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Summer 2014
IN THIS ISSUE
d&G Lawyer News
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Q & A – Business Entities
Q. What factors determine the business entity I should choose?
A. It depends on a number of factors including, but not limited to:
- how you want the ownership and management structured;
- the amount of protection for personal assets you desire;
- the size of the investment required;
- the federal tax consequences of the entity (as Florida does not have a personal state income tax);
- the plans for the business (present and future);
- the manageability of the entity;
- the ability to transfer ownership; and
- the ease with which a value can be attributed to the entity.
Q. What are the common business entities in Florida?
A. Some of the most common business entities include a sole proprietorship, a general partnership (GP), a limited liability partnership (LLP), a limited liability company (LLC), and a corporation (subchapter S or subchapter C).
Q. What is a sole proprietorship?
A. A sole proprietorship is the simplest business entity because it has only one owner. In addition, any income the sole proprietorship earns is treated as income of the sole proprietor and “flows through” to him or her which avoids the double taxation associated with other entities. However, the sole proprietor has unlimited liability. This essentially means the sole proprietor is personally liable for any liability of the sole proprietorship and any and all personal assets can be taken by a court to satisfy the liability.
Q. What is the difference between a GP and a LLP?
A. A GP requires the association of two or more persons to carry on a business as co-owners for profit. The Revised Uniform Partnership Act, Florida Statutes Sections 620.81001 through 620.9902 governs GPs. Although not preferred, a partnership can be formed without a written agreement. A GP operates similarly to a sole proprietorship in terms of liability and tax consequences. All general partners have unlimited liability, but for income tax purposes the GP’s income “flows through” to each partner, avoiding double taxation. Unlike a sole proprietorship, partners in a GP owe duties of loyalty and care to the GP and the other partners.
The main difference between a GP and a LLP is that an LLP provides the partners with some liability protection by limiting the liability for any act of the LLP to the partnership. No partner is personally liable for the liability just by being a partner. §602.8306, Fla. Stat. In addition, LLPs are governed by Florida Statutes Sections 620.9001-620.9101. An LLP is required to register as an LLP with the state, file a statement of qualification for an LLP, file an annual report, and contain some designation that the partnership is an LLP in the name of the LLP (for example: “Partnership X, LLP” or “Partnership X, Limited Liability Partnership”).
Q. What are the benefits of an LLC?
A. An LLC is a hybrid entity that allows a company to have legal protection and operate like a corporation, but be treated like a partnership for income tax purposes. An LLC can also be formed by just one person, unlike a partnership. However, in 2005 the Florida Supreme Court expanded the liability of single-member LLC’s in Crescent Miami Center, LLC v. Florida Department of Revenue, 903 So. 2d 913 (Fla. 2005). In Crescent, the Court found that a judgment debtor could be required to give up all rights in the debtor’s single member LLC to satisfy a judgment. Note: All LLCs formed after January 1, 2014 are governed by the new LLC Act found in Chapter 605. LLCs formed prior to January 1, 2014 will be governed by Chapter 608 until January 1, 2015 when Chapter 608 is set to be repealed; Chapter 605 will then govern.
Q. What is the difference between an S Corp and a C Corp?
A. Florida Statutes Chapter 607 governs corporations. All corporations have limited liability for their stockholders. The distinction between an S Corp and a C Corp is made at the federal level. Under the Internal Revenue Code, a C Corp is taxed as an independent entity and a C Corp’s shareholders are subject to personal income tax on any dividends the C Corp distributes. This is referred to as “double taxation.” S Corps are “regular” state incorporated entities; however, they make an election under the Internal Revenue Code Section 1362 to be taxed like a partnership, i.e., the income of the corporation “flows through” to the shareholders avoiding double taxation. To be eligible for this election, an S Corp must meet certain requirements.
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