When you start a new business, deciding which type of business entity to form represents one of your most important decisions.
The Internal Revenue Service advises that the most common types of business entities consist of the following:
- Sole proprietorship
- Limited liability company
A sole proprietorship is the easiest of all businesses to start. Since you and your business are one, you need to do nothing to set it up. Simply start selling your product or service. The business’s taxes pass through to you, and you compute and pay them by virtue of attaching a Schedule C to your 1040 tax return.
A partnership may be appropriate if others will have ownership of your business. To protect all concerned, you should have a written partnership agreement that clearly sets out each partner’s ownership interest, responsibilities, etc. Taxes pass through to the partners based on their respective ownership shares.
If you wish to limit your personal liability for your business’s debts and other obligations, forming a corporation will accomplish this. A corporation is a legal entity, separate and distinct from its shareholders. Establishing a corporation requires filing written Articles of Incorporation and Bylaws with the Division of Corporations of the Florida Department of State, as well as buying a corporate seal. In addition, you must hold annual shareholder meetings and record the minutes thereof. Your corporation pays its own income taxes, and each shareholder pays taxes on his or her share.
Limited Liability Company
An LLC is a hybrid between a partnership and a corporation, giving you the operational flexibility and income tax pass-throughs of the former and the limited liability of the latter.