Every business entity needs to select an appropriate legal structure or framework to work in. Why?
Answers
One of the first — and most important — decisions business owners make is choosing the proper type of business entity for their company. The structure you choose can have long lasting tax and legal consequences, so it is important to get it right.
Types of Business Entities
There are four types of business entities for owners to consider; each has their own advantages and disadvantages, which owners should discuss with a qualified Florida business attorney:
Sole proprietorship. The most common form of business structure in the U.S., a sole proprietorship is easy to establish and maintain. However, the owner has no protection for personal assets from business liabilities.
Partnership. A partnership can be formed by two or more owners who share in the business’ profits and losses. As with a sole proprietorship, there is no limited liability protection for owners in a partnership.
Limited Liability Company (LLC). A hybrid of partnership and corporation business structures, the LLC allows owners to report business profits and losses on their own tax returns without the business itself being taxed, and provides owners with limited liability protection.
Corporation. A corporation operates as a separate entity, and is taxed as such. “C Corporations” are taxed as separate entities, while “S Corporations” are pass-through entities where taxes are reported on the owners’ individual tax returns.
Considerations for Selecting the Right Business Entity
In general, there are three critical areas for consideration in selecting the right legal structure for your business. These include:
Risk. All businesses carry some degree of risk, and savvy business owners will want to choose a structure that protects their personal assets from business liabilities. A limited liability company (LLC) or a corporation (C Corp or S Corp) can insulate an owner’s personal property from business creditors and litigation.
Taxation. Business owners who prefer to report business profits and losses on their personal tax returns and be taxed on the net profits from the business should select what is known as a “pass through entity”, which includes sole proprietorships, partnerships and LLCs. Owners who would prefer to use a corporate structure to take advantage of preferred corporate tax rates would choose an S Corporation or C Corporation structure.
Complexity. Approximately 75% of small businesses in the U.S. operate as sole proprietorships, primarily because this type of business entity requires much less paperwork, time and money to maintain. Corporations and LLCs require detailed record keeping as well as adherence to a lengthy list of requirements in order to maintain their limited liability protection.
Choosing the right business entity for your company should be done in consultation with a qualified Florida business attorney. Contact one of the experienced Florida business attorneys at Jurado & Farshchian, P.L.