Florida Business Entity Types: A How-To Guide

Florida Business Entity Types: A How-To Guide

Entrepreneur’s Guide to Choosing the Right Business Entity in Florida

There are several business entity options available to Florida entrepreneurs. Corporations, partnerships, LLCs, and sole proprietorships all have unique benefits and requirements under the law. So, how do you choose the best one for your new business venture? 

Choosing the right legal structure is one of the four pillars of a solid business foundation—a vital decision that should not be made lightly. While you should always consult with a business formation attorney before submitting any paperwork, here is a brief description of each entity to help point you in the right direction.

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Advantages of Forming a Small Business in Florida

Florida is an extremely business-friendly state. Companies based here enjoy minimal small business regulations and minimal formation requirements for new businesses. Best of all, Florida businesses pay lower overall taxes than companies in other states. 

Florida does impose a 5.5% corporate tax, but this only applies to C corporations. Most businesses in the state operate as pass-through entities of some type, meaning their income is reported on an individual’s tax return. Since Florida does not have state income taxes for individuals, business owners are not taxed on income that passes through from their small business to themselves.

Now that you’re ready to incorporate your business, you need to know the subtle distinction between business entities and structures—terms that are sometimes used interchangeably. 

Overview of the Types of Florida Business Entities

A business entity is a catch-all term for an individual or group that conducts commercial practices. The type of entity varies depending on how many people are involved and their roles in the company. For example, your business can be organized as any of the following:

  • Sole Proprietorship. A sole proprietorship has a single owner. The owner is responsible for any business debts and obligations and reports company profits on their personal income tax return. No formal paperwork is required to be submitted to form a “Sole Prop”. Sole proprietors often upgrade to LLC status once business profits reach a certain threshold.
  • Limited Liability Company (LLC). An LLC is an entity legally separated from its owner(s). The difference between sole proprietors and LLCs is that creditors cannot legally collect personal assets as payment for the LLC’s debts. Moreover, the LLC’s flexibility makes it the most attractive business organization. In essence, you and the company are two different parties.
  • Limited Liability Partnership (LLP). Florida LLPs are commonly used by professional service providers, such as doctors, dentists, and attorneys. In Florida, only the general partners could be held personally liable for the partnership’s debts, but each limited partner is protected from collection on those same debts or other partners’ liabilities. Just like LLCs, LLPs are pass-through tax entities.
  • Corporations. Corporations are independent legal entities that can transact business, enter into contracts, and pay taxes. If they comply with certain state formalities and federal regulations, they protect the owners’ personal assets. Depending on the specific type of corporation, they have a range of tax structures and organizational requirements.

Types of Florida Corporations

A corporation exists separately from its owners, directors, and shareholders. It is required to remain in good standing with the state and is subject to other requirements, such as keeping corporate records and holding regular shareholder meetings. Common types of corporations in Florida include:

  • S Corporations (S-corp). This tax election for corporations is popular because taxes are paid through the owners’ personal tax returns. This is doubly beneficial for Florida owners: they pay no state taxes on income and pay federal tax on business income at the individual rate.
  • C Corporations (C-corps). C-corps pay a Florida corporate tax of 5.5% on the company’s federal taxable income. However, the first $50,000 in income is exempt from corporate taxation, and exemptions can lower a corporation’s effective tax rate even further.
  • Professional Corporations. Service providers required to hold a license to offer services may form professional corporations. For example, three certified public accountants could form a Florida professional corporation to share business costs.
  • Nonprofit Corporations. Nonprofits, such as charitable organizations and 501(c)(3) corporations, are formed for the public good and are eligible for federal and state tax exemptions.

Since multiple forms of documentation are needed to create a solid foundation for your business, it’s important to get your entity and structure right from the beginning. In fact, choosing the wrong business structure is one of the most common mistakes startups make, and the legal implications can drain your funds or even put you out of business.

What Is an LLC?

An LLC combines the legal protections of a corporation and the tax advantages of a partnership or sole proprietorship. Owners and stockholders are not required to hold regular management meetings nor comply with other formalities of a corporation.

[Note: LLCs can be taxed as a disregarded entity, partnership, or corporation depending on the specifics of the business. If you’re not sure which tax structure is right for you, speak with us as soon as possible—you could be leaving money on the table.]

