Formation of a New Business / Legal Entity in Orlando
There are many things that need to be done when starting a new business in Orlando, FL. Probably the most important is choosing the correct structure under which the business will operate and be recognized as a legal entity. There are several business structures to choose from, but no right or wrong way to organize any specific enterprise. The type of structure chosen will depend on a host of factors and each different structure has its own advantages and disadvantages.
In many cases, limiting personal liability and maximizing tax advantages will be foremost in the decision making process. But other considerations, such as the size of the business, who will control it, who will invest in it, and who will profit from it, also come into play. The most common business structures which can be legally formed are: Sole Proprietorships, General Partnerships, Limited Partnerships, C Corporations, S Corporations, Limited Liability Companies, and Non-Profit Organizations.
The Sole Proprietorship is the simplest business form. As its name suggests, it is the preferred structure for a single business owner who will be running and profiting from the business him or herself. In Florida, a sole proprietor needs to register any new company with the state and, in most cases, obtain a business or occupational license, or business tax receipt, from the county in which the owner of the business lives. He or she must also open a business bank account. If the business name differs from that of the owner, it must be published in a local newspaper in the county where it is located. If a sole proprietor intends to have employees, he or she must obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS).
A Sole Proprietorship is not taxed; its owner reports all business profit and loss on his or her personal tax return. Its owner also remains personally liable for any lawsuits filed against the business and any debts incurred by the business are considered to be personal debts, as well. In this regard, the Sole Proprietorship provides the least amount of financial and legal security compared to more complex business structures.
There are two types of Partnerships – the General Partnership and the Limited Partnership. In many ways, a General Partnership is similar to a Sole Proprietorship, except that there is more than one owner. Therefore, a Partnership Agreement will usually be necessary to define the arrangements between the partners, or among them, if there are more than two. The Agreement will specify how income is allocated, each partner’s contribution to the enterprise, what happens if one or more partners want to leave the business, or dies, the business goes bankrupt, and/or any other considerations necessary to the proper functioning of the business.
A Limited Partnership is made up of one or more general partners and one or more limited partners. In this arrangement, the general partners, who are considered “active” will still have unlimited liability, while the limited partners will not, as long as they are “passive” investors and do not actively run the business. Their liability will be limited to their initial investment.
In Florida, those wishing to form a Partnership must file with the state, obtain any necessary licenses and/or permits, publish a trade name of the new business in a local newspaper in the county where it is located, and obtain an EIN from the IRS. Neither form of partnership is taxed; the partners report their share of profit and loss on their own personal tax forms and pay their own income taxes, accordingly.
C Corporation (C Corp)
A C Corporation is an independent legal and tax entity in Florida that is separate from its owners. Incorporating a business allows one to safeguard one’s personal assets against potential claims from creditors and it is one of the most important reasons why many businesses choose to become corporations in the first place.
Another reason why a business might wish to incorporate is because it will gain the ability to issue shares of different classes of stock in order to attract investors. The investors then become shareholders in the corporation, responsible, in some measure, for the company’s ongoing functioning. Since there is no limit on the number of shareholders, C Corporations have unlimited potential for growth.
Forming a C Corporation is more complicated than forming a Sole Proprietorship or a Partnership. In addition to choosing a name, obtaining an EIN, and obtaining any necessary local licenses, articles of incorporation must be prepared and filed with the Florida Department of State, bylaws must be promulgated, a director or directors must be appointed, meetings must be held regularly between the company’s board of directors and shareholders, and annual reports must be filed.
One drawback to the corporate structure is “double taxation.” Unlike the simpler business models, corporations are taxed at the corporate level and any individual dividends paid to shareholders must also be reported on their personal income tax forms. Another disadvantage is the fact that shareholders are not able to deduct corporate losses on their taxes.
S Corporations (S Corp)
An S Corporation is similar to a C Corporation, except that it is subject to the rules of IRS Code, Subchapter S. It has a tax status that allows its income to be treated like the income of a Sole Proprietorship or Partnership, which means that instead of the corporation’s profits being taxed, any income is “passed through” to its shareholders who are taxed on their individual tax returns, only. Also, unlike the C Corporation, an S Corporation can have no more than 75 shareholders and can only issue one class of stock. Lastly, its shareholders must be US citizens or residents.
However, both types of corporations protect their owners from personal responsibility for the debts and liabilities of the business. They must be incorporated in the same way and both are required to hold annual meetings with their shareholders and directors.
Limited Liability Company (LLC)
The Limited Liability Company is a relatively new form of business structure that provides all of its owners, known as “members,” with limited liability while avoiding double taxation. Its members report their share of business profit and loss on their personal income taxes, the same as if the company was a Sole Proprietorship or Partnership. Unlike a corporation, it is not required to hold annual meetings, appoint a board of directors, or maintain a record of its minutes. And unlike an S Corporation, its members need not be US citizens or residents and there is no limit to the number of members it can have. However, it cannot issue stock in order to raise capital.
Non-Profit Organization (NPO)
A Non-Profit Organization (NPO) is a business whose aim is more concerned with doing public good than making a profit. Many social service, artistic, and charitable organizations are incorporated as NPOs. An NPO is eligible for tax exempt status under Section 501(c)(3) of the federal tax code, as well as Florida’s tax laws. Its officers have limited liability. In addition, an NPO has access to many types of grants, and donations to it are tax deductible.
An NPO must have at least three directors, promulgate Articles of Incorporation, and file annual reports with the Florida State Division of Corporations. Its finances must be open to public inspection and its assets may not be used for private benefit.
In addition to performing your own due diligence when deciding upon the best structure for your new business, it is always desirable to discuss all options with a knowledgeable attorney, experienced in the area of business law. Making a mistake early on can be detrimental to the long-term viability of your new venture or even cause it to be stillborn. Here at the law offices of John R. Samaan, P.A, we stand ready to help you navigate through the possibilities while offering our expert counsel and advice in the formation of your new business.
If you are starting a new business or interested in restructuring an existing one, contact us for a consultation.