By Samuel L. Gold, Esq. And Lauren Cohen, Esq.
Are you considering buying or starting a new business? Are you trying to decide about incorporating? But don’t know where to start or which options will best suit your goals? Well, there are a number of options to consider. The five main types of businesses are a sole proprietorship, corporation, subchapter S corporation, and Limited Liability Companies, or LLCs. It can often be daunting to figure out what business structure is best.
To help you understand the advantages of each type of entity, here is a brief overview:
The sole proprietorship involves less interaction with the government bureaucracy. While a sole proprietor must interact with the taxing and state/local licensing agencies, and worker’s compensation and unemployment agencies, they typically not have to register with state authorities, often with an office known as the Florida Secretary of State or similar authority in your state. A sole proprietor won’t have to file annual reports articles of incorporation, and shareholder papers. As a sole proprietorship, you have free reign in running your business within the confines of the law. If you’re doing business in Florida, the fourth largest market in the United States, you do not have to pay a state income tax. In Florida, there is no state income tax for individuals, but if you were a corporation, both you as an individual and your corporation would be subject to taxation. Sole proprietorships are viewed as the same entity as the owner individually, and pay no state income tax.
One major drawback to a sole property is that the owner is subject to personal liability regarding debts and court judgments. If a lawsuit is filed against the business on whatever matter, it is the owner who’s on the chopping block. Also, the owner may be viewed more skeptically by a bank in obtaining a loan. The owner’s credit record will be carefully examined and he or she will be responsible for the terms of the loans. Banks may view the sole proprietor as a higher risk as there are no other investors to pool resources.
You may wish to start a simple partnership. The principles governing a partnership are similar to those of a sole proprietorship. Absent agreement among the partners, the partners share in 50% of the profits…and losses.
Creating and running a corporation is the mirror opposite to a sole proprietorship. The owners or shareholders are usually shielded against the debts or judgment of the corporation unless they sign personal guarantees or run the corporation as it were an unincorporated business. Corporations are required to file articles of incorporations, annual reports, and other documents with the state. In Florida, the corporation will indeed be taxed on both the state and federal level; dividends will be taxed to the corporation, but count as well as income for the shareholders.
In an S corporation, there are “pass through” provisions effectively eliminating double taxation issues in most instances. Also, dividends are not subject to self-employment tax and there may be tax advantages to the shareholder as to treatment of wages. This a huge reason you may wish to file as a Subchapter-S corporation.
Finally, after receiving tax and legal advice, it is easy to create or convert to a Subchapter Corporation. This is usually accomplished by filing a simple form with the IRS within applicable deadlines.
LLCs are a popular form of business organization. The IRS does not usually tax the entity, as members determine how to be taxed. Profits or losses are taxed the personal tax return of a single member. It is quite common for an LLC to have an operating agreement describing organizational governance and tax issues. However, members should know that self-employment taxes are general passed through
In conclusion, what may seem simple on the face, has a myriad of legal and tax consequences. Absent agreement, state law will control the governance of the entity. While laws among the states are similar, there are enough differences that merit one being cautious.
The opinions here are not legal advice. Consult an attorney or CPA as each situation is unique. This column is not intended as advice to avoid paying applicable income taxes.
Samuel C. Gold, Esq., has practiced trademark law for nearly 15 years. Mr. Gold has been a member of the Florida and Wisconsin bars since 2002. He is also admitted to practice before several federal courts, including the U.S. Supreme Court.
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