Protecting a great idea almost often includes incorporating your business idea with the state. Before you incorporate a business, you will need to know which business entity to choose. The general options include: the limited liability company, the partnership, the limited partnership, the C-corporation or the S-corporation. Also, remember that the limited liability company can be taxed as an S-corporation while affording the legal protections that other limited liability companies have. Choosing the right business entity is a tough decision, but knowing the advantages and disadvantages of each entity type can make the choice easier.
First, traditional partnerships generally are disfavored because each partner has unlimited liability with respect to all of the other partner’s actions. Limited partnerships are a better option, but should be used with caution, as there still needs to be a general partner who bears all of the responsibility of the partnership on their shoulders. Limited partners enjoy limited liability, but they do not enjoy any ability to contract partnership actions. If a limited partner tries to manage a limited partnership, then they may be converted into a general partner and therefore lose their “limited liability” protection. These entities are often used in cases where a person is seeking investors for their business and/or where there is some sort of asset protection plan (“family limited partnerships”).
Limited liability companies (“LLC”) and corporations are used more frequently for new entities than partnerships. Deciding between whether to use a limited liability company over a corporation depends on a number of factors. One factor is whether your company will go public (does the business plan include selling shares on the public stock market). If so, then you must use a C-corporation since that is the only entity that allows this action. If you have a small family business, an LLC may be more favorable over the corporation as there are fewer formalities that will have to be followed overall. Choosing a business entity is an important task and depends on the purpose of the business as well as other factors on a case-by-case basis.
Contact the Attorneys of The Noble Law Firm, P.A. to assist you with your business law needs.
If you already have a business, but have realized or suspect that it may not be the best entity choice, its not too late to change your entity structure. This can be done with most entities, but is often seen the greatest with the limited liability company (“LLC”) and/or the corporation.
You may desire to convert your LLC to a corporation for many reasons. One may be that you initially only intended to operate your business as a private company, but now have the opportunity to take your company public. This may have to be done on both the state and federal levels. For instance, your LLC will have to be converted to a corporation with the Secretary of State using certain forms and procedures. And, your limited liability company may also have to change its tax structure (subsequent to the conversion), as only C corporations may be taken public.
If you have a corporation and have realized the benefits of the LLC or the limited liability company envelope, then you may have to do the same (change the entity structure on the state level and then change the taxation structure on the federal level). If you are considering changing your tax structure, it is important to understand that there may be positive and/or negative tax consequences to such change and proper formalities must be followed. Your Certified Public Accountant (“CPA”) will know how to advise you to complete such conversion with minimal negative consequences.
Contact the Attorneys of The Noble Law Firm, P.A. to discuss whether a business entity conversion would be beneficial for your business goals.
If you are interested in starting your own business, a good entity choice for such start-up may be the limited liability company (“LLC”). An LLC provides you with limited liability as to the debts and liabilities of the business. This keeps your personal assets safe from business debts (and vice versa) as well as serves as a much better entity choice than operating a business in your personal name.
If you were interested in receiving the tax benefits of the S corporation, you may still receive such benefits with an LLC. The limited liability company retains the benefits of limited liability, but can be federally taxed as a “subchapter S corporation”. This type of entity choice coupled with S corporation taxation benefits is often referred to as the LLC envelope.
The Limited Liability Company envelope achieves three important objectives:
- Protection of the owner’s interests in the company from their personal liabilities;
- Protection of the owner’s personal assets from the liabilities of the company; and
- Lower federal employment tax rates.
Further, incorporating an LLC taxed as a subchapter S corporation has asset protection benefits since the law in Florida limits a creditor’s remedy to a “charging order” [Florida Statute 608.433(4)]. In other words, the creditor may only receive distributions that the LLC owner would be entitled to in lieu of a foreclosure of the business. The owner may withhold such distributions, in certain cases, until the creditor threat has passed. This makes the LLC a great choice for asset protection.
Limited liability companies taxed as an S corporation allows the LLC to bypass double taxation (taxation to both the shareholders and the company). Second, your taxation rate may be reduced by as much as fifteen percent. However, it is important to have a knowledgeable Certified Public Accountant (“CPA”) assist you with minimizing your tax liability. The CPA will know the best way to maximize the tax benefits of the LLC envelope and reflect such tax benefit on your tax returns.
Contact the Attorneys of The Noble Law Firm, P.A. to discuss whether the LLC envelope is the good option for your business.