Congratulations! You are starting a new business and you want to know what type of business entity you want to establish. Do you want a corporation, a limited liability company, a professional association, a partnership, or be a sole proprietor? Here are three questions to take to your attorney AND your accountant.
1. DO I NEED TO HAVE A LEGALLY ORGANIZED BUSINESS TO CONDUCT BUSINESS SAFELY?
You do not need to have a business entity in order to conduct business. In other words, you do not need to incorporate or file paperwork with the Department of State, Division of Corporations to get a business license in your local county. If you start a business by yourself and do not “incorporate,” then you will be operating as a general partnership or as a sole proprietor as a matter of default.
To run a business safely, however, you really do need to consider incorporating your business in one form or another. By safely, I mean that you are separating your personal liability from your company’s liability. Whatever your business is, you also need to make sure you have the proper licenses and permits that are unique to your type of business.
2. WHAT TYPES OF BUSINESS ENTITIES ARE AVAILABLE IN FLORIDA?
You can choose a business entity type by going to the Department of State, Division of Corporations website if you are starting a new business. The website lets you choose between a for-profit corporation, a nonprofit corporation, a limited liability company, and a limited partnership.
A corporation is the classic type of business model where there are three levels of control: (1) shareholders who own a percentage of the business; (2) board of directors who are elected by the shareholders and elect the officers; and (3) the officers. For large corporations such as Disney and so forth, the shareholders have a limited ability to affect the outcome of the corporate direction unless they have a majority share in the business. For small businesses, the shareholders are usually the directors and officers (and employees). The corporation statute is located by clicking here at Chapter 607, Florida Statutes. In the classic model, a corporation is taxed on its income and the shareholders are also taxed on their dividends. However, its shareholders are protected from liability for the acts of the business.
A traditional partnership is a partnering of two or more people and is the default if you do not file any incorporating documents. However, the Florida Statutes do provide for limited partnerships and have a uniform partnership act. If you have a business partner and want to get protection, make sure you read the partnership statutes. In the classic model, a partnership is not double-taxed like a corporation and its shareholders, but the partners who do not follow the statute are personally liable for any act of the partnership.
Before we get to my favorite business model, I need to touch on professional associations and nonprofit organizations. As far as professional associations are concerned, they are reserved mainly for lawyers, accountants, and doctors (and some other types of professions). A professional association means that we are structured like a corporation, taxed like a corporation, but if the professional that rendered the services to you messed up, you can still hold him or her personally responsible. It is a less desirable business entity structure but necessary for some types of professions to protect the public.
A nonprofit is a corporation, but it does not pay taxes like a for-profit corporation. A nonprofit must get certified as a “501(c)(3)” and file 990 tax returns.
And then there is, in my opinion, the best business model: THE LLC. The limited liability company is a perfect business model for small businesses. Rather than shareholders, directors, and officers, you have managers, members, and managing members. You have the corporate liability protection with the “pass through” tax benefits of a partnership. You also remove many of the structural requirements of a corporation.
CAVEAT: If you incorporate and you are a small business, you can probably file as an S-Corp for tax purposes. If you file as an LLC, the IRS will also treat you as an S-Corp for tax purposes. So from a tax perspective for small businesses, there is little difference between being a corporation or an LLC. The wonderful thing is that from a liability perspective, there is little difference as well. However, an LLC is easier to maintain structurally.
3. WHAT IS THAT CORPORATE VEIL THING?
So you have chosen your business model appropriate for your business. You need to make sure you keep business separate from personal affairs. Filing your articles of organization or articles of incorporation is just the first step. Keep your bank accounts separate. File your annual reports and actually have a meeting with your business leaders. Buy a “corporate book” and fill it out. You would hate to have all your personal success from your business be vulnerable because you didn’t keep your business separate from your personal life.