choose a Business Structure in Florida

Choosing the best business structure is an important decision for our client entrepreneurs.

In Florida, business owners can select from various structures, including sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Each structure has its own requirements, tax obligations, and liability protections. Here is an overview and comparison of each type of Florida business structure available for new business owners.

Sole Proprietorship

A sole proprietorship is the simplest business structure. A sole proprietorship is owned and operated by one individual, and there is no distinction between the owner and his business entity. There is no business entity distinct from the individual owner. Legally, the business and its owner have the same rights, liabilities, and taxation. This structure does not require you to register with the Florida Division of Corporations or a separate federal tax identification number and tax return.

Features of Sole Proprietorships

1. Full Control: You have complete control over your business, including all decisions and management activities.
2. Personal Liability: You are personally liable for all business debts and obligations. Personal assets, such as a home or car, are at risk if the business is unable to pay its debts or incurs other legal liability. We caution our clients about risking their personal assets to start a new business.
3. Taxation: Income from a sole proprietorship is reported on your personal tax return. Your business income is subject to self-employment taxes, including Social Security and Medicare.

Advantages and Disadvantages of a Sole Proprietor Business Structure

While a sole proprietorship is easy to set up and manage, the absence of a corporate shield from business liability means that all your personal assets are placed at risk. Additionally, this structure limits growth opportunities because it does not offer flexibility or scalability to include additional owners.

Partnerships

A partnership is a business structure that involves two or more people sharing ownership. Partnerships are typically formalized through a partnership agreement that outlines each partner’s responsibilities, profit-sharing arrangements, and decision-making authority. In the absence of a partnership agreement, there are Florida statutes with default terms and conditions of the partnership. There are varieties of partnership structures in Florida, including general partnerships, limited partnerships, and limited liability partnerships.

Types of Partnerships

1. General Partnership (GP): In a general partnership, all partners are involved in the management of the business and all partners share liability for its debts. Each partner is personally liable for the business’s obligations. A creditor may collect partnership debts from one or all individual partners in equal or unequal shares.
2. Limited Partnership (LP): Limited partnerships include two classes of partners: there are both general and limited partners. General partners manage the business and assume personal liability for partnership debts. Limited partners have no management authority, and their personal liability is limited to the amount of their capital contributions to the partnership.
3. Limited Liability Partnership (LLLP): An LLLP offers liability protection for all partners. An LLLP is similar to a regular LP except that both the limited and general partners are protected from individual liability for partnership debt. In Florida, this structure is created by filing articles of organization for a limited partnership and then choosing an option for a limited liability limited partnership.

Features of Partnerships

1.  Shared Responsibility: Partnerships are a way for several people to join together to create and finance a business. Owners share responsibilities and pool resources, which can facilitate growth and make the business more resilient.

2.  Pass-Through Taxation: Partnerships are typically taxed as pass-through entities, meaning profits and losses flow through to the partners’ individual tax returns.

3.  Liability Considerations: General partnerships expose partners to personal liability, while limited partners in an LP and all partners in an LLLP have no personal liability related to business operations and investments.

4.  Cost. Florida charges relatively high filing fees for partnership creation.

Advantages and Disadvantages

Partnerships bring you together with other business people to share financial resources and expertise to grow the business. The personal liability of a general partner is a drawback of general partnerships. Limited partners have some liability protection, but they are restricted from participating in day-to-day operations, which may limit control over the business.

Limited Liability Company (LLC)

A Florida Limited Liability Company (LLC) is a flexible and popular business structure. Most of our clients choose an LLC for their new business. An LLC combines elements of partnerships and corporations. The LLC provides all owners a corporate shield against business liability. Like partnerships, the LLC flows through income taxation to the individual LLC members. LLCs can be owned by one person (single-member LLC) or multiple people (multi-member LLC.

