Whether you are considering starting a business or you have been operating for several years, creating a separate legal entity for your company is almost always a good idea. It provides much-needed separation for your company, which is helpful for liability concerns, taxes, employment issues, and a lot more.
At this point, you may realize the benefits of creating a separate business entity, but you are uncertain about your options and which choice is best for you. You can use these general tips to help you start the process.
A Sole Proprietorship Is NOT a Separate Legal Entity
A sole proprietorship is simply a business in name only. From a legal or tax perspective, there is no separation between you and your company. This is true even though you file a Schedule C for your business, have a name for your company, have a separate bank account, or register to do business in Florida. No matter how you look at it—a sole proprietorship is not a separate legal entity under Florida law, or under any law throughout the United States.
In addition, a partnership is also not considered a separate legal entity. A partnership is simply a combination of sole proprietors who choose to work together on the same venture. It offers no legal protections or tax advantages.
The Type of Entity You Choose Will Depend on the Size and Number of Owners
There are several options for legal entities that you can choose from. The size of your company and the number of people involved will have a big influence on how you choose to form.
For example, if you want to have a publicly-traded company, you’ll need to use a corporate structure. If you have several family members that will be co-owners, a limited liability company or limited partnership will likely make more sense.
Limited liability companies may make more sense if you only have a few owners and don’t want the burden of observing corporate formalities usually required of entities such as corporations that have more than thirty or so owners or shareholders. In most cases, an entity with only a few owners that don’t plan on taking on investors or additional partners in the future would be best suited to form as a limited liability company. However, in cases where there may be additional partners or investors joining the entity in the near future, a Corporate structure may make more sense.
Your Company Goals Have a Big Impact on Structure
Your business’s structure will also depend on your goals for the company and your future plans. Do you want to be able to sell portions of ownership to raise money? Then a corporation may make more sense than a limited liability company. Most investors do not want to have to file a K-1 return in every state in which they have an investment. That and many of them are more comfortable investing in corporate structures as opposed to limited liability company’s. So, if you are looking to take on investors, chances are you will want to be set up as a Corporation, even if you are initially an S-Corp, and later become a C-Corp. If you want to someday be able to sell the company or pass it along to your children, that will also have an impact on which structure makes the most sense for you, too. In that case, however, you will also want to work with a Trust and Estate Planning attorney. Many times, these attorneys will work with your business attorneys to take all of these circumstances into consideration when setting up your entity structure and the agreements and legal documents that go along with it.
Cost Savings and Upkeep Vary by Structure
In general, it is generally slightly more challenging and more expensive to comply with the requirements to upkeep a corporation when compared to a limited liability company. Florida, like most states, has more administrative requirements that must be met for corporations compared to any other type of business structure. However, this is not a reason to forego setting up as a Corporation if you’re just going to end up converting from an LLC to a Corp. down the road.
There are certain tax advantages of using an LLC or S-Corporation over a C-Corporation as well. However, those tax advantages are sometimes offset by other features unique to a corporation. This is something you will need to discuss thoroughly with a licensed CPA, who should be an invaluable part of your startup team, along with your business attorney.
Getting Help with Creating a Legal Entity
It is a good idea to work with a CPA and an experienced attorney to help you create the right legal entity to meet your overall goals as well as address expense concerns and liability worries.
Florida Entrepreneur Law, PA can help you get this process started. We take the time to talk to you about your goals and ideas for your company, so you make the right decisions about creating a legal entity the first time. Call today for more information or email us at [email protected]