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Which type of business entity is best for you?

On Behalf of | Aug 19, 2019 | Business Law |

If you plan to start a new business in Florida, choosing which business entity you will form represents one of the first and most important things you will need to do. You need to make this decision carefully because it will affect you and your business for years to come.

The Internal Revenue Service explains that you have the following five options when it comes to setting up your new business:

  1. Sole proprietorship
  2. Partnership
  3. Corporation
  4. S Corporation
  5. Limited Liability Company

Each of these business structures has its own advantages and disadvantages as briefly outlined below.

  1. Sole proprietorship

If you choose to establish a sole proprietorship, you and your business are one. You have complete responsibility for it, including personally covering any losses it may sustain and paying its income taxes as part of your own income tax return amount.

  1. Partnership

If you will own your business with one or more other people, you may wish to establish a partnership. This form of business requires a formal written partnership agreement setting forth the amount of money or other assets each partner will contribute, the partnership share (s)he will own and the responsibilities (s)he will assume. While your partnership will file an informational tax return each year, you and your other partners will pay your respective shares of the taxes owed.

  1. Corporation

A corporation is its own legal entity, separate and apart from its shareholders. If you choose to establish this type of business, you will need to file Articles of Incorporation with the Secretary of State’s Office as well as your Bylaws. In addition, you will need to purchase a corporate seal. A corporation pays its own income taxes each year, but you and the other shareholders will also pay taxes based on the income you received from your ownership shares. This double taxation feature represents the main drawback to corporations.

  1. S Corporation

To establish an S Corporation, you must first create a corporation and then elect to make it an S Corporation. Such election relieves your business from having to pay its own income taxes because they flow through to you and the other shareholders in your respective amounts.

  1. Limited Liability Company

LLCs represent business structures which, depending on the election you make, allow you, other individuals, corporations, other LLCs and foreign entitles to become members. Depending on which election you choose, the IRS will treat your business as a corporation, a partnership or a “disregarded entity,” meaning you yourself.

This is general educational information and not intended to provide legal advice.