As a business owner, you are faced with many decisions right from the start, one being the selection of your business structure. This may be the first time you’ve ever had to make such a decision; and your lack of experience or knowledge may cause immobilization. You’re afraid of making the wrong choice so you become stagnated by indecision.
Overcome that indecision and make a choice. When you make decisions, you create momentum and action. If your choice proves to be less than the best, or your business changes in the future, it’s OK.
You can change your business structure at any time.
Here’s some great news: you have resources to help you with the decision. This article, for example. You may also want to consult with your tax accountant, legal advisor, business coach, or other small business owners.
In Florida, there are a number of different business structures that each, on its own merits, may provide you the legal protection, tax advantages, and other benefits most appropriate to you. Let’s take a look at each one.
Many new entrepreneurs choose to do business as a sole proprietorship since it is the simplest business to create; and offers complete ownership control. A sole proprietorship typically is one individual who owns and operates the business alone. As such, you have complete control of your business and make all the decisions.
New solo entrepreneurs may choose to operate as a sole proprietorship for the tax advantages, especially for the first few years of business operation. It’s common for new businesses to lose money the first year or so as any income received is put back into the business. Since income and expenses from the business are included on your personal income tax return, business losses (business receivables-business expenses) may offset any other personal earned income.
Forming a sole proprietorship must be done with an eye to the down-sides also. First and foremost, as a sole proprietor, you are personally liable for all financial obligations of the business. To be clear, you are personally liable for your company’s liabilities. In other words, as a sole proprietor, you’re placing your own assets at risk, and they could be seized to satisfy a business debt or legal claim filed against you.
A second down-side is the ability to raise funding. Most financial lenders are unwilling to make business loans to sole proprietorships. If you do not have enough of your own financing sources, you may not want to operate as a sole proprietorship.
I suggest you now pause before continuing reading this article. Take a deep breath, and think about your business. Write down the pros and cons of a sole proprietorship as related to your business and rate this choice on a scale of 1 to 10.
Limited Liability Company
Now let’s take a look at the next most popular business structure for a small business, the Limited Liability Company (or LLC for short). The popularity of the LLC comes from the opportunity for flexible management, the personal liability protection offered its owners, along with a number of tax advantages.
Management of an LLC is fairly simple. Any member or owner of the LLC is allowed a full participatory role in the business’s operation. Corporate formalities such as stockholders and management meetings are not required. This gives you more time to focus on the success of your business.
Don’t underestimate the value of limited liability. As enthusiastic as you are over the success of your small business, shielding your personal assets from business debts and other liabilities is an important consideration. Planning ahead is like taking out insurance, you hope you never need it – but it’s there for peace of mind.
With an LLC, tax accountant can be fairly straightforward. Profits and losses are reported and taxed on the owners’ personal tax returns. There’s no separate business tax return. LLC members pay self-employment taxes only on salary, not business profits.
Forming an LLC must be done with an eye to the down-sides also. Firstly, forming an LLC requires more paperwork than a sole proprietorship. To form the business, you’ll need an Operating Agreement, outlining members rights and responsibilities. You’ll need to apply for an employer ID number (EIN), and file your choice of tax status with the IRS. You’ll need to file Articles of Organization with the Florida Division of Corporations. Periodically, you’ll also need to file other documents such as Florida annual reports and IRS quarterly tax payments.
A second down-side: if you expect a need for external financing, LLCs may not be the best choice for you. With an LLC, you don’t have shares or stock to offer. Are you comfortable offering your investors a percentage of the business? How much management control would you lose if so?
I suggest you now pause before continuing reading this article. Take a deep breath, and think about your business. Balance the pros and cons of a Limited Liability Company as related to your business and rate this choice on a scale of 1 to 10.
Now let’s take a look at the S Corporation. An S corporation has some appealing tax benefits and still provides business owners with the liability protection of a corporation. With an S corporation, income and losses are passed through to shareholders and included on their individual tax returns. This once again avoids double taxation.
Unlike the previously discussed business models, S Corporations are a good approach when you are looking for outside investors since shareholders are provided for in this business structure.
Forming an S-Corporation must be done with an eye to the down-sides also. Firstly, S corporations may be subject to higher legal and tax service costs for both setting up the entity and managing it. S-Corporations must file articles of incorporation, hold directors and shareholders meetings, keep corporate minutes, and allow shareholders to vote on major corporate decisions.
A second down side: although a better option than some business structures for investment potential, unlike a standard corporation, S corporation stock can only be owned by individuals, estates, certain types of trusts and some pension plans.
I suggest you now pause before continuing reading this article. Take a deep breath, and think about your business. Balance the pros and cons of a S-Corporation as related to your business and rate this choice on a scale of 1 to 10.
Now let’s take a look at the Corporation business structure. A corporation is an independent legal entity that exists separately from the people who own, control and manage it. Like a person, the corporation can be taxed and can be held legally liable for its actions. The corporation can also make a profit.
The key benefit of a Corporate business structure is the avoidance of personal liability. A corporation’s debt is not considered that of its owners, so if you organize your business as a corporation, you’re not putting your personal assets at risk. A corporation also can retain some of its profits, without the owner paying tax on them. Another plus is the ability of a corporation to raise money. A corporation can sell stock, either common or preferred, to raise funds. Corporations also continue indefinitely, even if one of the shareholders dies, sells the shares or becomes disabled.
Forming a Corporation must be done with an eye to the down-sides also. First is the cost to form and operate a corporation. A Corporation must follow more complex rules and regulations than other business structures, thus increasing potential legal costs. A corporation also requires more accounting and tax preparation, increasing potential accountant costs.
A second down-side: owners of the corporation pay a double tax on the business’s earnings. Not only are corporations subject to corporate income tax at both the federal and state levels, but any earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal income tax returns.
I suggest you now pause before continuing reading this article. Take a deep breath, and think about your business. Balance the pros and cons of a Corporation as related to your business and rate this choice on a scale of 1 to 10.
Now let’s take a look at the Partnership business structure. A partnership exists when two or more persons co-own a business and share in the profits and losses of the business. Each of the co-owners or partners contribute something, usually money or real property, to the business.
There are two types of Partnerships: general partnerships and limited partnerships. In a general partnership, the partners manage the company and assume responsibility for the partnership’s debts and other obligations. A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve as investors only; they have no control over the company and are not subject to the same liabilities as the general partners.
One advantage to a Partnership business structure is that profits or losses are passed through to partners to report on their personal income tax returns, thus not requiring double taxation.
In addition, each general partner can act on behalf of the partnership, take out loans and make business decisions that will affect and be binding on all the partners (if the general partnership agreement permits).
Forming a Partnership must be done with an eye to the down-sides also. A primary concern is that each general partner is personally liable for the Partnership’s financial obligations and debt. Also, similar to Corporate business structures, Partnerships are more expensive to establish than sole proprietorships or LLCs because they require more extensive legal and accounting services.
I suggest you now pause before continuing reading this article. Take a deep breath, and think about your business. Balance the pros and cons of a Partnership as related to your business and rate this choice on a scale of 1 to 10.
OK that’s it! Now take a look for each structure at the pros and cons you wrote down and your rating, make a choice and get started. Be the courageous, decisive you!
Are you and/or your business Florida based? If so and you need help Selecting Your Florida Business Structure, we’re here for you. Contact us here.
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