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Corporate Formation

The right choice matters.
Levin Legal > Corporate Formation

Choosing the right corporate structure is critical to the success of your business. Make sure your attorney understands the legal and financial consequences in helping you choose your corporate structure

Starting a small business is a big step and a great way to make more money. Choosing the right corporate structure for your business can be a challenge. Depending on the needs of your business, the choice of a corporate entity can either save or lose you money. Additionally, some corporate objectives, such as raising money or shielding yourself from certain liability and taxes can only be achieved by choosing specific corporate entities. For example, choosing to form a Florida C Corporation is a great way to appeal to investors, but you will subject yourself to double taxation. At Levin Legal, we can help you choose which entity is right for your small business and we can also create that entity for you. Here is a quick overview of the most common corporate entities. For a more in-depth review, either click the “more information” option by each entity description or call our office at (954) 613-0422. We will be happy to help you!

1. SOLE PROPRIETORSHIP

What is it: A Florida sole proprietorship is a business owned by a one person. If you have a sole proprietorship, you will be personally liable for all the debts of your business. Meaning, you as an individual have unlimited liability. If your business has a debt, the creditor can come after your personal assets.

 

How to create a Sole Proprietorship: To create a Sole Proprietorship, you actually do not need to file anything with the state. By conducting business as a single individual (with the possible exception of “occupational licenses” now known as local business tax receipts) you automatically are considered a “sole proprietor” and now have a Sole Proprietorship. Upon conducting business as a sole proprietor, your Sole Proprietorship will automatically be named after you. If, however, you would like to choose another name, you may do so by registering the name in accordance with Florida Statute § 865.09. For more information on Sole Proprietorships, click here.

 

Liability: As discussed above, a Florida Sole Proprietorship exposes the owner to unlimited liability and creditors can come after the individual’s personal assets.

 

Tax implications: As a sole proprietor, you will be taxed at your personal tax rate. Meaning, any money you make through your sole proprietorship will be taxed at your personal tax rate.

 

To learn about the advantages and disadvantages of a Sole Proprietorship, and to see if it’s right for you, call us at (954) 613-0422.

2. GENERAL PARTNERSHIP

What is it: A General Partnership is the any two or more people (or businesses) who conduct business as co-owners with the intention of obtaining profit. It does not matter whether you intended to create the partnership or not – when two or more people (or businesses) engage in business as co-owners for profit, a partnership is automatically created.

 

How to create a General Partnership: Remarkably, no written agreement is necessary to create a Florida General Partnership. Additionally, no documents need to be filed with the State of Florida to “register” your General Partnership. Rather, just the mere act of conducting business as co-owners for the purposes of obtaining a profit is enough to create a General Partnership Now, just because there is no requirement to have a written agreement between the partners of your General Partnership does not mean you shouldn’t have one. In fact, it’s very important to have an agreement as will be discussed below.

 

If you wish, you many file a file a partnership registration statement with the Department of State (department) in which it provides the public with information regarding the partners, their addresses, and other pertinent information.

 

Liability: In Florida all Partnerships are governed by the Revised Uniform Partnership Act (RUPA) which states that each partner is jointly and severally liable for all the debts and obligations of the partnership.  This means that you, as a partner, would be personally liable for the entire debt if another partner creates debt under the partnership. While each partner would be liable for the entire debt and each partner should split the debt, if nobody can pay it, you’ll be stuck with the bill.

Additionally, just like a Sole Proprietorship, your liability is unlimited. Meaning, a creditor can come after your personal assets to pay for debt, despite the fact that you personally never created that debt. If your partner took created debt for the partnership and nobody has the money to pay back the creditor, the creditor can come after your personal money.

Due to this “unlimited liability,” and the availability of corporate entities with reduced exposure to liability, General Partnerships are not a popular option for business with more than one owner.

 

Tax implications: Just like a Sole Proprietorship, any money you make through your partnership will be taxed at your personal income tax rate. This is called a “pass-through” entity. In a “pass-through” entity, the income you earn is “passed though” the business untaxed, and then taxed at your personal income tax rate.

 

To learn about the advantages and disadvantages of a General Partnership, and to see if it’s right for you, call us at (954) 613-0422.

3. LIMITED LIABILITY PARTNERSHIP

What is it: A Florida Limited Liability Partnership is similar to a General Partnership, but it limits the liability to the debts and obligation as to the partners personally and keeps the debts and obligations contained within the Limited Liability Partnership. This means, that unlike the General Partnership, you will not be personally liable if another partner created debt for the partnership.

 

How to form a Limited Liability Partnership: Unlike a General Partnership, you must elect to become a Limited Liability Partnership or LLP. This can be achieved by filing a statement of qualification with the department. Additionally, the name of the Limited Liability Partnership must end with any of the following suffixes: “Registered Limited Liability Partnership,” “Limited Liability Partnership,” “R.L.L.P.,” “L.L.P.,” “RLLP,” or “LLP.”

