Florida Business Entities: Sole Proprietorships, Partnerships, Corporations, and LLCs
There are four main types of business entities in Florida: sole proprietorships, partnerships, corporations, and limited liability companies. There are some major differences between them in areas such as governance, taxation, filing requirements, and liability. If you are planning to form a business in Florida, it is important to understand the differences to choose the entity that will best suit your needs.
In a sole proprietorship, a single person owns and manages the business. Florida law does not require any formal business structure for a sole proprietorship, and it is very simple to set up or dissolve. No state filing is required, unless the sole proprietorship is using a fictitious name or “Doing Business As” (DBA) name.
Sole proprietorships use pass-through taxation. This means that taxes on income are reported directly on the individual owner’s tax return. There is no taxation at the entity level. One downside to a sole proprietorship is that since the entity’s assets and liabilities are essentially the same as those of the owner, the entity’s debts may be collected from the owner’s personal assets.
The two most common types of partnership in Florida are general partnerships and limited partnerships. A general partnership is an association of two or more people doing business together for profit. A partnership agreement, while not required by law, generally governs the business structure and operations. Like a sole proprietorship, no filing with the state is required unless the partnership is using a fictitious name or DBA.
Partnerships also employ pass-through taxation, so the partnership is never taxed, but the individual partners must report their share of the partnership’s income. Again, like in a sole proprietorship, partners can be personally liable for the partnership’s debts.
A limited partnership differs from a general partnership in one key respect. Instead of being owned by two or more partners, limited partnerships are owned by at least one general partner and one limited partner. The general partner manages the limited partnership, and is personally liable for the partnership’s debts. The limited partner is less involved in the management of the partnership, and is typically not personally liable.
Florida corporations may be either C-Corporations or S-Corporations. The difference between the two entities deals with who may be a shareholder and how the corporation is taxed.
In a C-Corporation, shareholders own shares of the company. Anyone is eligible to be a shareholder. The Board of Directors, elected by the shareholders, governs the corporation according to the corporation’s bylaws. To form a corporation, Articles of Incorporation must be filed with the state, and an annual report must be filed with the Secretary of State, Division of Corporations.
C-Corporations use double taxation. This means that the corporation’s earnings are taxed at the corporate level, and shareholders must report distributions on their personal income taxes. The shareholders are not personally liable for the debts of the corporation, except in rare circumstances.
An S-Corporation has the same governance and structure as C-Corporation. However, S-Corporations are limited to 75 shareholders, all of whom must have social security numbers. Additionally, S-Corporations use pass-through taxation, so there is no taxation on the entity level.
Limited Liability Company
A limited liability company (LLC) is a hybrid entity, combining the attributes of partnerships and corporations. Similarly to a corporation, an LLC is governed by members, who have membership interests. It is possible to have a single-member LLC in Florida. The Operating Agreement defines the management and organization of the LLC. To create an LLC, the members must file Articles of Organization with the state.
Like partnerships, LLCs use pass-through taxation, though LLCs may elect double taxation. The limited liability of an LLC means that the members are not generally personally liable for the LLC’s debts.
If you have any questions about which type of business entity will work best for your business, please contact West Palm Beach business law attorney Larry E. Bray for a free initial consultation.