Which Florida Business Structure Is Right for You: An Examination of Federal Tax Consequences; Management of Business; and Exposure to, or Protection from, Liability Under Various Florida Business Structures

1) Introduction

Deciding which business structure fits your individual and business needs is vital to the success of your business.

This article will focus on the following Florida business structures, even though other ones exist:

a. Sole Proprietorship;

b. Corporation;

c. General Partnership; and

d. Limited Liability Company (“LLC”).

In determining which business structure is right for you, keep these issues, among others, in mind:

a. Federal tax consequences of each business structure:

Income Tax: Examine whether income is taxed once or twice,

Social Security/Medicare Taxes: Examine whether you can pay less Social
Security/Medicare taxes;

b. Management of each business structure; and

c. Exposure to, or protection from, personal liability in each business structure.

2) Examination of Each Type of Business Structure

a. Sole Proprietorship

In a sole proprietorship, you personally are your own business. No separate entity exists.


i.
Federal Tax Consequences of a Sole Proprietorship:

Income Tax: You are taxed once and will have income tax liability on your earnings.

Social security/Medicare Taxes: You will pay the full amount of Social Security/Medicare taxes on your earnings.


ii.
Management of a Sole Proprietorship: You can manage the business however you choose.


iii.
Exposure to Liability in a Sole Proprietorship: You are personally liable for all the liabilities of the business. As such, even though a sole proprietorship may be the correct business structure for certain businesses, be aware of the potential for exposure to personal liability.

b. Corporation

A corporation is an incorporated business. Incorporation occurs by filing articles
of incorporation with the Florida Department of State.


i.
Federal Tax Consequences of a Corporation:

The Federal tax consequences of a corporation depend on whether the corporation is treated for Federal tax purposes as a C Corporation or as an S Corporation. By default, a Florida corporation is a C corporation. Thus, if you want to be an S corporation for the first tax year of your business, be sure to elect so on a Form 2553 (Election by a Small Business Corporation) and file it with the Internal Revenue Service (the “IRS”) within 2 months and 15 days from incorporation. Otherwise, obtaining S corporation status will likely be very difficult or even impossible.

Your corporation can only be an S corporation if, among a few other things, it has no more than 100 shareholders; its shareholders are comprised of only individuals, estates, or certain types of trusts; and it has no more than one class of stock.

If You are Taxed as a C Corporation:

Income Tax: You are taxed twice. First, the corporation is taxed on its earnings. Second, the shareholder is taxed on dividends received from the corporation.

Social Security/Medicare Taxes:
Wages, but not dividends, to the shareholder are subject to Social Security/Medicare taxes.

If You are Taxed as an S Corporation:

Income Tax: You are taxed once. The individual shareholders are liable for their share of the tax liability of the corporation. Thus, only the shareholders, not the corporation, have the tax liability.

Social Security/Medicare Taxes: Wages, but not dividends, to the shareholder are subject to Social security/Medicare taxes. Thus, if you classify a reasonable amount of the distribution of income to you as wages, as opposed to dividends, the remaining dividends are not subject to Social Security/Medicare taxes.


ii.
Management of a Corporation: In general, a board of directors manages a corporation. In some cases, however, the shareholders of the corporation may choose to get rid of the Board of Directors and be managed by shareholders.


iii.
Protection from Liability in a Corporation: In general, a shareholder of a corporation is not
personally liable for the corporation’s liabilities or claims against the corporation. This protection from liability is a reason many people choose to form corporations through which they conduct their businesses.

c. General Partnership

A general partnership is an association of two or more people to carry on as coowners a business for profit whether or not those two or more people intend to form a partnership.


i.
Federal Tax Consequences (unless electing to be taxed as a C corporation or S corporation):

Income Tax: You are taxed once. Individual partners are liable for their share of the tax liability of the partnership. Thus, the partners, not the partnership, have the tax liability.

Social Security/Medicare Taxes: Each partner is liable for the full amount of Social Security/Medicare Taxes on the partner’s earnings.


ii.
Management of a General Partnership: The general rule is that each partner has equal rights in managing and conducting partnership business, but a partnership agreement can change the relationships between the partners and between the partnership and the partners.


iv.
Exposure to Liability in a General Partnership: You and all other partners are personally liable for all liabilities of the partnership. Thus, you are personally liable for debts of the partnership or wrongful acts of another partner, even if were not involved. As such, even though a general partnership may be the correct business structure for certain businesses, be aware of the potential for exposure to personal liability.

d. LLC

An LLC is an entity formed by filing articles of organization with the Florida Department of State. It combines Partnership and Corporate Qualities to create a very flexible business structure.

i. Federal Tax Consequences of an LLC

Income Tax: The Federal tax consequences of an LLC depend on whether the LLC has one member or more than one member.

If LLC Has One Member:

Default Rule: The LLC is treated as a disregarded entity for tax purposes, you are taxed like a sole proprietor.

Election to Be Taxed Otherwise: The LLC can elect to be taxed like a C corporation or an S corporation.

If LLC Has Two or More Members:

Default Rule:You are taxed like a partnership.

Election to be Taxed Otherwise: The LLC can elect to be taxed like a C corporation or S corporation.

Social Security/Medicare Taxes: Whether you can pay less Social Security/Medicare taxes depends on whether the LLC is treated as


1. a disregarded entity or partnership; or


2. a C corporation or S Corporation.

ii. Management of an LLC:

Default Rule: The LLC is managed by its members (similar to a partnership).

Election to be Treated Otherwise: The members can decide to be governed by a board or by managers (like a corporation).

iii. Protection from Liability in an LLC: In general, a member in an LLC is not personally liable from debts, obligations, and  liabilities of the LLC (similar to a corporation). This protection from liability is a reason many people choose to form LLCs through which they conduct their businesses.

3) Conclusion

The information is this article is general information, not legal or accounting advice. Nevertheless, you may use the contents of this article to help you determine which Florida business structure is right for you. You also may use the contents of this article to become a more informed consumer as you interact with attorneys, accountants, marketers, business coaches, and other professionals.

I suggest consulting with an attorney and certified public accountant before determining which business structure is right for you. In addition, acquiring significantly more in-depth information on many more topics is necessary to fully understand the workings of different Florida business structures.

*This document contains legal information, but does not contain legal advice.

*This document has examined laws in effect in July 2011.