Business Structures in Florida
Romy B. Jurado, Esq. ?
Attorney at Jurado & Associates, P.A., a Business, Immigration, Real Estate, Probate & Litigation Law Firm.
One of the most important decisions you will ever make as a business owner is choosing the right structure for your enterprise. A business structure is more than a formality: it has implications on matters ranging from administrative and managerial organization, to taxation and liability protection. The following business structures can be formed in the State of Florida:
- Sole proprietorships
- General partnerships
- Limited liability partnerships
- Limited partnerships
- Limited liability limited partnerships
- Limited liability companies
- Family limited partnerships
- Subchapter C corporations
- Subchapter S corporations
- Professional service corporations / professional liability companies
Each business structure has its distinct characteristics and advantages depending on the nature of the enterprise and the goals of its owners. Depending on what you have in mind for your business, you must think very carefully about which structure best suits your goals – and work with a qualified business attorney who knows all the business structures available in Florida.
A sole proprietorship is an enterprise owned by one individual. Any type of business can be a sole proprietorship, and it is by far the simplest business structure: with the possible exception of local business tax receipts, there is no additional paperwork, such as an agreement or filing documents, needed to create or operate a sole proprietorship. If the sole proprietor chooses a fictitious name for their business, they merely register with the state of Florida and proceed to conduct business under that name.
However, a sole proprietorship’s simplicity is a double-edged sword: since the individual who owns the business is legally indistinguishable from the business itself, any debts or liabilities associated with their enterprise can become entangled with their personal assets. In other words, the sole proprietor is without protection from a lawsuit or lien related to their business activity, and could find their non-business real property targeted to fulfill a judgment.
When at least two individuals or entities come together to own and operate a for-profit business, in effect they form a general partnership. Although this arrangement can be formally established through a written partnership agreement, any association of two or more persons for the purpose of running a commercial enterprise is recognized as a general partnership. In the absence of a written partnership agreement, Florida’s partnership laws set forth the default guidelines, procedures, duties, and other aspects governing general partnerships.
Unlike a sole proprietorship, an enterprise that is operated as a general partnership is a distinct legal entity from the partners that own it. Each partner has a share of the business’s profits and losses, has a right to receive distributions, and can transfer their respective interest. Partners have a fiduciary duty to look after the interests of the partnership and their fellow partners, and are individually and jointly liable for all obligations related to the partnership.
A major benefit of general partnerships is their “pass-through” status for income tax – the enterprise’s profits and losses are reported on the individual federal tax returns of the partners, thereby allowing them to avoid double taxation.
Nevertheless, the lack of liability protection, and the existence of other pass-through structures that offer limits to personal liability, means general partnerships are less common and popular than they once were.
Limited Liability Partnership
A limited liability partnership (LLP), also known as a registered limited liability partnership (RLLP), is similar to a general partnership except for one major distinction: no partner is personally liable for the actions and debts of the LLP / RLLP. A limited liability partnership essentially rectifies the aforementioned lack of liability protection of a general partnership.
An existing general partnership can elect to become an LLP by filing a statement of qualification with the Florida Department of State. This document provides basic information about the partnership and its registered agent, such as their name and mailing address, and states that all conditions for LLP status have been satisfied – including the name of the business now ending with LLP, RLLP, or some variation thereof.
Limited Partnership
Unlike a general partnership, which can be recognized without filing a document or creating a partnership agreement, a limited partnership is formed only upon the filing of a certificate of limited partnership with the Florida Department of State.
In a limited partnership, a general partner has the same rights and liabilities as in a general partnership, except that they are also accorded limited liability up to a certain limit based on their capital contribution. A person can be both a general and limited partner in a limited partnership. Many limited partnerships are run by two or more general partners, in addition to limited partners who provide capital but do not serve a managerial role.
A limited partner may assign their partnership interest in the limited partnership – including their share of profits and losses, distributions, and allocations of income – but the person being assigned this interest cannot become a partner.
Limited partnerships have become increasingly popular in recent years because they retain the tax benefits of a general partnership while also providing liability protection to limited partners. They are especially beneficial for those who have no interest in managing the business but still want to contribute capital by being limited partners.
Like a limited liability partnership, the certificate of filing must include the name and mailing address of the entity, the names and addresses of each partner, and the name and address of the registered agent. Unless otherwise specified, the effective date of the limited partnership is at the time of filing, although you can choose an effective date within 90 days of filing.
