Congratulations, you have decided to start your own business. But this is only the first of many important decisions that you will be making in the near future. One of the next big decisions you will make is choosing which type of business entity to form.
There are numerous business entities to choose from, including:
- Sole Proprietorship
- General Partnership
- Limited Liability Company (LLC)
- Limited Partnership
Each business entity has its own benefits and drawbacks. The structure to best suit your business' needs depends on the kind of business that you are forming and who you are forming it with. But first, let's discuss why choosing the right business structure is important.
Why choosing the right business entity matters
The business entity you choose will have serious legal and tax implications. Even before your business is up and running, the type of business your form will determine the legal relationships your business will have with the rest of the world. Therefore, it's important to make the right choice.
The best way to make sure you choose the right business entity for your circumstances is by working with an experienced business lawyer. Your lawyer can give you information about each business entity and help weigh the pros and cons as they apply to your business.
Before meeting with your lawyer, it will be helpful to know the basics about each of the most common business structures, which we provide below.
Sole Proprietorship: This is the simplest business structure, but also the riskiest as the owner of the sole proprietorship is often personally liable for business debts. There are no formalities required in order to start a sole proprietorship, and this is the default business structure when an individual uses their own assets and debts to start a business venture.
General Partnership: This is the simplest business structure when two or more people start a business together. However, the general partnership model is rarely cost effective. Formal documents are not necessary to start a general partnership, but having a written partnership agreement, in the very least, is highly recommended.
Corporation: This type of business entity is easy to form and offers the business owners some personal liability protection from the business' liabilities and debts. A corporation is considered an individual entity, unique from its owners. In Florida, a corporation is formed by filing articles of incorporation with the Florida Secretary of State.
S-Corporation: An S-corporation is similar to a regular corporation but with some differences in taxation and a few other characteristics. The taxation of an S-corporation is similar to the taxation of a partnership. Therefore, the S-corp has some benefits of a partnership with some benefits of a corporation, making it a popular choice.
Limited Liability Company (LLC): An LLC can be described as in between a corporation and a partnership. It is fairly easy to form, creates a new entity separate from its owners and offers the owners some personal protection from the LLC's liabilities and debts. This is another very popular choice for business owners.
Limited Partnership: A limited partnership involves two or more partners who engage in business together, with at least one general partner and one limited partner. The general partner manages the business and is generally liable for the debts. The limited partner has little say in the operation of the business and is generally not liable for the debts.
Keep reading for an even more detailed discussion on the various business entities that are available. As you can probably tell, choosing the right business entity is a decision that is best made with the guidance of an experienced business lawyer who is up-to-date on your state's business laws and regulations.