Tim Gillis, Attorney at Law of Jacksonville law firm GILLIS WAY & CAMPBELL was recently interviewed for his knowledge and experience on forming a new business in Florida. Gain insight into forming a new business from the legal standpoint in this interview.
Q: What are two fundamental issues that a new business owner needs to consider?
Gillis: When forming a new business, the new business owner has to consider two fundamental issues. They are:
- The type of legal entity they are going to form to operate the business.
- What type of tax structure they want the entity to have.
Q: What are the basic structures available for a business startup?
Gillis: The basic legal structures available for a business start up are:
- No structure whatsoever — a sole proprietorship. This is just an individual starting a business on their own in their individual name.
- Common-law Partnership. This is where two or more people join together to operate a business for profit.
- Corporation. This is a more formal type of entity and includes Limited Liability Companies, which are much more popular now.
Q: How do changes in my business affect my choice of business entity decisions?
Gillis: Changes in your business, such as growth, will affect your decision as to what type of entity you choose. Typically it is not uncommon for someone to form a new business as a sole proprietorship or as a single liability company that is taxed as a sole partnership or disregarded entity. Eventually they may either want to bring in a partner or investors, and they do not necessarily want to be stuck with the common-law partnership. There are good reasons to avoid that. Similarly, an investor is not going to want to be a common-law partner with you because they are not going to want exposure to the liabilities of the company. You will want to change your type of entity into something a little bit more complex and structured to take into account the new business structure.
Q: How does the type of entity generally affect tax matters?
Gillis: The type of entity that you use in forming your business generally affects your tax matters. If you have a sole proprietorship, then you do not have to worry about a separate tax return. Everything will be reported on your individual Schedule C to your personal income tax return. You will have to pay self-employment tax on all the income of the entity.
If you have a Partnership, then the entity will file a tax return but not actually pay tax. The partners themselves will pay the tax based on the income of the partnership. This is similar to a limited liability company which typically operates in this same manner.
If you form a Corporation, then you will have to worry about the dreaded double taxation, where the corporation pays tax on its income, and then when it distributes profits to the shareholders, they pay tax again. There are now ways to structure around that. The corporate entity most people file, an S Election, operating as an S Corporation, is available to small businesses and it avoids that second level of corporate tax in almost all instances.
Q: How does my choice of entity affect my business in general?
Gillis: Generally your choice of entity is going to affect your business in several ways. The most common factor that people consider is liability. If you do not have an entity and you have a sole proprietorship, you are going to be personally liable for all the obligations and liabilities of the business.
Similarly, if you have a general partnership, you and your partners are going to be completely liable for all the liabilities and obligations of the partnership. In order to protect your assets, you will want to look to either a corporation or a limited liability company.
Each of those types of entities will also affect how the entity is governed and each owner’s respective rights with respect to the entity.
If you have additional questions about forming a new business in Florida or would like to schedule a consultation with Tim Gillis, Attorney at Law, please contact us online or by phone at (904) 647-6476.