Aspiring entrepreneurs in Florida often ponder the question: which entity should I select when I create my company? This is an area which most entrepreneurs know little about. Gaining familiarity with entity selection is something aspiring entrepreneurs should strongly consider. The reason for this is because doing so can confer significant benefits. One of the main reasons why business owners stay in the dark when it comes to entity selection is that this topic contains a lot of strange business jargon. Once you get past this hurdle, however, you’ll see that entity selection can be understood without too much hassle.
In this post, we will go over a few of the entities which Florida entrepreneurs have to choose from. Again, the entity selection process is tremendously important, and so budding entrepreneurs should take this matter seriously.
Just as its name implies, a sole proprietorship is an entity which consists of only a single member. With a sole proprietorship, the business entity is not separate from its owner for liability or tax purposes; this means that the personal assets of the owner can be attached in order to satisfy the debts or liabilities of the business. Sole proprietorships are passthrough entities, which means that the income generated by the entity passes through to the owner and is reported on the owner’s personal income tax return. Sole proprietorships may be formally registered with the state, but they are also created automatically whenever an individual earns income independently. In other words, if you’re self-employed, then you have established a sole proprietorship, even if you haven’t taken the time to formally register your business with the state.
Limited Liability Company
The limited liability company (LLC) is among the most common type of entity selected in the State of Florida, and throughout the entire country. LLCs are often preferred by small to medium-sized businesses. LLCs offer shareholders the seemingly favorable arrangement of passthrough taxation and liability protection. With an LLC, the profits of the company flow through the shareholders – just as with a sole proprietorship – but, the assets of shareholders cannot be used to satisfy the debts of the company. LLCs can be “disregarded entities” in cases involving only a single shareholder; this means that anything held by the LLC will actually be owned by the shareholder for tax purposes.
S Corps & C Corps
Aside from a sole proprietorship or LLC, Florida entrepreneurs can also set up a corporation when they create a company. Corporations come in two basic variations: the S corporation and the C corporation. In many ways, the S corporation is very similar to the LLC. S corporations have passthrough taxation, and so all profits flow directly to shareholders; what’s more, the assets of shareholders are protected and cannot be attached to satisfy the S corporation’s debts or liabilities. S corporations may be a good choice if you expect to have a medium number of shareholders (fewer than 100), and those shareholders would prefer to avoid double taxation.
C corporations are unique in that these entities are subject to double taxation. C corporations are considered separate legal entities, and so they must file and pay income taxes on profits just as if they were individual persons. What’s more, shareholders must also pay taxes on the dividends they derive from corporate profits. This means that the income generated by the C corporation is taxed at both the entity level and then at the shareholder level (hence, “double taxation”). You might think that this double taxation would make C corporations the least desired entity; but, the truth is that C corporations offer a lot of benefits to shareholders. For one thing, C corporations can raise capital easier because they can offer different classes of shares and attach different rights to each class. C corporations also may be eligible for certain tax advantages which may be unavailable to S corporations.
Reach Out to Trembly Law Today
If you’re planning to open up a business at some point in the near future in our great State of Florida – ideally once this coronavirus has been eliminated – selecting the right entity is eventually going to be an important issue for you. Hopefully, this introduction will shed light on this complex topic. In the future, we will come back and discuss this topic in greater detail. For instance, we will dive further into the differences between S corporations and C corporations, and the many other entities you have to choose from (i.e. limited liability partnerships, general partnerships, etc.). If you’d like to learn more about entity selection, or if you’d like counsel on a specific entity selection issue, please contact Trembly Law Firm today. Give us a call today at (305) 431-5678.