Business Law West Palm Beach | Business Attorney West Palm Beach

Business Entity Formation

If you are forming a new business, understanding all of the legal aspects, advantages, and disadvantages of the various types of business formations available under Florida law is vitally important. How the business is structured will have personal liability and tax consequences for the business owners. A West Palm Beach Florida corporate lawyer or business attorney West Palm Beach from our firm can help you make the right choice.

The four main types of business entities are sole proprietorships, partnerships, limited liability companies, and corporations. Most businesses can be formed using a variation of one of these general types.

Sole Proprietorship

A sole proprietorship is an unincorporated business owned and run by one individual with no distinction between the business and the owner.

The owner is entitled to all profits and is responsible for all the business’ debts, losses, and liabilities. Because the owner and the business are one and the same, the business itself is not taxed separately—the sole proprietorship income is the owner’s income. You do not have to take any formal action to form a sole proprietorship. As long as you are the only owner, this status automatically comes from your business activities. But like all businesses, you need to obtain the necessary licenses and permits. Regulations vary by industry, state and locality. If you choose to operate under a name different than your own personal name, you will most likely have to file a fictitious name (also known as an assumed name, trade name, or DBA name, short for “doing business as”). You must choose an original name; it cannot already be claimed by another business. This is one area where an experienced corporate attorney in West Palm Beach can ensure you stay in compliance with all regulations.

Partnership

A partnership is a single business where two or more people share ownership. 

Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business. Because partnerships entail more than one person in the decision-making process, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (bring in new partners or buy out current partners) and how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one. Our West Palm Beach corporate attorney, Stacey Griffiths, has extensive experience drafting partnership agreements and can help you protect your interests now and in the future.

Types of Partnerships

There are three general types of partnership arrangements:

• General Partnerships assume that profits, liability and management duties are divided equally among partners. If you opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement.
• Limited Partnerships (also known as a partnership with limited liability) are more complex than general partnerships. Limited partnerships allow partners to have limited liability as well as limited input with management decisions. These limits depend on the extent of each partner’s investment percentage. Limited partnerships are attractive to investors of short-term projects.
• Joint Ventures act as general partnership, but for only a limited period of time or for a single project. Partners in a joint venture can be recognized as an ongoing partnership if they continue the venture, but they must file as such.

The way in which a partnership is formed and the way a dispute between partners is resolved could determine the life or death of a business.

Corporations

A corporation (C Corp) is an independent legal entity owned by shareholders. 

This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs. Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees. For businesses in that position, corporations offer the ability to sell ownership shares in the business through stock offerings. “Going public” through an initial public offering (IPO) is a major selling point in attracting investment capital and high-quality employees.

Forming a Corporation

A corporation is formed under the laws of the state in which it is registered. To form a corporation you’ll need to establish your business name and register your legal name with your state government. If you choose to operate your business under a name different than the officially registered name, you’ll most likely have to file a fictitious name (also known as an assumed name, trade name, or DBA name, short for “doing business as”). State laws vary, but generally corporations must include a corporate designation (Corporation, Incorporated, Limited) at the end of the business name.

To register your business as a corporation, you need to file certain documents, typically articles of incorporation, with your state’s Secretary of State office. Some states require corporations to establish directors and issue stock certificates to initial shareholders in the registration process. Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state and locality.

Corporation Taxes

Corporations are required to pay federal, state, and in some cases, local taxes. Most businesses must register with the IRS and state and local revenue agencies, and receive a tax ID number or permit. When you form a corporation, you create a separate tax-paying entity. Regular corporations are called “C corporations” because Subchapter C of Chapter 1 of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders.

Unlike sole proprietors and partnerships, corporations pay income tax on their profits. In some cases, corporations are taxed twice – first, when the company makes a profit, and again when dividends are paid to shareholders on their personal tax returns. Corporations use IRS Form 1120 or 1120-A, U.S. Corporation Income Tax Return to report revenue to the federal government. Shareholders who are also employees pay income tax on their wages. The corporation and the employee each pay one half of the Social Security and Medicare taxes, but this is usually a deductible business expense.

S Corporation

An S corporation (sometimes referred to as an S Corp) is a special type of corporation created through an IRS tax election. 

An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation.

An S Corp is a corporation with the Subchapter S designation from the IRS. To be considered an S Corp, you must first charter a business as a corporation in the state where it is headquartered. According to the IRS, S corporations are “considered by law to be a unique entity, separate and apart from those who own it.” This limits the financial liability for which you (the owner or “shareholder”) are responsible. Nevertheless, liability protection is limited – S Corps do not necessarily shield you from all litigation such as an employee’s tort actions as a result of a workplace incident. What makes the S Corp different from a traditional corporation (C Corp) is that profits and losses can pass through to your personal tax return. Consequently, the business is not taxed itself; only the shareholders are taxed. There is an important caveat, however: any shareholder who works for the company must pay him or herself “reasonable compensation.” Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as “wages.”

Limited Liability Company

A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. 

The “owners” of an LLC are referred to as “members.” Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs. Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would

Forming an LLC

While each state has slight variations to forming an LLC, they all adhere to some general principles:

• Choose a Business Name
  There are 3 rules that your LLC name needs to follow: (1) it must be different from an existing LLC in your state, (2) it must indicate that it’s an LLC (such as “LLC” or Limited Company”) and (3) it must not include words restricted by your state (such as “bank” and “insurance”). Your business name is automatically registered with your state when you register your business, so you do not have to go through a separate process.
• File the Articles of Organization
  The “articles of organization” is a simple document that legitimizes your LLC and includes information like your business name, address, and the names of its members. For most states, you file with the Secretary of State.
• Create an Operating Agreement
  Most states do not require operating agreements. However, an operating agreement is highly recommended for multi-member LLCs because it structures your LLC’s finances and organization, and provides rules and regulations for smooth operation. The operating agreement usually includes percentage of interests, allocation of profits and losses, member’s rights and responsibilities and other provisions.
• Obtain Licenses and Permits
  Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state and locality.

Attorney Spotlight

Attorney

Stacey L Griffiths, Esq.

Founding partner of Griffiths & Smitherman, P.L. concentrating in the area of Business Law, Marketing and Advertising Law, Trademark and Copyright, Entertainment Law, and Business Litigation.

• Business Law Palm Beach
• Trademark & Copyright
• Product Licensing
• Entertainment Law
• Civil & Commercial Litigation

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