5 BUSINESS ENTITY OPTIONS FOR START-UP NEW BUSINESSES

When you have a great idea for a business, it can be tempting to dive right and open your doors. But experienced entrepreneurs know that careful planning is a must. If you’re thinking about starting up a new business, an important part of that planning process is choosing the right business entity. The 5 business entity options are outlined below for you.

Consider These 5 Business Entity Options With your Business Attorney

Florida offers several business entity options for business owners to choose from. They range from a no frills and no personal protection sole proprietorship to a complex C corporation for large businesses. Not every business entity is right for every business. Which business entity is right for your business will depend on several factors. An experienced Florida business attorney can guide you through the options to help you choose the best business entity for you.

1. SOLE PROPRIETORSHIP

A Sole Proprietorship is a business that’s formed just by starting to do business in your own name or using a fictitious name. It’s the easiest form of business entity but it can be very dangerous. A Sole Proprietorship offers no protection to the owner for personal liability, so your personal assets are at risk when you operate your start-up new business as a Sole Proprietorship. Sole Proprietorships are not a favored business entity if your business involves providing services or products to the general public.

2. GENERAL PARTNERSHIP

A General Partnership is the oldest form of business association. A General Partnership is formed when two or more people work together on a common business venture. It’s similar to a Sole Proprietorship, but with more than one person involved in the business.

An advantage of a General Partnership is that they are simple. A General Partnership doesn’t pay income taxes. Any business profits are the responsibility of the owners and are taxed on the business owners’ individual tax returns. Management is also straight-forward. By default, each partner is assumed to have an equal say in the partnership’s management and to have authority to enter into transactions on behalf of the business. That sounds pretty good. But, there is a danger to using a General Partnership s your business entity of choice.

Similar to a Sole Proprietorship, a General Partnership has no personal liability protection for the partners. In a General Partnership, each partner is personally responsible for all debts or liability incurred by the business- or by the other partners when the partners are acting on behalf of the business. So, if your partner injures someone in an accident while working for the partnership, your personal assets could potentially be at risk to have to pay for the damages.

If you decide to form a General Partnership, then having a Partnership Agreement is a must. Partnership agreements set out the business relationship between the partners, each partner’s financial stake in profits and losses, and the details as to how the business venture will be managed. Florida law assumes all partners have equal financial and management interests, unless your Partnership Agreement details other business arrangements.

General partnerships have a hard time raising money from outside investors because, for an investor to receive a stake in the business, the investor must become a general partner. But, of course, investors are often reluctant to take on the risk of becoming liable for the partnership’s debts and might not want to have anything to do with the business’s management,

If you do not want to take the risk of personal liability, then a Limited Liability Partnership may be a business option for you.

3. LIMIITED LIABILITY PARTNERSHIP (LLP)

A Limited liability Partnership (or just “limited partnership” or “LLP”) is similar to a General Partnership, but offers business owners the option of having two classes of partners. First are “General Partners”. A General Partner is essentially the same as partners in a General Partnership. In matters relating to the business, general partners have the power to act for the partnership and are responsible for business debts and liability on the same terms.

“Limited Partners”, on the other hand, are usually not involved in managing the business and don’t have presumed authority to bind the partnership with regard to third parties. And Limited Partners do not have any personal liability for business debts or other obligations, unless they agree to guaranty a debt or are personally liable for some other reason other than their status as a Limited Partner.

Limited Partners are sometimes called “silent partners,” and they are often outside investors with no operational role in the business but with a financial stake in its performance. A limited partner has the right to share in an LLP’s profits but doesn’t have to worry about losses or liability beyond the amount he or she actually invests in the business. Because of the different partnership classes, having a Partnership Agreement drafted is essential for an LLP.

LLPs are taxed like ordinary partnerships or sole proprietorships, with profits and losses passing through to general and limited partners’ returns in accordance with their respective investment in the partnership. In Florida, LLPs are required to register with the Department of State by filing a Statement of Qualification for Limited Liability Partnership, and they must provide annual reports thereafter.

