John Randall Shores, CPA, PA
Certified Public Accountant
Pensacola, Florida
850-444-9979

CHOICE OF ENTITY

This section will provide a brief overview of the type of entities that businesses normally use. The choice of business entity should be made only after consulting with your CPA since the choice of entity has a direct impact on how the entity is taxed. The following facts are for information purposes only. You should not base a decision based solely on the information below. The type of entity for a specific business will depend on the specific facts relating to that particular business. This information is intended only to educate the business owner on the general characterics of specific forms of business organization.

The following are only the most common business entities that are used by new businesses.

1.) SOLE PROPRIETORSHIP - Just as it sounds, a sole proprietorship is a business that is owned by one individual (this can be a husband
     and wife). A sole proprietorship is the simplest of all business entities. Reporting of income and expenses is made on Schedule C of
     the taxpayer's personal Form 1040. Unincorporated Farms are reported on Schedule F of Form 1040.

     Net income exceeding $400.00 is subject to Self Employment Tax (both parts of FICA and Medicare). Self employment taxes are
     calculated on Schedule SE of the taxpayer's Form 1040.

     A sole proprietorship has no legal existence apart from its owner. Unlike corporations and partnerships, a sole proprietorship is not subject
     to any separate set of laws. General business and tax laws apply, including those governing contracts and torts. Occupational or other
     business licenses may be required depending on local and state laws.

2.) PARTNERSHIPS - Partnerships like sole proprietorships are unincorporated businesses. Partnerships are divided into two broad
     categories, general partnerships and limited partnerships:

     a.) General Partnerships - Aside from the sole proprietorship, the general partnership is the easiest business entity to form.
          There are no legal requirments aside from the agreement of two or more people or entities to operate a business for profit.
          Each general partner is entitled to manage the enterprise and is jointly and severally liable for the debts and obligations of the 
          partnership. 

          While there is no rquirement that the partners exectute a written partnership agreement it is strongly recommended. There is
          no requirement for registering with a state agency. There are no other formalities required other than local business licenses. This
          makes the general partnership the simplest type of business entity where there is more than one owner.

          A general partnership is a disregarded entity for purposes of federal income tax.  Profits and losses flow through to the partners. The
          partnership files an information return (Form 1065 and the related Schedule K-1s) with the Service (IRS). Each partner's distributive
          share of income, losses, dividends, capital gains, etc. are passed through to each partner (as shown on Schedule K-1),
          generally, based on their percentage ownership of the general partnership.

     b.) Limited Partnerships - A limited partnership is comprised of one or more "general" partners and one or more "limited" partners.  The
          general partner or partners are responsible for managing the partnership and, like partners in a general partnership, are
          jointly and severally liable for all partnership debts and obligations. The general partner or partners need not be a natural person (i.e. a
          corporation, may serve as a general partner).

          Limited partners are typically passive investors who are not involved in management of the partnership and who, as a result, are
          generally, not personally liable for the debts and obligations of the partnership beyond their capital contributions. Limited partners can 
          potentially have personal liability if the limited partner is involved in the managment of the partnership.

          Every state has a body of law governing limited partnerships. While these laws may varry by state the Federal Uniform Limited
          Partnership Act is the model that many states use as a model for state laws governing limited partnerships.

          Like general partnerships, a limited partnership files an information return (Form 1065) with the Service (IRS). Income and losses pass
          through to the partners based on their ownership percentage in the partnership.

          The above discussion of partnerships is a brief overview and not intended to be a comprehensive coverage of partnerships.
          State filing requirements for limited partnerships vary by state.  In Florida limited partnerships are required to file Florida Form F-1065 if
          the general partner is a corporation. Professional legal and CPA counsel should be sought if you are considering organizing a limited
          partnership.

3.) Corporations - A corporation is a separate legal entity with a life beyond that of it's owners. Creating a corporation requires compliance
     with the corporate laws of the state of organization. In Florida, corporate organizations are handled by the Florida Secretary of State,
     Division of Corporations. You should alway seek professional assistance when organizing a corporation. The Florida Secretary of State's
     website at www.sunbiz.org provides a good place to start researching Florida law. While there are a variety of types of corporations, The
     following is a  brief description of three types that are commonly used.

     a.) Limited Liability Company - Limited liability companies have been a popular form of business organization in Europe and other
          countries for decades.  In the United States the first state to recognize limited liability companies was Wyoming, which allowed them
          beginning in 1977.  Florida followed suit in 1982. It was not until the IRS agreed, in a 1988 Revenue Ruling (Rev Rul. 88-76), to treat 
          LLCs as partnerships for tax purposes. Limited Liability Companies file their tax returns on a variety of forms depending on several
          factors.  Always consult a CPA before choosing the type of LLC you wish to organize. The following are a brief descriptions of some of
          the type of tax forms used to report LLC income and expenses.

         1. Single Member LLC - If there is only one member (shareholder) in an LLC it is reported on Schedule C (Form 1040) of the individual
              taxpayer or on Schedules E and F (Form 1040), depending on the nature of the business. Single member LLCs can elect to be
              treated as a corporation.
         2. Mutiple Member LLC - If there are two or more members in an LLC the LLC reports as a partnership on Form 1065, if no election
             to be treated as a corporation is filed.
         3. Election to be a Sub-S Corporation - Single or mutiple member LLCs, can elect to be treated as a Sub-S Corporation on
             Form 2553. LLCs electing Sub-S status will report income and expenses on Form 1120S. This is probably the most common LLC.
         4. Election to be a C Corporation -  LLCs can elect to be treated as taxable (C- Corporations) and report income and expenses
             on Form 1120. An election is required on Form 8832.

      b.) Sub-S Corporation - As mentioned above under LLCs, a corporation (INC, PA, LLC, etc) can file an election for treatment as a Sub-S
           corporation on Form 2553. This election should be filed in the first 75 days of the corporation's existance. You should consult a CPA
           when desiding to elect Sub-S status. Sub-S corporations combines the limited liability of a classic C corporation with tax treatment
           similar to a partnership, with some key differences you should discuss with your CPA. There are several restrictions placed on S
           corporations, including a cap on the number of shareholders (currently limited to 100) and a requirement that there be only one class of
           stock. Failure to comply with the IRS requirements for an Sub-S corporation can potentially result in a termination of the Sub-S election
           and reversion to C corporate status.

      c.) C Corporations - A C-corporation is a separate taxable entity and responsible for reporting income and expenses on Form 1120. In
           general a C-corporation is used for a businesses organization type when specific tax characteristics of the business may require. The
           C-corporation is the principle type of corporate organization used by publicly traded companies.  For local businesses a C corporation 
           offers some additional tax planning benefits for high income shareholders.

Again you should discuss the possible incorporation of a business with legal and tax professionals before making any choices of entity. Each 
entity above has its advantages and disadvantage and you should understand these clearly before making a decision.
           
           
       

      

    
Website Builder