So you’ve taken a great idea, formed a plan, created a blueprint for how to get the attention of your customers and acquired the appropriate amount of start-up funding. Now you face your next big decision – what type of business organization is best for you? Possible organization structuring can include partnerships, corporations, sole proprietorships and limited liability companies. There are key differences between these structures that can impact your business’ management, your taxes and your day-to-day operations.
A Sole Proprietor is, basically, you. You may elect to operate your business under your own name or under a descriptive “new” name. The descriptive new name can be linked to you by the filing of a Fictitious Business name with Florida’s Secretary of State. While the Sole Proprietorship structure is the simplest and least bureaucratic form under which to operate a business, it fails to protect your personal individual assets from litigation/claims by unhappy business customers, vendors or guests or from the debts of the business.
A “partnership” is typically an agreement between two or more people to finance and operate a business. The “creation” document is generally referred to as a Partnership Agreement. Partnerships, unlike sole proprietorships, are a legally separate entity from the partners themselves. Contractual obligations are made with the entity, not the individual partners. Taxation does not occur at the entity level, but rather is passed through to the partners. With regard to liability for claims by unhappy business customers, vendors or guests, or claims against you for business debts, the partnership structure does not protect the partners from personal liability for the obligations and debts of the business. The partners share responsibility and authority regarding operating the business. However, partners have the flexibility to define their relationship among one another and are permitted to split the ownership and profits of the partnership in the way they desire. Partners can also share equity interests – ownership interest in the partnership, which helps in building capital. As partnerships are based on a shared ownership concept, the actions of one partner can bind the whole partnership.
Florida corporations are created under Florida law and basic “creation” documents generally include the Articles of Incorporation and the Bylaws. The basic attributes of a corporation and what distinguishes a corporation from other business organizations include: (1) limited liability of the corporation’s directors, officers and managers and (2) a corporation’s potential for perpetual existence (the corporation exists independent of the lifetimes of its directors, officers, etc.). The corporation can initiate a legal suit, as well as be sued. The corporation may also have the status as a separate tax payer. Many of these attributes are considered advantages of this form of business organization. However, the multiple levels of management (shareholders, directors and officers) will present certain administrative requirements for you in operating the business.
The basic “creation” documents for a Florida Limited Liability Company (or “LLC”) will include the Articles of Incorporation and the Operating Agreement. The management structure of the entity is designated in the Operating Agreement. The owners of the LLC are called members. Liability of members of the LLC is generally limited to each member’s investment in the LLC. An exception to that protection from personal liability can arise in the event an individual member engages in unlawful actions in relation to a claim against the LLC.
You should carefully consider the advantages and disadvantages of the various business organizations.