The LLP business entity can be useful for small businesses that want to keep things simple but still have the option of raising capital from an investor with no management rights. However, LLPs have been declining in popularity in recent years in favor of a relatively newer business entity that offers many of the benefits of an LLP, but with greater liability protection: the LLC.

4. LIMITED LIABILITY COMPANIES (LLC)

The Limited Liability Company (“LLC”) business entity was designed as a hybrid between partnerships and corporations. Over recent years, an LLC has become a popular business entity option. An LLC maintains the simplicity of a partnership, but with liability protection for its members.

LLC owners are referred to as “members,” and business owners’ investments in an LLC are called “membership interests.”

In addition to their use for business, LLCs can also be useful for estate planning and asset protection for your business in Florida and even if the LLC does business in other states. LLCs are generally managed by their members in accordance with each member’s membership interest. However, LLCs used for businesses can choose to allocate management rights differently among its members in an Operating Agreement. Or, alternatively, an LLC can opt to be “manager-manager,” in which case the company is managed by a manager or board of managers appointed by the members.

For taxation purposes, LLCs are assumed to be “pass-through entities,” which means profits are taxed on the members’ individual tax returns, as with a partnership. But an LLC’s members can also elect to be taxed like an S Corporation or a C Corporation. Such an election is made with the IRS.

LLCs should prepare an Operating Agreement. The Operating Agreement sets out the rights, responsibilities, and obligations of all of the LLC members, describes the relationships between and among the members and the company, and delineates the way the LLC will be managed, among many other things. An LLC filed in Florida is not required to have an Operating Agreement. But, having an LLC without an Operating Agreement signed by all of the members is risky and significantly increases the likelihood of disputes between members.

One advantage of the LLC business entity is that it is relatively simple to add new members, so raising capital from outside investors is a simpler task than for partnerships. Due to the flexibility allowed in operating agreements, a new member can be admitted in exchange for a capital contribution without affecting the existing management. Or, a new member can buy in and immediately have voting rights proportional to other partners.

And lastly, LLC offer significant asset protection for its members. Liability is limited to the amount that the individual member has invested into the company. A member’s personal assets are thus protected from a lawsuit.

5. Corporations (S and C Corporations)

Of the various business entity options, incorporation is favored by most large businesses because it offers limited liability to owners, like an LLC, along with the fund-raising advantages that come with the right to sell and issue corporate shares. But note that the corporation is the most complicated and expensive entity to use administratively. Given the ability to use an LLC, the corporation is normally no longer the preferred business entity for start-up new business owners to protect themselves from personal liability.

A corporation’s business owners (called “shareholders”) are issued shares of stock in the corporation in exchange for their business investment of capital, their labor, or other assets. A corporation exists as its own independent legal entity, and is managed by a Board of Directors and elected Officers.

The two basic types of corporations in Florida are C Corporations and S Corporations. With the majority of start-up new businesses, a C Corporation costs too much and is too complicated. A C Corporation has to file its own corporate tax returns. The C Corporation can also lead to what is called “double taxation,” where business profits are taxed first on the entity’s return and then again when profits are distributed to shareholders as dividends.

S Corporations are much less complicated. S Corporations pass through profits and losses to their shareholders’ individual returns, like for LLCs.

Florida corporations are formed by filing Articles of Incorporation. Corporations are generally required to publicly file more information about their ownership and management than other entities, and they have more complicated annual reporting and filing requirements than other entities.

Business owners of a corporation are urged to draw up corporation Bylaws and Shareholder Agreements. The Corporation Bylaws, like an LLC’s Operating Agreement, set forth the duties, rights, responsibilities, general relationship between shareholders, and the management of the corporation. A Shareholder Agreement delineates the rights and responsibilities of the shareholders investing on the corporation. A Shareholdr Agreement will even set out how to manage the company, and will place restrictions or limitations on the shareholders’ right to transfer their stock ownership in certain situations.

So, there you have them… the 5 Business Entity options for start-up new businesses. Which one you choose will depend on the various factors listed above, among others.

Your East Orlando Start-Up New Business attorney can review your Start-Up New Business entity choices with you. Call The Mendez Law Firm at (407)380-7724 or email us at mail@themendez law firm.com. The Start-Up New Business consultation is FREE, and there is NO obligation. 

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