Key Features of LLCs

1. Limited Liability Protection: A main advantage of an LLC is that it provides limited liability to its members. The members’ personal assets are generally protected from business debts and claims.
2. Flexible Management Structure: An LLC can be managed by its members (member-managed) or by appointed managers (manager-managed), allowing for flexibility in governance. Management committees or co-managers can share business control.
3. Pass-Through Taxation: By default, LLCs are taxed as pass-through entities, meaning income is reported on your personal tax returns. IRS regulations permit LLCs to elect taxation as either a corporation, including S-Corporations, or partnerships.
4.  Fewer Formalities: Unlike corporations, LLCs are not required to hold annual meetings or keep extensive records, making them easier to operate.
5. Cost: Florida’s initial filing fee and annual renewal fees are much less for LLCs than they are for partnerships.
6. Personal Asset Protection: Your interest in a multi-member LLC has qualified protection from civil judgments. Your creditor’s collection remedy is limited to a lien on LLC distributions, if any.

Advantages and Disadvantages

LLCs offer significant liability protection and tax flexibility, making them the primary choice among our clients. However, LLCs can incur higher fees than sole proprietorships or partnerships, and you may still be subject to self-employment taxes on pass-through LLC income.

Corporation

A corporation is a more complex business structure that is a separate legal entity from its owners. The corporate structure and operation does not change because of a change in the ownership of corporation stock. Therefore, stockholders can buy and sell stock without affecting corporate structure or operations.

Florida statutes require that corporations follow formal governance procedures, such as appointing a board of directors, holding annual meetings of directors and shareholders, and keeping records and meeting minutes.

Types of Corporations

The IRS classifies corporations as either Subchapter C corporations or Subchapter S corporations.

1. C Corporation (C Corp): C corporations are taxed separately from their owners as distinct taxable entities. They have liability protection for shareholders, who are generally not personally responsible for corporate debts. C corporations feature double taxation: the corporate entity pays taxes in net taxable income, and you pay income tax on corporate dividends.
2. S Corporation (S Corp): An S corporation is a special designation that allows the corporation to be taxed as a pass-through entity, avoiding double taxation. However, S corporations have restrictions on the number and type of shareholders. S corporations are suitable for small businesses that meet IRS shareholder qualifications.

Key Features of Corporations

• Liability Protection: Both C and S corporations provide a strong corporate shield against owner liability for corporate obligations. An owner’s personal assets are not exposed by purchasing corporate stock.
• Potential for Growth: Corporations can raise additional capital by issuing stock. Corporations are suitable for businesses planning to expand or seek outside investors.
• Formal Structure: Corporation boards of directors must adhere to strict corporate formalities

Advantages and Disadvantages

While corporations offer liability protection and growth potential, they are relatively costly to set up and maintain. The double taxation on C corporations is problematic for a small business, though S corporations avoid this issue. the statutory rules related to corporate governance can make corporations less appealing than LLCs for smaller businesses.

Choosing the Right Business Structure

Selecting the best legal entity for your Florida business depends on many factors including liability protection, tax considerations, operational efficiency, and growth plans. Here are our guidelines for choosing the right structure:

1. For Sole Proprietors and Freelancers: A sole proprietorship is preferred for a solo entrepreneur or freelancer who is not concerned about liability protection. It’s easy to set up and maintain, making it suitable for low-risk, small-scale businesses.
2. For Partnerships: New businesses with two or more founders should consider a partnership or limited partnership. An LLP or LLLP is preferable if you want liability protection for investors who will not participate in business management. General partnerships work if liability concerns are minimal.
3. For Small Businesses Needing Liability Protection: Today, an LLC is the first choice for our clients with two or more owners looking for liability protection both at the LLC level and at the individual level without the complexity of a corporation. LLCs offer flexibility in management and tax treatment.
4. For Growth-Oriented Businesses Seeking Outside Investors: A corporation might be the best option if you plan to raise capital, seek outside investors, or take the business public in the future. The ability to issue stock and attract shareholders makes corporations suitable for businesses with growth ambitions.