 

Tax implications: Just like a General Partnership, any money you make through your Limited Liability Partnership will be taxed at your personal income tax rate. This is called a “pass-through” entity. In a “pass-through” entity, the income you earn is “passed though” the business untaxed, and then taxed at your personal income tax rate.

 

To learn about the advantages and disadvantages of a Limited Liability Partnership, and to see if it’s right for you, call us at (954) 613-0422.

4. LIMITED PARTNERSHIP

What is it: A Limited Partnership is like a hybrid of a General Partnership and a Limited Liability Partnership. Basically, in a Limited Partnership, the general partner(s) has both the rights and liabilities of a general partner in a general partnership. However, a Limited Partnership adds a layer – it allows for limited liability for “limited partners.” A limited partner generally has limited liability to third parties but that is often coupled with limited rights in the Limited Partnership. Uniquely, you may be both a general and a limited partner in your Limited Partnership. As a limited partner, you can assign your profits and losses to someone else, but you can never make the assignee, meaning the person you give these rights to, to become a limited partner.

 

How to form a Limited Partnership: Similar to a Limited Liability Partnership and unlike a General Partnership, you must execute and file a certificate of limited partnership with the department. Upon the filing of the certificate, your Limited Partnership is formed unless you specify a later date at which you would like the limited partnership to form, provided you do not stipulate a date that is more than 90 days from the filing date.

 

Tax Implications: Similar to a General Partnership, Limited Partnerships are “pass through” entities. That means that you will be taxed on your profits at your personal income tax rates, and there is no corporate-level taxation (like there is for C-Corps). Additionally, unlike General Partnerships which expose the general partners to liability, Limited Partnerships offer the benefit of being a “pass through” entity while simultaneously shielding its limited partners from liability. As such, it’s become an increasingly popular entity choice.

 

To learn about the advantages and disadvantages of a Limited Partnership, and to see if it’s right for you, call us at (954) 613-0422.

5. LIMITED LIABILITY LIMITED PARTNERSHIP

What is it: A Limited Liability Limited Partnership, also referred to as an LLLP, is a unique combination of many of the entities described above. A Limited Liability Limited Partnership is just like a limited partnership but shields the general partner from personal liability (much like a Limited Partnership does for its limited partners). However, it must be noted that not every state recognizes LLLPs. As such, the limited liability “shield” can only be relied upon for debts that were created from creditors that reside in-state.

 

How to form a Limited Liability Limited Partnership: To form a Limited Liability Limited Partnership, the general partner of a limited partnership must elect for that status. Once a general partner of a Limited Partnership elects to be treated in such a fashion, s/he will be personally shielded from all liability and debt that exceed the general partner’s interest in the LLLP.

 

Tax Implications: Similar to a General Partnership, Limited Partnerships are “pass through” entities. That means that you will be taxed on your profits at your personal income tax rates, and there is no corporate-level taxation (like there is for C-Corps). Additionally, unlike General Partnerships which expose the general partners to liability, Limited Partnerships offer the benefit of being a “pass through” entity while simultaneously shielding its limited partners from liability. As such, it’s become an increasingly popular entity choice.

 

To learn about the advantages and disadvantages of a Limited Liability Limited Partnership, and to see if it’s right for you, call us at (954) 613-0422.

6. LIMITED LIABILITY COMPANY

What is it: A Limited Liability Company (LLC) is famously referred to as a hybrid entity. This is because it carries the benefit of being taxed as a partnership, meaning it’s a “pass through” entity resulting in each member is taxed at their personal income tax rates, there is no corporate taxation, and it operates and functions similar to a Corporation. Just like a corporation has officers and other management, an LLC is managed either by the owners (member-managed) or by a manager(s) elected by the owners (manager-managed).

 

It is important to note that single member LLC’s no longer offer the liability protection they used to. In 2010, a case called Olmstead v. Federal Trade Commission, 44 So.3d 76 (Fla. 2010) concluded “a court may order a judgment debtor to surrender all right, title, and interest in the debtor’s single-member LLC to satisfy an outstanding judgment.” This means, that if you are a single member LLC, you can be personally exposed to the obligations and debts owed to creditors. Therefore, it has become increasingly popular to join another member in your LLC if you are considering opening an LLC for the purposes of Asset Protection. (If you are interested in Asset protection services, click here.)

 

How to Form a Florida Limited Liability Company: A Limited Liability Company is formed by filing articles of organization with the department. Similar to the Limited Liability Limited Partnership, you can also choose for the creation date to be at a date later than the date of filing. Because it can elect to be a pass through entity and have its owners taxed as partners, the operating agreement may contain many of the intricate tax provisions often found in complex partnership agreements.

 

Tax Implications: A Limited Liability can elect its “tax status.” Meaning, it can elect to be taxed as a “pass through” entity (similar to a General Partnership, meaning you will be taxed on your profits at your personal income tax rates), or, it can elect to be taxed as an S-Corp or a C-Corp. (which will be discussed below).

 

To learn about the advantages and disadvantages of a Florida Limited Liability Limited Company, and to see if it’s right for you, call us at (954) 613-0422.

