Myths and Misconceptions About Creating a Business Entity in Florida

A business is much more than a great idea: it has numerous moving parts that all have to work together seamlessly. Unfortunately, any one of those parts can mean the partial or total loss of everything you have worked for. By establishing a limited liability company, limited liability partnership, or corporation, you can protect your enterprise no matter how many (or how few) shareholders are behind it.

Common Misconceptions About Incorporating a Business in Florida

It’s easy to mistake your incorporation documents as one more paperwork hurdle required to start your business. However, choosing the proper legal entity for your endeavor ensures some of the most valuable protection and benefits you will need in the future, so it pays to do your homework before you open for business.

Some common myths surrounding business entities and incorporation include:

  • Sole proprietors don’t need an LLC. While you may be able to run your business without creating an LLC or corporation, failing to set up a business entity puts everything you own at risk. In Florida, any business that has not been established as a specific corporate entity will automatically be classified as a sole proprietorship or general partnership. The classification depends on the number of owners, but neither classification makes a separation between the assets of the business and the personal assets of its owners. If your business incurs debt or is named in a lawsuit, your personal bank accounts, house, and anything else in your name could be lost.
  • I don’t need a business entity for the first year. Your company is financially vulnerable long before you make a profit, so you should put your business entity in place as soon as possible. There are additional benefits to establishing your company as a separate legal entity right from the start, including applying for credit in your company’s name, holding money from investors in a business bank account, and adding legitimacy to your company when seeking customers, partners, and financial backers.
  • Incorporation will allow me to avoid state taxes. Florida imposes a 5.5% corporate income tax on any corporation doing business in the state. However, owners can designate an LLC as either a C Corporation or an S Corporation, allowing them to choose how their businesses will be taxed. C Corporations pay corporate income taxes on their profits, and any dividends paid to shareholders are then reported and taxed on each shareholder’s personal tax returns. S corporations are usually exempt from income tax, with any income and losses listed on each shareholder’s personal tax returns. Either structure allows business owners to take deductions on business expenses and save on self-employment and payroll taxes, but all deductions must be reasonable.
  • My personal assets are completely protected by an LLC. Incorporation goes a long way toward protecting you from personal liability, but it’s not infallible. A simple mistake when signing a document or commingling business and personal funds could give the court leverage to go after your personal holdings. We regularly work with business clients on an ongoing basis, ensuring that contracts meet administrative formalities and the corporation is properly maintained.
  • Incorporation prevents the need for business insurance. There are limitations on what your incorporation documents can do. Even if they can provide a legal basis to protect you personally, they won’t pay for hurricane damage, for example, or shield your business assets from a claim against a shareholder. The best way to ensure your profits aren’t lost to a lawsuit or force of nature is to invest in a strong business insurance policy. Commercial insurance, combined with a comprehensive operating agreement, can head off many problems before they turn into expensive litigation.

Protecting What Matters Most to You

At Yolofsky Law, our Florida business law team can advise you on the corporate and tax structure that’s best for your business, as well as draft agreements to provide maximum protection for you and your shareholders. Give us a call today to discuss your options.

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