Limited Liability Partnership
One of the newest entities available in Florida, the limited liability limited partnership (LLLP) modifies the limited partnership by granting general partners limited liability for debts and obligations that occur during the period in which they elect to be an LLLP. This election can be made in the certificate of limited partnership, and thereafter any liability incurred is limited only to the amount of the general partner’s capital contribution (in addition to any obligations stated in the partnership agreement).
Thus a general partner’s creditor can obtain a charging lien – i.e., a right to receive income and distribution – only in regards to said partner’s partnership interest rather than their full rights and obligations in the partnership. An LLLP provides is an increasingly popular choice for providing asset protection whenever the partnership’s assets are exposed to a lawsuit.
It is important to note that not all states recognize or allow the formation of an LLLP, so take this into consideration when conducting business elsewhere in the country.
Family Limited Partnership
The family limited partnership (FLP) is equivalent in most respects to a limited partnership, but offers additional benefits for enterprises or ventures that are family-oriented. In an FLP, the older generation of partners can transfer their income or partnership interest to the younger generation of partners (such as from parents to children) based on the values and terms set forth in the partnership agreement. Moreover, transferring limited partnership interests to relatives minimizes the amount of taxable assets for the senior partner’s estate, making the FLP a useful means of providing for your loved ones while avoiding some taxation.
A limited liability company (LLC) is one of the most popular business structures in Florida, since it is a hybrid entity that combines the benefits of a partnership (pass-through taxation) with those of a corporation (liability protection). Another benefit is its versatility: an LLC can be used by an individual for a small business, or by multiple owners for a large business. In either case, an LLC must either be member-managed (managed by the owners) or manager-managed (in which one or more managers is selected by the owners).
To form an LLC, the owners need only to file articles of organization with the Florida Department of State. Although an operating agreement is not required, the absence of one means that the LLC’s guidelines and operations – including the rights and duties of its members – will default to Florida Statutes. Therefore, it is advisable to form an operating agreement that better suits the goals and desires of the members.
Individuals considering an LLC for asset protection should know that a single-member LLC may be less effective for this purpose than a multiple-member LLC. The Florida Supreme Court’s ruling in Olmstead v. Federal Trade Commission (2010) left the assets of single-member LLCs open to outstanding judgments. Moreover, the adoption of the Florida Revised Limited Liability Company Act in 2013 (F.S. 605.0503) limited creditors to a charging order as their only remedy against the member of a multi-member LLC.
A corporation is formed when one or more persons (or their registered agent) files articles of incorporation with the Florida Department of State. Like an LLC or general partnership, a corporation is a distinct legal entity from the individuals who own and operate it. The rules and guidelines governing a corporation and its members are set forth in its bylaws (which serve the equivalent function of an LLC operating agreement or partnership agreement).
Corporations are owned by stockholders (also known shareholders), who transfer capital or other property into the corporation in exchange for a proportionate value of stock. Stockholders are responsible for electing directors, who in turn appoint officers.
Corporations are divided into two categories: subchapter C and subchapter S (or C corporations and S corporations, respectively), which are named after provisions in the U.S. Internal Revenue Code. Under both state and federal law, the rules and regulations applying to both types of corporations are similar, especially with regards to offering limited liability to stockholders (up to the value of the stock they own).
The major distinction between both types of corporations is that C corporations are subject to corporate income tax on all net profits, with any dividends being subject to a separate income tax, whereas S corporations have elected to be taxed as “flow through” entities, thereby avoiding double taxation.
However, companies that elect to be S corporations face several constraints: they must be domestic entities, have no more than 100 stockholders, offer only one type of stock, and be limited in what sorts of entities may own shares in the company.
Professional Service Corporation / Professional Limited Liability Company
Professional service corporations and professional limited liability companies are similar to corporations and limited liability companies, respectively, except that they can only be formed, operated, and owned by members of specific professions, such as those listed in F.S. 621.03. These include, but are not limited to, certified public accountants, attorneys at law, physicians, and veterinarians.
These business structures must be formed for the sole purpose of rendering a professional service, and can only be owned and operated by individuals or entities of the same profession. Professionals must be sure that the rules of their profession allow them to practice as part of a professional service corporation or professional LLC.
When deciding on which business structure to form, it is advisable to consult with a Florida business attorney with experience in this specialized area. Please contact me at 305-921-0440, or email me at [email protected].