When you have a great idea for a business, it can be tempting to dive right in—strike while the iron is hot. Experienced entrepreneurs, though, know that careful planning is half the battle. If you’re working with a partner, part of that planning process is choosing the right entity structure and getting the precise business relationship between the parties nailed down on paper. There are various pros and cons to different structures to be aware of and the chosen approach can have an impact on your Florida business planning and can even cause estate planning complications in Florida. Thus, it is important to understand the various business entity options for partners in Florida.
Florida offers numerous entity models for business owners to choose from. They range from the simple-as-it-gets sole proprietorship to highly complex C corporations. No business model is right for every business, so a lot will depend on your business plan, whether you’re working with partners, and how you expect your business to progress in the future. An experienced Florida business and estate planning attorney can provide more information on the models available for Florida business partners and help you choose the ideal business entity option in Florida.
These are various business entity options for partners in Florida:
Sole Proprietorships in Florida
A sole proprietorship is one person doing business in his or her own name (or under a trade name). By definition, a sole proprietorship has only one owner, so, for two or more people planning to enter into a business partnership, a sole proprietorship is not an option.
General Partnerships in Florida
General partnerships are the oldest form of business association and basically amount to two or more people working together on a common business venture in Florida or elsewhere. It’s the equivalent of a sole proprietorship, but with more than one person involved.
The big advantage of general partnerships is that they are simple. A partnership doesn’t pay income taxes on its own—instead, business profits are the responsibility of the owners and are taxed on their individual returns. Management is also straight-forward. By default, each partner is assumed to have an equal say in the partnership’s management and to have authority to enter into transactions on behalf of the business. The downside of partnerships is that, like sole proprietorships, they don’t come with any liability protection.
In a traditional general partnership, each partner is personally responsible for all debts or liability incurred by the business—or by other partners when acting on behalf of the business. So, if your partner injures someone in an accident while working for the partnership, your personal assets could potentially be at risk to cover the damages.
Registering with the State of Florida is effectively optional for general partnerships. Partners can, but don’t necessarily have to, file a Partnership Registration Statement creating a public record of the partnership’s existence. In some cases, partnerships can be presumed by law even if owners didn’t actually plan to enter into a partnership.
General partners can also choose to file Statements of Authority, which put the public on notice of areas in which a partner is empowered to act for the business. Statements of Authority can help protect other partners from liability—if liability arises from another partners action in an area in which the other partner did not have authority—but they are not airtight.
For anyone entering into a partnership, a partnership agreement should be considered a necessity. Partnership agreements outline the precise business relationship between the partners, each partner’s financial stake in profits and losses, and the details as to how the business venture will be managed. Florida law assumes all partners have equal financial and management interests, so if you want any terms other than those, you need a partnership agreement.
General partnerships have a hard time raising money from outside investors because, for an investor to receive a stake in the business, the investor must become a general partner. But, of course, investors are often reluctant to take on the risk of becoming liable for the partnership’s debts and might not want to have anything to do with the business’s management. If you find yourself facing that dilemma, the LLP structure might be what you need.
Limited Liability Partnerships (LLP) in Florida
Limited liability partnerships (or just “limited partnership” or “LLP”) are similar to general partnerships in Florida but give business owners the option of having two classes of partners. “General partners” are essentially the same as partners in a general partnership. In matters relating to the business, general partners have the power to act for the partnership and are responsible for business debts and liability on the same terms.
“Limited partners,” on the other hand, are more hands off. They’re usually not involved in managing the business and don’t have presumed authority to bind the partnership with regard to third parties. And (perhaps most importantly) limited partners do not have any personal liability for business debts or other obligations—unless they voluntarily agree to guaranty a debt or are personally liable for some reason other than their status as a limited partner.
Limited partners are sometimes called “silent partners,” and they are often outside investors with no operational role in the business but with a financial stake in its performance. A limited partner has the right to share in an LLP’s profits but doesn’t have to worry about losses or liability beyond the amount he or she actually invested in the business. Because of the different partnership classes, partnership agreements are even more important for LLPs than for general partnerships.
LLPs are taxed like ordinary partnerships or sole proprietorships, with profits and losses passing through to general and limited partners’ returns in accordance with their respective stakes. In Florida, LLPs are required to register with the Department of State by filing a Statement of Qualification for Limited Liability Partnership, and they must provide annual reports thereafter.
The LLP model can be useful for small businesses that want to keep things simple but still have the option of raising capital from an investor with no management rights. However, LLPs have been declining in popularity in recent years in favor of a relatively newer business model that offers many of the benefits of an LLP, but with enhanced liability protection: the LLC.
