Once you have decided the type of business you would like to start,
you should determine the legal structure of your business. There are
three main types of structures:
Most small businesses with one or more employees choose to become sole
proprietorships. This is the simplest form of business to start and
-Start-up costs are minimal (only requiring a fictitious business name,
a business bank account and business license(s).)
-A sole proprietorship has no "double taxation" on profits as do some
other forms of business like corporations. All taxes are reported on
the owner's individual income tax return.
-A sole proprietor can freely transfer the business by selling all
or a portion of its assets.
-The owner has unlimited personal liability for the business and vice-versa,
because legally there is no difference between the owner and his business.
-Ownership is limited to one person; you can't bring in a partner.
The main advantage of a partnership is that it allows you to bring
in one or more partners to invest in the business. It, too, avoids "double
The two types of partners are:
general partners: liable for all the losses of the business
limited partners: not personally liable for business losses;
only the amount of their initial investment is at risk
A limited partnership must include at least one general partner along
with one or more limited partners.
A partnership lasts as long as all of the general partners remain in
the partnership. Once a general partner dies or leaves the partnership,
it dissolves and the partnership assets must be sold to pay first the
partnership's créditors and then the partners themselves.
Most states charge an initial fee for filing partnership documents
plus an annual fee. For a list of filing fees to create a partnership
in Florida, click here: http://www.dos.state.fl.us/doc/feelp.html
A corporation is formed by issuing shares of stock to its owners, who
are then known as shareholders. The corporation is a separate legal
entity from its shareholders, therefore they are not personally responsible
for the losses of the business.
Exceptions to this rule include shareholders who do not keep their
personal accounts and assets separate from the corporation's or shareholders
who do not observe the statutory requirements for running the corporation.
For example, in the case of fraud, shareholders may be sued individually.
A corporation may have only one owner, or many owners.
! Some single-owner corporations, such
as doctors and lawyers, register as "professional corporations".
Each corporation should have a Board of Directors, which meets annually
and makes the major decisions of the corporation; and officers, who
are responsible for running the day to day business.
Owners who also work as employees are paid wages plus a "dividend"
or distribution on the stock if the corporation makes a profit.
It is easy to transfer ownership in a corporation, simply by selling
The main disadvantage of a corporation is that profits are taxed directly
to the corporation, and then again to the separate shareholders when
they receive a dividend on the profits. This is known as "double taxation".
In order to create a corporation, the owners must agree to:
- the name of the business
- the total number of shares of stock the corporation can sell or
- the number of shares of stock each owner will purchase
- the amount of money or property each owner will contribute to buy
- the business in which the corporation will engage
- who will manage the corporation, i.e. the board of directors and
Owners must then file articles of incorporation or a certificate of
incorporation with the corporate office of the state in which they want
Most states charge an initial fee for filing corporate documents plus
an annual fee.
For a list of filing fees to incorporate in Florida, click here: http://www.dos.state.fl.us/doc/feecorp.html
The corporation, as a separate legal entity, requires its own bank
account and records. The money earned by the corporation is owned by
the corporation, not the shareholders.
Alternatives to C Corporations
Chapter S Corporation
The Limited Liability Corporation, or "LLC"
Filing as a special type of corporation, an "S" corporation
passes along taxes directly to the shareholders; it does not tax the
corporation, thus avoiding "double taxation". Like a C corporation its
stock is freely transferable. In addition, an S Corporation may have
certain advantages over an LLC in regards to self-employment taxes.
For more information on this issue, please contact a tax advisor.
corporations have their own limitations:
- no more than 35 shareholders
- no non-US residents can be shareholders
Yet another type of corporation, the limited liability
corporation, or LLC, lets non-US residents hold shares and allows an
unlimited number of shareholders while maintaining limited liability
for shareholders. It, too, is a "pass-through" tax entity.
Disadvantages of an LLC:
- While a corporation's existence is perpetual, an LLC's is not; it
must list a dissolution date in its articles of incorporation.
- While the stock of an S Corporation is freely transferable, the
interest (ownership) of an LLC is not. It usually requires the approval
of the other members.