7. FAMILY LIMITED PARTNERSHIP

What is it: A Family Limited Partnership functions just like the Limited Partnership, but it’s unique in that its partners are family. Generally, Family Limited Partnerships were started for the purposes of achieving a family objective, such as transferring money from parents (or any family grantor) who are in a higher tax bracket to family members in a lower tax bracket. If properly used, a Family Limited Partnership can save a great deal of money on estate and gift tax. The typical scenario is the higher tax bracket donor will form the Family Limited Partnership and take s very small interest as a General Partner and a large interest as a Limited Partner. After such a formation is achieved, the grantor can give some or all of their interest as a Limited Partner to their children which can either be set aside in trust or go the children or grandchildren directly.

 

How to form a Family Limited Partnership: A Family Limited Partnership is formed much like a Limited Partnership. Just as in a Limited Partnership, the General Partners control all the management and investment. Further, the general partners are jointly and severally liable for the liabilities of the Limited Partnership.

 

Tax Implications: A Family Limited Partnership is taxed like a Limited Partnership. However, there are ways to use it as an effective tool for avoiding certain taxes upon transfers to family.

 

To learn about the advantages and disadvantages of a Florida Family Limited Partnership, and to see if it’s right for you, call us at (954) 613-0422.

8. C-CORPORATION

What is it: C Corporations are legal entities that are statutorily created. They have been the subject of substantial legislative attention and, therefore, are much more defined in their application than other entites. For example, they have a specific method of operating: C Corporations are governed by bylaws. Investors in the C Corp. can purchase stock in the Corporation in exchange for money or property. The investors, who are now stockholders, are tasked with the responsibility of electing directors. After the Directors are elected, they appoint officers, such as the Chief Executive Officer (CEO), Chief Operations Officer (COO), etc.

C-Corporation are a great way to raise money for your business as it’s an appealing opportunity for investors who would like to buy stock. Additionally, the investors who have purchased stock (stockholders) are also shielded from liability.

 

How to form a C-Corporation: In order to form a C-Corporation, you must choose a business name, file articles of incorporation with the department by one or more persons, and issue stock certificates. Corporations are governed by bylaws. Stockholders are issued stock for cash or property transferred into the corporation. Stockholders elect directors, and directors appoint officers.

 

Tax implications: C-Corporations are not known for their great tax shelter capabilities. While you have the advantage of tax-deductible business expenses, you may actually end up paying more in taxes as you will be subjected to something known as “double taxation.” This occurs due to the C Corporation being taxed on the corporate level and another tax is applied on shareholder dividends.

 

To learn about the advantages and disadvantages of a C Corporation, and to see if it’s right for you, call us at (954) 613-0422.

9. S-CORPORATION

What is it: First, it should be noted that an S Corp is not really a corporation. Rather, it’s a corporate entity, such as a Limited Liability Company or C-Corporation that made the election to be treated as an S Corp for tax purposes. S Corporations are state entities that have elected to be taxed differently. Meaning, instead of the tax method they would have been subjected to before, they have elected to be taxed as a “flow through” or “pass through” entity. As described above, this means that the profits “flow through” the corporation and are taxed at your personal income tax rate. This way, you avoid double taxation. There are several restrictions and requirements associated with an S Corp. For example, the corporation must be domestic, have no more than one hundred shareholders, have once class of stock, etc.

Similar to the C Corp., as an S Corporation, the directors, officers, shareholders, and employees enjoy limited liability protection.

 

How to form an S-Corporation: In order to form a C-Corporation, you must choose a business name, file articles of incorporation (or articles of organization if you’re opening an LLC with the intent of later electing as an S Corp) with the department by one or more persons, and issue stock certificates. Lastly, and most importantly, you must elect to be treated as an S Corporation within two months and fifteen days (75) days from the formation of your entity. If you miss this deadline, there are ways to rectify the problem by filing for late application or waiting for the next tax year and electing to be treated as an S Corporation.

 

Tax implications: Unlike C-Corporations you will NOT be subjected to “double taxation.” Rather, you will only be taxed on your personal income at your personal income tax rate. S Corporations have many tax advantages due to their unique nature. For example, as a “self-employed” individual, you must pay the IRS roughly 15% self-employment tax. However, that tax is only applied to wages. With an S-Corp., you can designate some money as wages and some as leftover distributive share. You do not pay self employment tax on the distributive share. So, for example’s sake, say you make $100,000, if you never elected to be taxed as an S Corp, you would pay roughly 15% or $15,000 of that in self employment tax. However, if you designate $50,000 as wages and $50,000 as distributive share, you will only have to pay the self employment taxes on the $50,000 earned in wages. This will result in a savings of $7,500! There are many other tax advantages in electing to be treated as an S Corp.

 

To learn about the advantages and disadvantages of an S Corporation, and to see if it’s right for you, call us at (954) 613-0422.

What's Next...

At Levin Legal, we take the time to make sure we choose the right corporate structure for you. If you’re thinking about starting a business or changing your current corporate structure, call us at (954) 613-0422 and we’ll make sure to assist you.

Do you need legal help or guidance? Contact us now.