With thousands of businesses starting in the U.S. every year, many entrepreneurs are confused about the legal aspects involved in choosing the right business entity for their company. Choosing the right business entity depends on several aspects and considerations. Every legal business entity has its own subtle details that need to be addressed and should always be reviewed with the help of a professional Business Attorney.
Here is a list of the most popular business entities, their differences, their similarities, and their advantages and disadvantages:
Sole Proprietorships
These are the simplest business structures to establish and the majority of small businesses begin as sole proprietorships, which are run by an individual without outside investors and the business becomes an extension of its owner.
Advantages of Sole Proprietorships:
- They are the easiest and least expensive type of business entity.
- The owner is in complete control of the company within legal parameters.
- Profits are taxed through the owner’s personal tax return.
- They are relatively easy to dissolve.
Disadvantages of Sole Proprietorships:
- They are terminated upon the death of the sole proprietor.
- Proprietors can be held liable for business debts, putting their personal assets at risk.
- It might be difficult to raise funds for the business.
- All the responsibilities of running the business fall on the shoulders of the owner.
Partnerships
General Partnerships
A general partnership is a business entity formed when two or more persons share ownership and operate a business through an agreement. Similar to sole proprietorships, the partners in a general partnership are held liable for any debts incurred by the business.
Advantages of General Partnerships:
- They are relatively easy to form.
- Taxes are not required to be paid on a business level as partners are taxed on the income they receive from their business.
Disadvantages of General Partnerships:
- They may have a limited life, depending on the partnership agreement.
- Each partner can be held liable for any business claims or debts and their personal assets are at risk of being used to settle such debts.
Limited Partnerships and Limited Liability Partnerships
Limited Partnerships (or LPs) are a more complex and formal type of business entity. They typically limit the liability of their partners while also limiting the management decisions they are able to make, which generally attracts short‐term investors.
Limited Liability Partnerships (or LLPs) are similar to general partnerships; however, they come with more liability protection for partners. To form an LLP in Florida, a Certificate of Partnership must be filed with the Florida Department of State.
Corporations
A corporation is a business entity that is entirely separate from the shareholders who own it and is considered its own entity by Florida law. Unlike other business structures, Corporations will not dissolve when ownership changes; and owners are protected against liability for business debts. As its own entity, a corporation can be taxed, sued, and enter contractual agreements. Corporations are owned by shareholders who must elect a board of directors. When it comes to taxes, Corporations have a separate legal and tax life; they file taxes annually and pay their own tax rates. When it comes to management, control is in the hands of the board of directors.
However, a corporation may not be the right choice for every business, mainly because the process of establishing this type of business entity generally requires more money and time to be spent than other structures. Additionally, corporations are monitored on the local, state, and federal level, which often means a lot of paperwork.
Limited Liability Companies
A Limited Liability Company (or LLC) is a hybrid that comes with the operational flexibility and tax benefits of a partnership and the liability protection of a corporation. The owners of an LLC are called “members” and LLCs can be owned by one or more persons, corporations, or even LLCs and other entities.
LLCs are easier to form than corporations and they have been gaining a lot of popularity among entrepreneurs in Florida over the last decade due to their flexibility and liability protection benefits.
How to Choose the Right Business Entity
Every business entity described above has its advantages and disadvantages; and sometimes there are legal details involved that must be taken into account when making your choice, which makes the help of a qualified Business Lawyer an invaluable asset in your road to finding success in the world of business.
Hiring a skilled and experienced Business Lawyer to help you is the first step you must take towards forming a business in Florida. I can be that lawyer.
Send me an email to [email protected] to schedule an initial consultation.
