In these difficult economic times, many people are thinking about starting a business to help ends meet. In fact, more small businesses are started in the United States during hard economic times than during times of prosperity. This article is not intended to give legal advice, but to provide general information about applicable business regulations.
There are several basic business forms that you can choose from, as well as more complex ones that require consulting with a professional, such as an accountant or lawyer. The basic legal business forms are a sole proprietorship, a partnership, and a corporation. There are many different forms of partnerships and corporations, and you should consider consulting a professional regarding the tax and liability consequences of each form.
If you simply start your business alone without any written documents regarding its form, then state law automatically designates your business as a sole proprietorship (solo). This is believed to be the most common form of home-based business. A sole proprietorship means that you and your business are considered to be the same entity. You can act on the businesses’ behalf for all things, and all the post-tax net profits belong to you. You do not generally need to have any business or corporate formalities like board meetings or reports. You can file a fictitious name registration with the Florida Department of Corporations to apply for authorization to engage in businesses under a different name than your own. Registration does not protect you against duplicate names.
The ‘solo’ form is the simplest and least expensive to start a business with. Generally, your taxes are simpler in this form, although some accountants believe this form has a higher audit risk. If you are starting your business by yourself, then you are not violating any law if you do not incorporate or have any formal documents explaining how your business is run. However, if you are sued, your personal assets are at risk because they are legally merged with your business. You are also personally responsible for any violations of state regulations. You should carefully consider the risk to your assets before entering into this business form.
If you start a business with one or more other people without stating what type of business it is, then state law declares your business a partnership. This does not require any action or documents on your part. Partnership tax treatment can be simpler than some corporations, but it is best to consult a tax professional regarding the specifics of your business. All partners can act on behalf of the company absent an agreement stating otherwise.
The partnership form can simplify your business, but it can also become confusing if there is no agreement regarding how profits or losses are split. State law imposes an equal split, if there are no special circumstances dictating otherwise. If you want to be clear on how profits and debts are treated, it is best to have a written agreement. You should consult an attorney if you expect there will be a significant amount of money or debts involved.
There are many different types of corporations, such as: general corporations, close corporations, limited liability corporations (LLC) and corporations with specialized tax treatment like S corporations. All corporations offer protection from lawsuits or other liability, but they have different levels of corporate formalities and tax treatment. Please consult your tax professional or attorney for information on most corporations.
The Limited Liability Corporation (LLC) is popular because it is considered the simplest corporation to protect against personal liability. It is preferred because of its simplified tax treatment and it requires less formalities than other corporations. Currently, the IRS allows LLC owners a limited time from inception to elect to be treated as a corporation or a partnership. This gives business owners freedom to arrange their tax matters favorably with the IRS.
An LLC does not require a board of directors, board minutes, or meetings. Despite is simplicity, the LLC does have an annual renewal amount that is close to other corporate forms. The LLC also does not require consultation with other parties who could give needed input about business decisions. Businesses in LLC status also risk losing their liability protection if the proper documents are not filed in time. This risk is partly because there are no corporate formalities to support an LLC’s corporate status.
No matter what form the entrepreneur decides on, he or she will benefit from considering which business form best fits his or her business needs.