If a business is formed in Florida, it will usually be structured as either a “Sole Proprietorship”, a “Partnership”, “ a Corporation,” or a “Limited Liability Company” (LLC).
The simplest and least expensive structure for a business to take is a “Sole Proprietorship” where one person owns and operates the business. The owner may have employees, but is held responsible for all business decisions and is personally liable for any damages resulting from activities of the business. Business earnings are subject to tax and are reported on a Schedule C added to the owner’s personal IRS Form 1040.
“Partnerships” occur when two or more people join together to own a business, but do not incorporate or form an LLC. The “Partnership” will file a separate informational tax return, Form 1065, but does not pay taxes as all profits or losses are returned on each individual partner’s personal tax return, usually, but not always, in proportion to their ownership of the partnership. As in a Sole Proprietorship, EACH partner, is personally liable for any debts or claims against the business—each or any owner will end up being liable for the full amount owed, regardless of only owning a part of the business. It is the exposure to personal liability as a sole proprietor or a partner that often results in many/most businesses being structured as a “corporation” or “limited liability company”. Both are considered separate entities from their owners for purposes of liability, so long as care is taken in operating them – “dotting the i’s and crossing the t’s”. Corporations and LLC’s need to be “registered with the State of Florida, to come into existence.
It must be remembered that when a corporation is registered in Florida it is considered for a “C” corporation under the IRS CODE and without further action, filing a Form 2553 Election with the IRS to become an “S” corporation, corporate profits could be taxed at the corporate level and again at the personal level on distribution.
LLC’s and S Corps are considered “ignored entities” by the IRS and income or losses will “flow through” to the owner’s personal tax returns. Because of insulation from personal liability and the fact that they are “ignored” by the IRS for tax purposes, most businesses registered with the state will choose to be structured as an LLC or a corporation that almost immediately files a Subchapter S election.
Assuming a business qualifies for Sub S treatment, less than 100 shareholders, all shareholders being US citizens or “Permanent Residents” and distribution of profit or loss in proportion to stock ownership, professionals split on their preference for LLC’s or Sub S corporations as the way to structure small businesses. Sometimes businesses will be structured as C corporations if it is anticipated that they will become very large—but not often.
Where a business has multiple owners, they should negotiate a written agreement outlining their individual rights and responsibilities. Retention of legal counsel by each owner is strongly suggested.
Author: Don Gorenberg is the Chairman of the North Central Florida SCORE Chapter 408. He is an attorney and UF grad, with 30 years owning and operating multi-unit retail businesses. He retired back to Gainesville from Fort Lauderdale as one of the “Top 10 Retailers of American Craft in the USA” (Niche Magazine)
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