Key benefits of an LLC include:

  • Limited Liability. An LLC is that it separates your personal assets from your business liabilities. If your business faces legal troubles or debts, creditors are limited to collecting your business assets (profits or insurance) but not your personal possessions (home, car, or savings).
  • Flexibility. Unlike corporations, which rely on shareholders, directors, and officers, LLCs allow for a simpler management structure. You can manage the LLC yourself or appoint managers to run the day-to-day operations.
  • Ease of Formation. Forming an LLC is generally simpler and requires less paperwork than forming a corporation. Florida allows owners to file Articles of Organization online at Sunbiz, and the ongoing compliance requirements are usually less burdensome than corporations.

LLCs are a popular choice for protecting an entrepreneur’s assets, but they require maintenance. Each year, owners must renew their entities and report Beneficial Ownership information to the federal government. If you miss these deadlines, you could lose the ability to do business in the state

What Is a Sole Proprietorship?

The simplest company type is a sole proprietorship. It’s owned and operated by one person, without any legal distinction between the owner and the business entity. Sole proprietorships can operate under the owner’s legal name or a business name, but the fictitious name must be filed with the Florida Division of Corporations.

Operating as a sole proprietorship is straightforward—no need to file formation documents with the state, hold meetings, or adhere to complex regulations. You can start conducting business as soon as you’re ready.

Sole proprietorships have the following pros and cons:

  • Full Control. As the sole owner, you have complete control over all aspects of the business. You make all decisions, from day-to-day operations to long-term strategies, without consulting with partners or shareholders.
  • Tax Simplicity. Sole proprietors report the business’s income and expenses on their personal tax returns, reducing administrative burdens and costs.
  • Direct Profits. You don’t need to share profits with partners or shareholders. Any profits the business generates belong to you.
  • Unlimited Liability. The biggest disadvantage of sole proprietorships is there’s no legal separation between the business and the owner. This means you are personally liable for all business debts and legal obligations. If the business faces lawsuits or financial problems, your home and other personal assets could be at risk.
  • Limited Growth Potential. Sole proprietorships may have difficulty in raising capital or attracting investors since they lack the protection of other business structures. Without outside investors, the business’s growth potential relies solely on the owner’s resources and capabilities.

Sole proprietorships may consider transitioning to an LLC or corporation to gain added protection and flexibility. A legal advisor can help you make the leap to a more formal business structure.

What Is a Business Partnership?

Partnerships involve two or more individuals running a business together to share profits, losses, and management responsibilities. Each partner contributes capital, expertise, or labor according to the terms of the partnership agreement.

Florida recognizes two types of partnerships: General and Limited.

General Partnerships divide rights and responsibilities equally among partners. This means that one partner can legally act on behalf of all the partners and each partner is held responsible for the partnership’s debts and obligations.

Limited Partnerships are often made up of both general and limited partners. Limited partners are not responsible for the actions, debts, and obligations of the partnership. However, limited partners do not have the right to manage the business since they are only entitled to its benefits.

Partnerships are created through a written agreement outlining the terms of the partnership, including each partner’s contributions, responsibilities, profit-sharing arrangements, decision-making processes, and procedures for resolving disputes. The benefits of this structure include:

  • Division of Duties. Partners can distribute management responsibilities among themselves based on their skills, interests, and availability. 
  • Tax Advantages. Like sole proprietorships, partnerships are pass-through entities for tax purposes.
  • Team Mindset. Decisions are typically made jointly, although the partnership agreement may designate certain partners with more authority in specific areas.
  • Conflict Resolution. Partnership agreements can help resolve internal disagreements by clearly outlining each partner’s rights and mechanisms for dispute resolution.

Business partnerships can be an excellent choice for individuals who want to combine their skills, resources, and expertise. However, it’s essential to establish clear expectations and agreements upfront to ensure a successful partnership. We can help you draft a comprehensive partnership agreement that protects the interests of all partners and minimizes conflicts.

Expert tip: An oral agreement to form a partnership will result in the existence of a partnership with the statute serving as the terms of the agreement if no written partnership agreement is created. Be careful!

What is an S Corp?

