Back to Basics – Choosing the Right Entity for Your Business

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There are several different options when forming a business entity. Whether starting a new business or reevaluating an existing one, choosing the right entity structure involves several important considerations including taxes, investment needs, and protection against personal liability. For many businesses, the business structure selected at the outset, after some time, fails to serve the business in its current and future endeavors. Accordingly, periodic evaluation of a business’s structure, though often overlooked, can be a valuable undertaking. These considerations relative to three of the most common business structures are discussed below:

The Corporation

The main purpose served by a corporate structure is it provides shareholders with protection from personal liability. Thanks to modern statutes, however, this goal can be achieved with other entities as well. Management of a corporation is highly formal, and failure to comply with formalities can affect the liability protections. Additionally, the Florida Business Corporation Act provides various protections for minority shareholders of corporations, such as appraisal rights, which can either advance or hinder the business depending on its goals. For businesses that need the ability to easily sell ownership interests or attract investment capital, the corporation is usually the appropriate choice.

Unless S corporation status is elected, corporations are subject to “double taxation,” meaning not only are shareholders taxed on income received as dividends, salaries, and bonuses, but the corporation itself is taxed on its profits.

The Partnership

Partnerships are “pass-through” tax entities, which means that profits and losses of the entity pass through the owners. Unlike shareholders of a corporation, partners of general partnerships generally have no protection from personal liability. However, creation of the limited liability partnership (LLP) and the limited liability limited partnership (LLLP) has helped eliminate this concern. Partnerships generally are less formal and have much more flexibility with respect to management and business operation than corporations. Transfer of ownership, however, is limited.

The Limited Liability Company

A hybrid of the corporation and partnership, the limited liability company affords the liability protection of a corporation, with the management flexibility and tax benefits of a partnership. However, single member LLCs in Florida are not protected from the creditors of its sole member. LLCs are a creature of contract, and thus owners are generally free to manage and operate an LLC as they see fit. Like partnerships, LLCs are taxed as pass-through entities.

 

Topics:  Business Formation, Choice of Entity, Small Business Formation, Startups

Published In: Business Organization Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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