Business Formation Lawyer

When starting a business, the formation process is a crucial step that can impact the business’s success. The formation of a business refers to the legal process of establishing a business entity that the state or government recognizes. Most businesses are formed here in Florida by filing business formation documents with the Florida Division of Corporations.

Why is Business Formation Important?

Business formation is essential for several reasons. It establishes a legal framework for the business, determining its rights and responsibilities. The legal framework allows business owners to choose how the business will operate on a day-to-day basis. Business formation also can protect the business owners’ assets and sometimes the business assets. Finally, it significantly impacts the business’ tax liabilities since the business formation will dictate how the State and Federal governments will tax the business.

Types of Business Formation

There are several types of business formations, each with unique advantages and disadvantages. Some of the most common forms of business formation include:

1. Sole Proprietorship. A sole proprietorship is the simplest form of business formation, where the owner is responsible for all aspects of the business. The owner is personally liable for all the business’s debts and obligations. A sole proprietorship is also the most accessible business to start since there are generally minimal requirements to operate as a sole proprietorship.
2. A partnership is a business formation where two or more individuals share ownership of the business. Partnerships can be created formally and informally and can be general or limited, depending on the level of liability each partner assumes.
3. Limited Liability Company (LLC). An LLC is a hybrid business formation that combines the characteristics of a corporation and a partnership. The LLC allows the business to choose any tax classification. The LLC has far surpassed the corporation as the most popular type of business structure due to its flexibility and fewer formalities. The owners of an LLC are generally not personally liable for the company’s debts and obligations.
4. A corporation is a separate legal entity that can own property, enter into contracts, and conduct business activities. The owners of a corporation are not personally liable for the company’s debts and obligations.

Steps to Form a Business

Forming a business will depend on the type of business formation you choose. However, there are some general steps you should follow:

1. Choose a business name: Choose a unique and memorable name. Also, ensure another business does not already use your chosen name.
2. Register your business: Register your business with the appropriate state or local agencies.
3. Obtain necessary permits and licenses: Depending on your business’s nature, you may need to obtain permits or licenses to operate legally.
4. File necessary documents: File necessary documents, such as articles of incorporation, operating agreements, or partnership agreements.
5. Obtain an EIN: An EIN is a unique identifier assigned by the IRS that is required for tax purposes.
6. Open a business bank account: Open a separate bank account to separate your personal and business finances. Keeping finances separate can be critical when facing a creditor’s lawsuit.

Can I file formation documents by myself?

The short answer is yes. You can file your formation documents through Florida’s Division of Corporations (www.sunbiz.com). However, some important factors must be considered before deciding whether to handle the process or hire an attorney.

Formation documents are legal documents required to officially create a business entity in Florida, such as a corporation or a limited liability company (LLC). The documents that must be filed with the state depend entirely on which type of business entity you choose.

First, let’s define what we mean by “formation documents.” These are the legal documents required to officially create a business entity, such as a corporation or a limited liability company (LLC). Depending on your state and the type of business you’re starting, these documents may include articles of incorporation, articles of organization, or a certificate of partnership.

While filing the documents is relatively easy here in Florida, there are a few things you should keep in mind before filing on your own:

1.Familiarize Yourself with Florida’s Business Filing Requirements

Florida has very specific requirements that must be followed when filing business formation documents. Ensure you understand these requirements, what fees you must pay, and what you must do annually to maintain the business formation.

2.Decide Which Business Entity to Form

Before filing any formation documents, you must decide what business entity you want to create. This decision will depend on your personal liability, tax implications, and how you plan to raise capital. Consider consulting with a business lawyer and an accountant to help you make this decision. Choosing the right entity type can be highly beneficial to your future business.

3.Consider Hiring a Professional

While it’s certainly possible to file formation documents on your own, there are some situations where it may be beneficial to hire a professional. For example, if you’re forming a complex business entity with multiple owners, you may want to consult a lawyer to ensure everything is set up correctly. Choosing the correct business entity from the start is much easier than switching the entity type years later. Additionally, if you need to become more familiar with the process or are short on time, hiring a professional to handle the paperwork may be worthwhile.

