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Starting a new business or buying an existing business is an exciting time but you should not overlook the importance of doing your due diligence, how you plan to organize your business and how you plan to operate a business. The particular business structure that you choose is very important and will significantly impact your liability exposure and income taxes. The type of business in which you engage will impact your need for liability protection and the income tax consequences of the various business structures. Some business structures provide liability protection while others do not. We look forward to meeting with you to determine which type of business structure will protect you and your family while minimizing your income taxes. Proper business planning is also an important part of an overall estate plan. Business valuation and succession need to be contemplated as part of your business planning. The following is a summary of the basic business structures that are commonly used in the US.

Sole Proprietorship

A sole proprietorship is when a person starts a business as themselves just doing business.   This type of business is not a separate entity and does not provide any personal liability protection.  It is simply you doing business in your own name or by using a fictitious or trade name.  There are no formal filing requirements to establish a sole proprietorship.  If, however, you are using a fictitious or trade name for your business, then you need to file a “d/b/a (doing business as) with the state, county, city and/or municipality in which you are operating.  When you file your individual income tax return, you file a schedule C as a part of your personal tax return.  This type of tax filing is historically the most highly audited return by the IRS.  Your profit is subject to your personal income tax rates regardless of whether you take the money out or reinvest the money in the business.   

General Partnership

Frequently, you and a friend or a family member may want to start a business together. Sometimes one person has an idea or particular skills and another person has some funding. If two or more individuals agree to operate a business for profit, then the result is a general partnership. A formal written partnership agreement is not required to form a general partnership. As with most things in life if it’s worth doing, then it’s worth doing in writing. Even a simple agreement outlining the basic terms of the partnership can save a lot of headache down the road in the event of a possible dispute. Similar to a sole proprietorship, there are no filing requirements at the state level to form a general partnership. A general partnership also does not provide liability protection for the general partners. As with the sole proprietorship, the profit is reported on your personal income tax return and taxed at your personal income tax rates regardless of whether you take the money out or reinvest the money in the business.

Limited Liability Partnership

A Limited Liability Partnership (LLP) is a formal separate entity requiring some additional work to create it.  You cannot create a LLP simply by saying so like a Sole Proprietorship or a General Partnership.  In order to form a LLP, you must file certain paperwork and pay filing fees at the state level.  This particular business structure can be owned by two or more individuals or other business entities.  As its name implies, at least one of the partners has limited liability protection.  Generally, the LLP will provide liability protection against the negligence of your partners but not your own negligence.  The IRS will, basically, treat the LLP the same as a general partnership for income tax purposes.

Limited Liability Company

An LLC is the newest type of business structure but is widely used by many businesses.   An LLC is a company organized and existing under the Florida Revised Limited Liability Company Act.  An LLC is created by filing Articles of Organization with state and will be governed by its Operating Agreement.  If you do not have an Operating Agreement, then the LLC with be governed by the Florida Revised Limited Liability Company Act.  We strongly advise that you create an Operating Agreement so that you may include any and all provisions applicable to your business and family needs.  It can be created by a single individual, other entity, several individuals, several entities or a combination thereof.  The owners are called “members” and they have liability protection.  A single-member LLC may also provide less protection against creditors in bankruptcy or from the IRS.  A LLC can be an excellent choice for many different types of businesses, holding real estate and/or for estate planning combined with discounted valuations.  A single-member LLC is disregarded for federal income tax purposes and treated like a partnership when there are two or more members but has the flexibility to elect alternate tax treatment with the IRS. 

S Corporation

An S corporation is a C Corporation that has elected a special tax status granted by the IRS. The IRS imposes fairly strict guidelines regarding filing deadlines to be granted Subchapter S tax status. The S Corporation is owned by shareholders and is limited to 100 shareholders. The S Corporation provides all the liability protection of a C Corporation but does not pay corporate income taxes. The S Corporation files an informational return known as IRS form 1120-S. Each shareholder will receive a form K-1 which represents that shareholder’s share of the profit or loss. This is known as a flow-through entity whereby the profit or losses of the business flow through to the shareholders in proportion to their percentage of ownership.

C Corporation

The most formal and rigid business structure listed here is the C Corporation. A C Corporation is formed by filing Articles of Incorporation at the state level. The C Corporation is owned by shareholders and requires more formalities for its operation than any other business structure. It provides excellent liability protection to its shareholders provided the corporate paperwork and formalities are diligently maintained. There is also no limit regarding the number of shareholders in a C Corporation. Shareholder liability is generally limited to their personal investment in the corporation. The C Corporation pays its own taxes at the corporate level and is not a flow-through tax entity. The C Corporation can pay its shareholders wages and dividends.

We have been helping business owners and investors set up the best business structure for their personal needs for almost 20 years. We look forward to helping you start, build and protect your business and investments. Contact us to discuss your business needs.

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Contact Daniel M. Genet, P.A.

Daniel M. Genet, P.A., 3621 W. Kennedy Blvd., Tampa, FL 33609
Ph: (813) 872-8787 | Fax: (813) 944-5205