Things to Consider When Choosing Your Small Business Structure

When you start your company, you need to consider your business structure. Since we are referring to small businesses we will consider the four basic types: sole proprietor, partnership, LLC and S Corp.

Let’s first look at sole proprietorship since it is usually the way people start earning money from an idea. First of all, a sole proprietor is one person who owns a business and that business is not separate from the owner. For this reason this type of business does not transfer ownership and no longer exists when the owner dies. If you decide to start this type of business you will need to file a Fictitious Name Registration with the state of Florida for $50 and renew every 5 years for a $50 fee. As far as taxes are concerned, you will pay SE Tax quarterly and report your income on your 1040. If you have a successful business you could pay a large tax bill. When it comes to liability you are responsible for all the business debts and your personal assets could be at risk. Finally, there is no stock and it could be difficult to get a loan for your business.

Next we have a partnership. It could be a general partnership (GP), a limited partnership (LP), a limited liability partnership (LLP), or a limited liability limited partnership (LLLP). As the name implies these businesses have two or more owners. This type of business has a short life and must dissolve or reform if an owner joins or leaves. Because there is more than one owner it is advisable to have a written agreement similar to a prenup that outlines the duties and responsibilities of each owner. The business will need to file a Partnership Registration Statement and pay a fee depending on the type of partnership. This fee ranges from $50 to $1000. It will need to be renewed every year for $25 to $411.25. Taxes for a partnership are similar to a sole proprietor. Each owner will pay SE Tax quarterly and file a 1065. Liability depends on the type of partnership you choose. This business structure does not have any stock and it could be difficult to raise money outside of the partnership.

LLCs are limited liability companies. This structure can have one or more members and has a limited life similar to a partnership. This type of business can be transferred if it is outlined in the operating agreement. To start a LLC you must file Articles of Organization for a Florida Limited Liability Company, pay $125 then renew annually for $138.75. Each owner will pay quarterly SE Tax either on a 1040 for a single member or 1065 for multi-member. Because the company has limited liability the owners are not personally responsible for the company’s debts or liabilities. LLCs do not have stock but they can add owners to raise capital.

The last small business structure is an S Corp. This business structure is a separate entity that can have between one and one hundred owners. They are called shareholders and must be US citizens or residents. This type of business has unlimited life since it is a separate entity. To start an S Corp you must file Articles of Incorporation for Florida Profit Corporations and pay $70 then renew annually for $150. People are drawn to this type of business because the owner receives a paycheck and dividends and the business can be passed down or sold. The S Corp will prepare an 1120S and each owner a 1065. Owners of the business will not be personally responsible for debts or liabilities. S Corps have stock and because they are a separate entity they can enter into their own contracts. S Corps also have annual meetings and corporate minute filings.

You should take your time and weigh all of your options. What type of business will you run? What are the risks and liabilities involved in that type of business? What will your tax burden be? Do you wish to pass this business on when you retire? Many people also consult a lawyer and/or accountant when making this decision. If you are ready to start your business, give me a call. I have special pricing for newly established businesses.