Limited Liability Companies (LLC) in Florida
The limited liability company (“LLC”) model was designed as a hybrid between partnerships and corporations thus is often the most attractive of the business entity options for partners in Florida. The general idea is that you maintain most of the simplicity of a partnership, but with the liability protection that comes with the corporate model. LLCs are also very popular among small business owners because they offer more flexibility and adaptability than most other models. Unlike partnerships, LLCs don’t have to have multiple owners. In fact, single-member LLCs are fairly common among small business owners who want greater liability protection than with a sole proprietorship.
An LLC’s owners are referred to as “members,” and business owners’ stakes in a company are called “membership interests.”
In addition to business operations, Florida LLCs can be useful for estate planning and asset protection in Florida and elsewhere. , LLCs are assumed by default to be managed by their members in accordance with each member’s membership interest. However, Florida LLCs used for businesses can choose to allocate management rights differently among members. Or, alternatively, an LLC can opt to be “manager-managed,” in which case the company is managed by a manager or board of managers appointed by the members.
For taxation purposes, LLCs are assumed to be “pass-through entities,” which means profits are taxed on members’ individual returns like with a partnership. But an LLC’s members can also choose to be taxed like an S Corp or a C Corp by making an election with the IRS.
LLCs are formed by filing Articles of Organization with the Florida Department of State. Each year after it is formed, a Florida LLC must pay a fee of $138.75 and file an annual report, which can be completed online. LLC Operating agreements in Florida, which do not have to be filed publicly, define the rights, responsibilities, and obligations of members; describe the relationships between and among the members and the company; and lay out protocols for management of the company—among many other things. Florida LLCs are not technically required to have operating agreements. However, proceeding without an operating agreement is risky and significantly increases the likelihood of disputes between members.
One of the up-sides of the LLC model is that it is relatively simple to add new members—which generally makes raising capital through outside investors easier for LLCs than for partnerships. Due to the flexibility allowed in operating agreements, a new member can be admitted in exchange for a capital contribution without affecting the existing management. Or, a new member can buy in and immediately have voting rights proportional to other partners. Either way, the new member won’t need to worry about liability beyond the amount invested into the company.
Corporations (S Corp and C Corp) in Florida
Of the various business entity options for partners in Florida, incorporation is the model favored by most large businesses because it offers limited liability to owners, like an LLC, along with the fund-raising advantages that come with the right to issue corporate shares. The corporate model is also the most complicated and expensive entity administratively, so it’s not usually a good fit for newly formed small businesses.
A corporation’s owners (called “shareholders”) are issued shares in the business as consideration of their contributions of capital, labor, or other assets. For almost all purposes, a corporation exists as its own independent legal entity. They are managed by directors and appointed officers, who can be shareholders don’t have to be.
The two basic types of corporations in Florida are C Corporations (“C Corp”) and S Corporations (“S Corp”). The C Corporation is the traditional corporate structure and is the default form unless a business elects to be an S Corp. In the vast majority of cases, it doesn’t make sense for new small businesses to start out as C Corps. It may, though, end up being a good idea to convert to a C Corp later—particularly if the business has seen strong growth and is looking to raise significant cash by issuing shares.
S Corps are corporations that can, like LLCs, pass through profits and losses to their shareholders’ returns. In Florida, this means S Corps don’t have any state income tax liability because Florida has no individual state income tax. C Corps, though, have to file their own corporate tax returns and are potentially subject to state-level business income tax not owed by other Florida business models. The C Corp model can also lead to what is called “double taxation,” where business profits are taxed first on the entity’s return and then again when profits are distributed to shareholders as dividends.
Florida corporations are formed by filing Articles of Incorporation. Alternatively, a would-be corporation can opt to organize under the laws of another state and then apply for authorization to transact business in Florida as a foreign corporation. Corporations are generally required to publicly file more information about their ownership and management than other entities, and they have more onerous annual reporting and filing requirements than other entities.
Owners of a corporation set forth the duties, rights, responsibilities, and general relationship between shareholders within corporate bylaws and/or a shareholder agreement. Shareholder agreements are similar to an LLC’s Articles of Organization and are essential to any business that wants to maintain consistent management and place restrictions or limitations on shareholders’ right to transfer ownership interests.
So, the key to understanding and choosing among business entity options for partners in Florida is about understanding the goals of the business and how the intended objectives, including the size and scope of the business and the relationship of the partners will be memorialized in writing.
Steve Gibbs, Esq.