If you are currently operating a business in Florida or Ohio, you already have a business entity. Whether you are starting a new business or evaluating your current business, you should be sure to choose the entity best suited for you and your needs. In order to decide properly what kind of business structure works for you, you need to carefully consider the following:
- How do you want to structure the control within your business?
- How have you protected yourself from liability?
- How are you currently being taxed and is there a way to minimize tax on your business?
- How do you want your business to operate if/when you retire?
Below, I’ve included some basic differences in a few entities.
Sole Proprietorship
A Sole Proprietorship consists of one person carrying on a business for profit. This entity is easily recognized and regularly used. The individual IS the entity and for liability purposes, there are no differences between the assets of the individual and the assets of the entity. Often, the sole proprietorship has no official documents as simply has one or two bank accounts in the name of the individual followed with a “dba” (doing business as) designation.
Because the sole proprietorship is the individual, the individual will report taxes on the
individual’s return. The individual, not the sole proprietorship, is subject to taxation. Creditors of the sole proprietorship are creditors of the individual. There is no liability protection with a sole proprietorship.
Corporation
“C” Corporations are one of the oldest entities. At the top of the corporate structure is the board of directors. The Board members are the ultimate managers of the corporation. The Board controls major decisions and leaves the day to day activities being run by Officers of the corporation, who are subject to replacement by members of the board. The shareholders own an interest in the corporation and may or may not possess the ability to vote on issues, such as merger or sale, depending on the corporate structure and bylaws. The board members and officers may or may not be shareholders in the corporation. The shareholders own “shares” or “stock” in the corporation. There can be many different classifications and ownership can be “preferred” or “common”—entitling the holder to different distributions and voting rights within the corporation.
A corporation can have an unlimited number of shareholders and often have an open market for its shares. A corporation is a separate entity for tax and liability issues. This is beneficial in that, the members of the corporation are not personally liable for actions taken as the corporation—in most cases and absent fraud, only the corporate assets are at risk in litigation. However, because a corporation is an entity separate and apart from its members, it is also subject to tax and like many other entities, carries its own tax I.D. number. Dividends or distributions made to shareholders are taxed at the corporate level first, and then taxed again as income to the individual shareholder—the “double tax” often mentioned in corporate issues.
“S” Corporation
An “S” Corporation is similarly structured to the “C” corporation. However, there are important distinctions that must be maintained in order for a corporation to retain its preferred “S” status. Unlike a “C” corporation, an “S” corporation may only have one class of stock. The stock may be voting or non-voting or a combination, but they must still be the same classification. An “S” corporation, unlike the “C” corporation, may only have one hundred shareholders that are U.S. citizens, resident aliens, estate, or certain trusts or tax-exempt organizations.
An “S” Corporation is a corporation in many respects; however, it differs in that the “S” corporation elects to be taxed under subchapter “S” of the Internal Revenue Code. In this way, the corporation is not subject to taxation at the corporate level—it becomes a “pass-through” or “flow through” entity, which means that the income is taxable only on the shareholder level and only taxed once. For liability purposes, an “S” corporation is similarly situated to the “C” Corporation, in that its members are not personally liable for the acts of the “S” Corporation.
General Partnership
A General Partnership is simply two or more persons carrying on business for a profit. Like the corporation, the general partnership is an old and well settled entity. There can be any number of members and many different ways to structure. In the absence of an agreement otherwise, each partner is entitled to share equally in the profits and losses of the partnership. Each partner, however, is liable for the acts of the other partners in the business. In Florida as well as in Ohio, general partners are jointly and severally liable for the acts of the partnership. General partnerships offer little liability protection. Creditors, however, are entitled to economic rights of the partnership/partner only and cannot force themselves into management of the partnership.
General partnerships are pass through entities for tax purposes. The Partnership itself may carry a tax identification number, but the partners individually report the income on his or her own tax returns. The general partnership itself does not pay tax on its income, though the business may be subject to other taxes.
Limited Partnership
A Limited Partnership is similar to the General Partnership in structure; however, it is a recent creature of statute. Like the “S” corporation, the Limited Partnership must be proactive in seeking its status. There are general Partners who remain responsible for the overall managing and splitting of the losses and profits. There are also limited partners who may instead receive a salary and are not permitted to manage the key aspects of the partnership.
A Limited Partnership provides limited liability to its limited partners. As long as the limited partner does not otherwise hold himself out as a general partner nor does he take on the duties of a general partner, he remains free of personal liability for the acts of the general partners and partnership. The general partners, however, are still liable. A Limited Partnership is taxed and subject to creditors in the same manner as a General Partnership.
Limited Liability Partnership
A Limited Liability Partnership is also a recent creature of statute in Ohio and Florida. A Limited Liability Partnership is more akin to a general partnership in structure and style, but partners are not liable for the acts, errors, and omissions of other partners. Each partner is liable for his own actions as a partner. There are no limited partners, in that all partners may participate actively in the management and control of the partnership. In the absence of agreement, all partners are entitled to share equally in the profits and losses as well as the assets of the partnership, regardless of the assets original source.
Limited Liability Partnerships are similarly taxed as general partnerships—income flowing through the partners themselves. Limited Partnerships are best suited to professional practices: such as dentistry, CPAs, and law firms.
Limited Liability Company
A Limited Liability Company is a relatively new business model that may consist of any number of individuals. An LLC may be formed in Ohio and Florida without an operating Agreement. Although an LLC may be structured in any number of ways, in the absence of agreement, the LLC will be run by majority consent of its members. LLC can also be manager-managed. In this way, LLC would be similar to that of a limited partnership—the managers, like the general partners, make the decisions on behalf of the LLC and the other members may have only economic rights in the LLC. LLCs consist of shares and shares may be organized in different ways (managing shares, limited shares, etc.). Members and managers are not personally liable for the acts of the Limited Liability Company and vice versa. Creditors of the LLC can only reach the assets of the LLC and are not entitled to participate in management of the LLC, without consent of its members.
An LLC is a pass through entity for tax purposes and its members report the income on their individual returns. An LLC may consist of a single member or multiple members.
Special case in Florida with single member LLCs. The Florida Supreme Court recently upheld a creditor’s right not only to the economic interest of the single member, but also, the right to become to member, as a single member LLC arguably can have no dissenting members after the forming individual has lost his interest. This is NOT the case in Ohio with single or multiple member LLCs and also not the case in Florida with multi-member LLCs, both of which provide that a charging order is the sole remedy available to the creditor of these LLCs.
Are there any other aspects of business entities to consider? Of course. After individual
consultation, Roth and Bacon Attorneys is in a better positions to address your specific needs. As always, your business plan should work with your estate plan. Owning an interest in any of the above entities, while providing liability protection and other advantages, does nothing to protect you from the Probate Court when you pass away. Revocable Living Trusts and other methods are often used in conjunction with your business plan to ensure your business interests pass according to your wishes.
Copyright 2011@ Jessica B. Moon