An S Corporation (S Corp) offers the limited liability of a corporation while allowing income to pass through to shareholders. One of the top three clarifications we make for people we speak with is that an S Corp is a TAX ELECTION, not a legal entity structure. Here’s an overview of the pros and cons of an S Corp and who it might be suitable for:

Pros:

  • Limited Liability. Shareholders in an S Corp have limited liability, protecting shareholders’ personal assets from business liabilities and debts.
  • Pass-Through Taxation. An S Corp’s profits and losses are passed through to shareholders’ personal tax returns and taxed at individual income tax rates.
  • Investor Attraction. Structuring your business as an S Corp can make it more attractive to investors. Many investors prefer pass-through taxation because it allows them to avoid double taxation on dividends and distributions. [Note: Investors in S Corporations will create many traps for the unwary. This is definitely not DIY territory.]
  • Flexibility in Ownership. S Corps can potentially have up to 100 shareholders, including individuals, certain trusts, or estates. This flexibility in ownership structure allows for potential growth and the ability to bring in new investors.

Cons:

  • Eligibility Restrictions. S Corps have strict eligibility requirements. For example, they must be domestic corporations, have only one class of stock, and have no more than 100 shareholders. Additionally, shareholders must be U.S. citizens or residents.
  • Limited Growth Potential. Because of the restrictions on ownership and the complexity of maintaining S Corp status, it may not be the best choice for businesses seeking significant growth or planning to go public.
  • Complexity and Compliance Costs. While S Corps offer tax benefits, they also have increased compliance requirements and administrative burdens. This includes maintaining corporate formalities, filing annual reports, holding shareholder meetings, and adhering to IRS regulations.
  • Salary Requirements. Shareholders actively involved in the business must receive “reasonable compensation” for their services, which means they must receive a salary subject to payroll taxes.

An S Corp may be a good choice for small to mid-sized businesses with a small number of shareholders who are actively involved in the company’s operations. However, it’s crucial to carefully consider compliance obligations, tax saving strategies, and long-term growth plans before electing S Corp status.  

What is a C Corp?

A C Corporation (C Corp) is a legal structure for businesses that is separate from its owners, offering limited liability protection to shareholders. Florida C Corps are subject to a 5.5% corporate tax, but the first $50,000 in income is exempt. Here’s an overview of the pros and cons of a C Corp and who it might be suitable for:

Pros:

  • Limited Liability. Shareholders’ personal assets are generally shielded from business liabilities and debts.
  • Ability to Raise Capital. C Corps have the ability to raise capital by selling shares of stock. This can make it easier for C Corps to attract investors to fund business expansion, research and development, or other growth initiatives.
  • Perpetual Existence. C Corps have perpetual existence, meaning they do not automatically dissolve if ownership changes or shareholders pass away. This provides stability and business continuity, making it easier to plan for long-term growth.
  • Tax Considerations. While C Corps are subject to corporate income tax, there’s more flexibility in C Corp’s tax strategies compared to other business structures. For example, they can choose fiscal year-ends, deduct certain business expenses, and offer employee benefits such as retirement plans and stock options.
  • Employee Benefits Deductibility. C Corps can deduct health insurance premiums, retirement contributions, and other employee benefits as business expenses. This can provide tax advantages for both the corporation and its employees.

Cons:

  • Double Taxation. C Corps are subject to corporate tax on their profits, and shareholders are taxed again on any dividends or distributions they receive from the corporation. This can result in higher tax liability than pass-through entities like S Corps or LLCs.
  • Compliance Costs. C Corps are subject to more complex regulatory and compliance requirements than other business structures. These include filing articles of incorporation, holding regular shareholder meetings, maintaining corporate formalities, and complying with federal and state tax laws. These requirements can result in higher administrative costs and legal fees.
  • Ownership Restrictions. C Corps have restrictions on ownership, including limitations on the number and types of shareholders and restrictions on foreign ownership. This can limit flexibility in structuring the ownership and financing of the business.
  • Corporate Formalities. To maintain limited liability protection, C Corps must adhere to corporate formalities, such as regular board meetings, accurate financial records, and corporate governance requirements. Failure to do so could potentially expose shareholders to personal liability.

A C Corp may be a good choice for businesses planning to go public or seeking significant outside investment, as the ability to issue stock can make it easier to attract investors and raise capital. 

What Legal Structure is Best for My Business?

Ultimately, the best legal structure for a small business will depend on your goals, scale of operations, and vision for the future. At Yolofsky Law, we can help you choose the right type of business entity for you and your shareholders. Email us at [email protected] today or schedule a 15-minute call to get started.