Starting a new business is a stressful time. From hiring employees to determining an operating budget, there are many decisions to make in the beginning stages of the creation of your business. One of the most important decisions is choosing a business structure that’s right for you.
Choosing a business structure is important for many reasons. Your structure will determine how much you pay in taxes, filing requirements and personal liability. The four main business structures in Florida are: Sole Proprietorships, Partnerships, Limited Liability Companies and Corporations.
- Sole Proprietorship – A sole proprietorship is the easiest business structure to form, and therefore one of the most common. This type of business entity is an unincorporated business that is owned and operated by a single individual. Some business owners choose to form a sole proprietorship while they test out a business idea. However, a sole proprietorship does not protect your personal assets from any debts or liabilities from the business. If your business includes a high-risk or inherently dangerous activity, it would be best to choose a different type of business structure, as you will be personally liable.
- Partnership – There are many different types of partnerships: general, limited, limited liability (LLP) and limited liability limited (LLLP). General partnerships usually exists when two or more people own a business together. A disadvantage to the general partnership is the personal liability that comes with it. Similar to a sole proprietorship, co-owners in a general partnership are personally liable for the debts or liabilities of the partnership. Due to the liability that comes with a general partnership, most new business owners choose a different business structure. The various forms of limited partnerships are more advantageous. In a limited partnership, a general partner has the same rights and liabilities as in a general partnership, however, a limited partner has limited rights and liability. If forming a limited partnership, you may want to consider forming a corporation to act as a general partner to further limit the total exposure of the principals involved. A limited partnership may elect to become a LLLP. This frees general partners of the limited partnership from personal liability and leaves the partnership with the sole obligation. However, LLPs go a step farther and absolve partners in a general partnership from personal liability altogether (with exception to personal misconduct) so long as the partnership is formed as a LLP. A good way to understand this is a LLP is a general partnership with limited liability protection, compared to a LLLP, which is a limited partnership with limited liability protection.
- Limited Liability Company – A limited liability company “LLC” is a very popular business entity and it allows business owners the benefits of both partnership and corporation structures. LLCs protect your personal assets by offering limited personal liability. LLCs also do not require the same formalities as corporations (mandatory stockholder meetings, management meetings, etc). Additionally, subject to the number of members, the LLC may elect to be taxed as a sole proprietorship, partnership or corporation. You can read more about LLCs at LakelandLaw.com.
- Corporation – A corporation is an independent legal entity that is separate from the people managing the corporation. Offering the strongest personal liability protection, corporations are a much better choice if the business engages in a higher risk activity. While the cost to form a corporation is higher than other entities, corporations have a significant advantage in raising capital through stock sales. Additionally, corporations require more formalities such as, annual stockholder meetings, extensive record keeping and reporting.
Selecting the right business structure can be your first step toward success in creating a new business. The decision can be challenging, but consulting with a local attorney is always the best option to make sure your personal and business needs are met.
Miranda K. Martinez is a 2019 graduate of Stetson University’s College of Law and recently joined Clark, Campbell, Lancaster & Munson, P.A., in Lakeland. Questions can be submitted to firstname.lastname@example.org.