Florida is a business-friendly state. Forming the entity is quick and inexpensive, state income taxation is minor and our bankruptcy laws are debtor friendly. When you combine these benefits with the inexpensive “right to work” labor market, great weather and stable population, Florida is a good place for business.
This article will discuss the business structures available in Florida, including sole proprietorship; general partnership; limited liability company; limited liability partnership; professional service corporation (PA); limited liability limited partnership; C corporation; and S corporation.
In some instances, single-owner entities may be “disregarded” for income tax purposes, but treated as separate legal entities. This provides some liability protection for the owner. The Olmstead case imposed additional challenges for single-owner businesses that now require additional planning.
New tax legislation will apply to business structures in Florida and other states. The Affordable Care Act provides that beginning in 2013, Schedule K-1 earnings from investment entities (except personal service corporations) for taxpayers with AGI in excess of $250,000 (married filing jointly) or $200,000 (single) will be subject to Medicare tax of 3.8 percent.
Sole Proprietorship
A sole proprietorship is not a separate taxable entity. The earnings are reported on Schedule C of the Form 1040, and the net earnings are subject to self-employment tax. A sole proprietorship provides no liability protection for its owner.
General Partnership (GP)
The general partnership is not subject to income taxation. The general partnership files an information tax return (Form 1065) with the IRS, and each partner reports his or her respective share of partnership ordinary income, capital gains, non-taxable income, etc., according to the Schedule K-1 received from the partnership. The individual or entity partner reports this share of income whether or not the partner received any actual distribution of cash.
Partnerships may dictate special allocation arrangements to support capital, risk and ownership differences if the economic substance of the arrangement aligns with the terms of the partnership agreement. However, individual general partners are subject to the self-employment tax on net income.
The general partnership requires at least two general partners. The general partnership is not a good choice from an asset-protection perspective, and isn’t the entity of choice under most circumstances because of the shared negligence and contract liability partners must bear. A negligent partner is personally liable for his or her own negligence (an unintentional tort) and for intentional torts. The entity, the general partnership, also is liable for the partner’s negligence and intentional torts under the doctrine of respondeat superior. A non-negligent partner is personally liable for the negligent partner’s negligence and intentional torts. All general partners are personally liable for partnership contracts.
Limited Liability Partnership (LLP)
The LLP is not a taxpaying entity. The LLP that elects to be taxed as a partnership is treated like a general partnership with limited liability for the partners.
A limited liability partnership requires two or more partners who each are liable. The negligent partner is personally liable for his or her negligence and intentional torts. The LLP entity also is liable for the partners’ negligence and intentional torts under the doctrine of respondeat superior. The non-negligent partner who did not review or supervise the negligent partner is not personally liable for the negligent partner’s negligence or intentional torts. Partners are not personally liable for the LLP’s contracts.
Limited Liability Limited Partnership (LLLP)
The Florida LLLP requires at least one general partner and one limited partner. The limited partners may participate in management and retain their limited-liability protection. In addition, the general partner is limited as to liability.
These entities are afforded the best creditor protection in Florida when coupled with the same income-tax treatment as general partnerships.
Source: Florida Institute of CPAs
