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Legal Structure | Sole Proprietorships, Partnerships, Corporations

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:

Sole Proprietorship

Most small businesses with one or more employees choose to become sole proprietorships. This is the simplest form of business to start and run.

Advantages:

-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.

Disadvantages:

-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.

Partnership

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 taxation".

Disadvantages:

  • Each partner is, "jointly and severally", personally liable for the obligations of the partnership. If the partnership's assets are insufficient to satisfy a créditor╣s claims, the partners╣ personal assets would be subject to attachment and liquidation to pay the business debts.

  • The partnership is legally responsible for the business acts of each partner. A créditor could choose to sue only one of the partners for the entire amount of the debt. If one partner is unable to pay, the other partners can be held personally liable for the debt.

  • A partnership is not as readily transferable as other structures like corporations; in many states a partnership interest may not be sold or transferred without the consent of all the partners, unless otherwise stated in the partnership agreement.

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

Corporations

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.

Advantages:

It is easy to transfer ownership in a corporation, simply by selling stock.

Disadvantages:

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 issue

  • the number of shares of stock each owner will purchase

  • the amount of money or property each owner will contribute to buy their shares

  • the business in which the corporation will engage

  • who will manage the corporation, i.e. the board of directors and officers

Owners must then file articles of incorporation or a certificate of incorporation with the corporate office of the state in which they want to incorporate

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.

 

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