Starting a business – the types of business entities, which type is best?

Interested in starting a legal business entity in Florida? Exciting opportunities lie ahead — but first, you need to create a strong foundation by selecting the right structure for your business.

A variety of options are available. Each approach comes with a unique set of opportunities and challenges that must be considered long before embarking on this process. Also important? Setting clear business objectives so you can determine how various types of entities will play into these goals.

The better you understand the relationship between entity selection and business success, the more likely you are to make the right decision for your future. Struggling to keep the various types of business entities straight? To help, we’ve compiled a guide that clarifies these main structures:

1. Sole Proprietorship
2. Partnership
3. Limited Liability Company (LLC)
4. C. Corporation
5. S. Corporation

Keep reading to learn what these types of business entities are, how they differ, and how various structures might help or hinder your business moving forward.

1. Sole Proprietorship

At the outset, the sole proprietorship approach seems simple and straightforward. It’s certainly among the easiest approaches in the early stages of business formation, as there is no need to deal with mountains of paperwork. Take a closer look, however, and this approach may seem less advantageous. Unfortunately, it leaves you vulnerable to a great deal of personal risk.

Under the sole proprietorship model, no legal separation exists between the business and the person. In other words: the assets owned by the professional and the assets owned by the business remain one and the same. This means that no personal protection exists in the event of a lawsuit. Many sole proprietors expose themselves to a range of risks when conducting everyday business, there is no such thing as too much protection.

Another consideration for sole proprietors: early paperwork might not be extensive, but more may be required than initially anticipated. For example, fictitious names must be registered prior to doing business as a sole proprietor. Sole proprietors must register “Doing Business As” or DBA with the Division of Corporations. This process is relatively easy to complete.

2. Partnership

Generally speaking, a partnership exists when two or more people co-own a business. These partners share not only the responsibilities of running the business, but also, all ensuing profits and losses. At the outset, each partner must contribute in some way to the business, be it through financial support or labor.

As with sole proprietorships, partnerships are typically easy to establish. There is some inherent complexity simply by nature of the partnership involving more than one person. At times, partners may disagree about key aspects of running their business. These potential conflicts must be addressed early on to protect both partners while preventing disputes from getting in the way of business success.

The process of launching a partnership will vary considerably based on who is involved and how much protection these parties desire.
Florida provides the opportunity to form several types of partnerships. These include:

● General partnership. As the most basic form of partnership, this is as close as it gets to creating a sole proprietorship — but with more than one person. Under a general partnership, the owners of the unincorporated business choose to share assets, profits, and liabilities. However, both parties are also responsible for the actions of one another. This can leave partners vulnerable to lawsuits or debts, even when they don’t think they are to blame for these issues.

● Limited partnership. Aspiring partners who worry about their personal liability may prefer to form limited partnerships. Under this approach, limited partners can only be deemed liable according to the specific amounts they have invested. Meanwhile, general partners hold the bulk of the authority when managing the business.

● Florida limited liability partnership. Business partners who prefer to set clear limits on their liability tend to opt for Florida LLPs. This is a popular solution for local accountants, lawyers, and physicians who run their own medical practices. These professionals appreciate that, under the LLP approach, they cannot be held personally liable based on the behavior of their partner.

● Limited liability limited partnership. Many aspiring entrepreneurs are unfamiliar with the LLLP, which is one of the newest business entities available. This hybrid structure holds much in common with the limited partnership referenced above.

Where it differs, however, is in the applicability of its liability protection; under the LLLP approach, both general and limited partners enjoy protection from personal liability, should legal action be taken against the partnership.

As indicated above, avoidance of personal liability is possible but not guaranteed under a partnership approach. Prospective entrepreneurs who are especially concerned about liability may be better off with one of the business structures mentioned below: limited liability company, C corporation, or S corporation.

3. Limited Liability Company (LLC)

An excellent option for small or midsize businesses seeking a modest level of liability protection, the LLC combines the security of a corporate structure with the flexibility of the entities outlined above. While an LLC requires quite a bit more paperwork than a sole proprietorship, the initial formation process is nowhere near as lengthy as that associated with a C. corporation or S. corporation. As such, many business owners believe that the LLC provides the best of both worlds.

As with a sole proprietorship or partnership, there is no need for an LLC to conduct regular stockholder meetings or deal with other formalities. The entity’s status as legally separate from its members ensures that, in the event of a lawsuit or bankruptcy, the members’ personal assets will remain protected. Still, members are permitted to determine how profits and losses will be shared. This need not correlate to ownership percentage.

4. C. Corporation

Delivering unlimited growth potential, the C. corporation is the most common type of corporation in the U.S., to the point that it currently serves as the default solution. This entity is most notable for its taxation approach, with the business taxed separately from its owners. This structure’s name derives from its taxation under Subchapter C. Because dozens — even hundreds — of shareholders can be involved, the C. corporation is the best option for any business that intends to scale up quickly.
The greatest downside to starting a C. corporation? It’s expensive and time-consuming. C. corporations must abide by an extensive and increasingly complicated range of regulations at the federal, state, and local level. Double taxation is also a problem, as taxes are assessed at both a personal level and on a corporate basis.

5. S. Corporation

Technically speaking, an S. corporation is not a type of entity; it constitutes a tax classification. Still, it’s important to understand how S. corporations work, as these can sometimes confer huge benefits on their owners.
Like the C. corporation, this structure is named for the subchapter under which businesses are taxed.

This solution can provide the best of both worlds for those caught between the possibility of launching a partnership or corporation. The S. corporation produces the general benefits of incorporation, along with the tax-exempt opportunities associated with partnership.

Both C. and S. corporations serve as separate legal entities from their owners, thereby granting an important element of liability protection. During the formation process, both types of corporations must file official articles of incorporation via the Florida Department of State.

C. and S. corporations are mostly distinguished based on their respective sizes. While C. corporations are often quite large, S. corporations are inherently limited; they cannot possess more than 100 shareholders. As such, S. corporations are typically favored by small business owners who have no intention of scaling up considerably.

Choosing the Right Business Structure

From formation requirements to liability exposure, a wide array of factors play into legal business entity selection. At the outset, all this can feel overwhelming. Regardless of which approach you ultimately select, guidance will be key to ensuring that your chosen entity allows you to meet your specific business objectives. This is easier to determine under the assistance of a professional who has a strong background in business formation.