Starting and running a business requires making many important decisions. The very first decision faced by many business owners is what kind of entity should be formed to operate their business. In Florida, there are a number of available options. While the decision can be daunting, the variety in flavor of business entities provides the opportunity to choose a type of entity suited to your particular needs. In determining which entity is right for you, there are many tax and non-tax factors to take into consideration.
Types of Entities
There are four primary classifications of business entities in Florida: (i) sole proprietorships, (ii) partnerships, (iii) limited liability companies (LLCs), and (iv) corporations. The partnership category is further subdivided into four different types of partnerships: (i) general partnerships, (ii) limited partnerships, (iii) limited liability partnerships, and (iv) limited liability limited partnerships. Additionally, if your business will provide a “professional service” to the public which requires getting a license or other legal authorization (for example, a medical practice) then you may form a special type of LLC or corporation.
For tax purposes, there are three primary classifications of business entities: (i) disregarded entities, (ii) partnerships, and (iii) corporations. While the classification of a state law partnership or corporation is self-explanatory, the classification of an LLC hinges on the number of members and the election of those members. A single-member LLC may be either a disregarded entity or elect to be treated as a corporation. A multi-member LLC may either be a partnership or elect to be treated as a corporation. Further, a corporation meeting certain eligibility requirements can elect to be treated as an “S” corporation.
Generally speaking, the taxing regime for business entities depends upon whether such entity is a passthrough entity or a taxable entity. Passthrough entities (partnerships and “S” corporations) pass profits and losses on to their owners, who then report such items on their individual tax return. On the other hand, taxable entities, such as corporations (other than “S” corporations) must pay federal and state income taxes. Although Florida does not impose an individual income tax, it does impose a corporate income tax. In addition, the owners of taxable entities are subject to federal income tax on any dividends received, resulting in a second level of taxation.
With the exception of general partnerships and sole proprietorships, each type of entity offers its owners some degree of protection from the liabilities of the entity. Additionally, some provide protection to the entity and other owners from the liabilities of the owner. While liability protection is an important consideration, other important non-tax considerations include the type of management structure desired, restrictions on transferability, and the costs associated with formation and maintenance of the entity.
Ultimately, the type of business entity you choose is a part of not just your present business plan, but also potentially your estate plan or business succession plan. Different business entities can provide different strategies for passing interests to the next owners, be they buyers or your heirs.
Due to the many important factors that should be considered in choosing a type of business entity, you should consult with a qualified business and tax attorney to make sure that you select an appropriate entity that is suited to meet your needs.
About the Author:
Dana M. Apfelbaum practices in the areas of federal income, estate, and gift tax law and family business succession planning. She counsels individuals in estate planning, with an emphasis on implementing the client’s objectives, asset protection and minimizing wealth transfer taxes. Ms. Apfelbaum also represents fiduciaries through all stages of probate, estate and trust administration. In addition, she represents businesses and business owners in all types of business and tax matters, including choice of entity, mergers and acquisitions, reorganizations, other general business matters, and succession planning. She may be reached at firstname.lastname@example.org.