Which Business Structure Should I Choose

Choosing a business structure for your company is an extremely important decision. If you are struggling with deciding on the right structure for your small business, you are not alone. With so many options it’s easy to understand why a business owner would get confused. After all it is an important decision that will have a serious impact on; the operation of your business, growth of your business, how you get paid, and how taxes are paid.

Whether you are starting a business from the ground up, buying an established business, purchasing a franchise there are a few critical questions you should ask before making a decision?

Why do you want to form a company or corporation? This is probably one of the most important questions you could ask yourself. The answer will guide your choice. Wanting to form company because that’s what everyone is telling you to do is not a good answer. To make a good decision about the best legal structure for your business you need to understand the key factors motivating your decision. What advantages are you looking for? What challenges, issues, or problems are you trying to resolve?

Common Motivations for Choosing a Business Structure

  • You want separation between yourself and your business.
  • Improve the business credibility.
  • You want to reduce personal liability.
  • You want to reduce tax liability.
  • You want to bring on partners on other business principals.
  • You want to establish credit in the business’ name.
  • You want to bring on investors.
  • Liquidity (Easier to sell or transfer ownership).
  • Privacy and confidentiality.
  • Easier access to bank services.
  • Shelter an investment.
  • Cost of forming and maintaining.

There are definitely other reasons for adopting a more formal business structure. But, those are the most common reasons and motivations. Taking time to consider your motivations and the reasons why you want to start a company will provide insight to guide your decision making process.

Florida Business Organizations & Structures

Each type of legal structure has advantages and disadvantages. You should fully understand the implications of each before choosing the right one for your business. Most often the three primary considerations when choosing a business entity are: liability protection, taxes and corporate maintenance. Here’s a quick overview of those most frequently used by small businesses:

Sole Proprietorship

A sole proprietorship is the simplest business structure. It is also the most common business entity. Usually only a single person is involved in the business. They own all the assets and receive all the income. Income and expenses for the business are declared on personal income taxes. Anyone who is either selling a product or providing a service outside of being employed is considered a sole proprietor.

Because there is no formal distinction between the business and the owner of the business the sole proprietorship does not normally have to be declared. However, you still have to comply with all licensing and permitting requirements of the state of Florida and your local jurisdiction as-well-as register to collect sales and usage tax.

Because the sole proprietorship is that it is indistinguishable from the owner, its greatest drawback is that it provides no liability protection whatsoever. As a sole proprietor, if your business (you) are sued. Your personal assets could be seized. To the IRS and creditors, alike, the business and you are indistinguishable from one another. If you run into personal financial problems they could seize, what you would consider business assets, to satisfy personal debt.

Partnership

The basic premise of a partnership is that each person involved in the business contributes something to the business – ideas, intellectual property, money, work hours, or any number of things or combination of things that are accepted by the other partners as valuable to the business. There are two types of partnerships; general partnership and limited partnership. With a general partnership all members of the partnership share in the management of the company, its profits, its losses, and liabilities. Similar to a sole proprietorship the liability of a general partnership could be unlimited.

Limited partnerships, on the other hand, are made up of one or more general partners, who run the business and whose liability is unlimited, and one or more limited partners who do not participate in the business and whose liability is limited by their investment in the business.

Although liability is a major issue concerning partnerships, one advantage is that they do not pay taxes on the income and expenses pass through directly to its members.

Depending on the type, size, and the number of active members partnerships can become difficult to manage and maintain.

Limited Liability Company (LLC)

An LLC combines the pass through tax advantage of a partnership with the liability protection of a corporation. This hybrid business entity allows for a larger number of investors, known as members, those members can actively participate in the operations of the business, and profit distribution and ownership rights are not limited as in partnerships. Unlike an S Corporation LLCs can have an unlimited number of investors. LLCs are extremely flexible in their use. Except for the sole proprietorship they are the most popular for of business entity.

Although an LLC is more complex to form and maintain than basic partnerships, they are far easier to run than a corporation; which is why so many small business owners are attracted to LLCs.

When registering an LLC the state of Florida requires Articles of Organization to be filed with the Secretary of State. To remain active an LLC must also file an annual report.

Corporation

When people talk about incorporating they are usually talking about starting either a C Corporation or an S Corporation. Unlike an LLC or partnership corporations are considered independent legal entities. Forming and maintaining corporations are more complex. You have to adhere to more regulations and there is a greater tax liability. Moreover, they are more complex and expensive to maintain.

However, the greatest benefit of incorporating is the liability protection. As an independent entity a corporation’s debt is considered its own. If a corporation is sued assets of shareholders cannot be seized, except under very specific circumstances (piercing the corporate veil). Corporations can also retain profits and raise money by selling stock.

There are two primary distinctions between C Corporations and S Corporations. While a C Corporation can sell an unlimited amount of stock across multiple classes of stock, an S Corporation is limited to a total of 75 shareholders who much be U.S. citizens or residents. The tradeoff for an S Corporation is that unlike a C Corporation, where double taxation is possible, the income of an S corporation can be treated like a Sole proprietorship or partnership and pass through directly to shareholders.

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Walsh Banks Law is a boutique law firm located in Orlando, Florida. We specialize in business law, real estate law and commercial litigation.