Choosing a business entity is often a new entrepreneur’s first significant decision. Selecting an entity has significant long-term consequences because it impacts both your legal and financial responsibilities. Those who don’t take the time to consider their options may regret their haste later on. In this blog, we will briefly look at the various business entities available to start-ups and entrepreneurs while also looking at what factors they should consider.
Breaking Down the Various Entities
The most basic (and straightforward) option is a sole proprietorship. This is when an individual operates their business as an extension of themselves. Though that may sound simplistic, it will make more sense as we elaborate on the other entities. Sole proprietorships are informal and the easiest to set up, and they allow you direct and complete control over your business. On the other hand, the owner is personally liable for all the business’s debts and liabilities, and if you ever decide to sell, transferring ownership can be challenging.
Partnerships are also common. Partnerships are formed when two or more people agree to join together to operate a business. In a partnership, there is a sharing of responsibilities and a merging of resources. Like sole proprietors, partners are personally responsible for the company’s debts.
This latter point is precisely why many businesspeople choose to form Limited Liability Companies (LLCs). The owners—who are called members—receive limited liability protection. This is also paired with flexibility regarding how the company is managed and run. Forming an LLC, however, is a formal process and requires more paperwork and filing when compared to a sole proprietorship or a partnership.
Lastly, there are corporations, which have several subcategories. Forming a corporation often offers the most extensive and robust liability protection compared to other entities. Rather than owners, corporations have shareholders, and these protections generally extend to all of them. Corporations issue stock, and they can also sell stock to investors. Corporations face more legal and regulatory compliance requirements but these are typically easy to manage.
Factors to Consider
As highlighted above, we should always consider liability protection. How much liability are you willing to assume? This is paramount because choosing either a sole proprietorship or a partnership can result in unlimited personal liability. In other words, your home or other assets can be exposed to claims and used to pay the business’s debts. Most business owners are unwilling to accept that risk, so they will usually opt for an LLC or a type of corporation.
Each entity also comes with its own tax implications. Sole proprietorships and partnerships have what is referred to as “pass-through” taxation. These owners report profits and losses on their personal income tax returns. LLCs and corporations have distinct tax structures because they are legally treated as separate taxpayers and there is a distinction between the individual and the business entity.
Selecting an entity also demands that you consider how much control and decision-making authority you want. As we’ve mentioned, sole proprietorships and partnerships offer maximum control but they come with minimal liability protection. In contrast, LLCs have a formalized structure, less direct control but often provide some protection from legal claims. Though it is beyond the scope of this article, it is important to note that most states also require operating agreements. These are not required in Florida, but having one has some appealing advantages too. Operating agreements outline the day-to-day operations and can clearly establish how decisions are to be made.
For example:
- The roles and responsibilities of the members
- Decision-making processes
- Voting rights
- Profit distribution
- Record keeping and compliance
- Whether the LLC is member-managed or manager-managed
Speak with an Attorney at Cove Law, P.A.
Cove Law, P.A. can assist Florida-based companies with selecting the ideal entity that fits their business’s needs. And for those based outside of Florida, we are usually able to refer clients to colleagues knowledgeable in other states as well. Contact our office today to schedule a free initial consultation, so we can provide you with the legal guidance necessary to make informed decisions about your organization’s future. Making the correct choice now will significantly impact your long-term success, and we want to be a part of it.
- Examining What Unfair Trade Practices Are - August 16, 2024
- When Can You Plead the Fifth? - July 15, 2024
- The FTC Bans Non-Compete Agreements - May 16, 2024