Which type of entity is right for me?

When starting a business, one of the most important decisions you will make is choosing the right type of business entity. The correct entity will provide legal protection, tax benefits, and the flexibility to grow your business. However, it’s often challenging for a non-professional to determine which type of business entity is suitable for their business as there are a lot of significant differences between business entities. Here are the most common forms of business entities formed here in Florida:

1.Sole Proprietorship

A sole proprietorship is the simplest form of business entity. It is owned and operated by one person who assumes all legal and financial responsibility for the business. This entity type is easy to set up and maintain, but it offers no legal protection to the owner. Additionally, the owner is responsible for all the debts and obligations of the business.

A sole proprietorship may be a good choice if you start a small, low-risk business and plan to hire someone other than employees or raise outside capital.

2.Partnership

A partnership is a business entity owned by two or more people. Each partner contributes money, property, or labor and shares in the profits and losses of the business. There are two main types of partnerships: general partnerships and limited partnerships.

In a general partnership, all partners share in the management and liability of the business. In a limited partnership, general partners manage the business, and limited partners contribute capital but have no say in management.

A partnership is a good choice if you want to share the responsibilities and risks of running a business with someone else.

Partnerships have a flow-through taxation structure, meaning the income and losses will flow through to the partners, and the partners will pay the tax on the income for their share.

3.Limited Liability Company (LLC)

A limited liability company (LLC) is a hybrid entity that combines a corporation’s liability protection with a partnership’s tax benefits. Multi-member LLCs in Florida offer personal liability protection for the owners, meaning that their personal assets are shielded from the company’s debts and legal obligations.

LLCs are easy to set up and maintain and offer a great deal of flexibility in terms of management and taxation. They are a good choice for businesses that want liability protection but want to avoid the formalities and expenses of a corporation.

LLCs are unique in that you can choose how the LLC is taxed. An LLC can be taxed as a sole proprietorship, S or C corporation, or a partnership.

4.Corporation

A corporation is a separate legal entity from its owners. It is owned by shareholders who elect a board of directors to manage the business. Corporations offer liability protection for their owners, as their personal assets are generally shielded from the company’s debts and legal obligations. However, corporations typically provide less overall creditor protection than an LLC.

Corporations are more complex to set up and maintain than other business entities. They also face double taxation, meaning that the company’s profits are taxed at the corporate level and then again when distributed to shareholders.

A corporation is a good choice for businesses that plan to raise capital through outside investors and have the potential for significant growth.

Choosing the right type of business entity is a crucial step in starting and growing your business. The decision depends on many factors, including business goals, personal liability concerns, and tax considerations. As you consider your options, consult a qualified attorney or accountant to ensure you make the right choice for your business needs.

How long does the formation process take?

The business formation process varies depending on several factors, but the general rule of thumb is that the formation process will sometimes take a few days, a couple of weeks, or a few months. The business formation process can vary depending on several factors, including:

1. Business Entity Type: The type of business entity you choose, such as a sole proprietorship, partnership, limited liability company (LLC), or corporation, will impact the time it takes to form your business.
2. Florida State Requirements: Florida has its own requirements for forming a business, and the process is relatively streamlined. However, there is usually a delay from when you file to when the documents are posted.
3. Completeness of Documentation: Submitting complete or correct documentation can ensure the business formation process is completed on time. Ensuring all required documentation is accurate and complete before submitting it to the relevant authorities is essential.
4. Hiring Professionals: If you choose to hire professionals, such as attorneys or accountants, to assist with the business formation process, it can impact the timeline. It’s usually best to consult with an attorney and accountant before starting a business to see if there’s anything that you should or should not be doing. It’s easier to make changes from the get-go than to make changes years later when the entity is already formed.

What are the most common forms of business formation?

There are five common forms of business formation: Sole Proprietorship, a Partnership, a Limited Liability Company (LLC), an S-Corporation, and a C-Corporation. Here’s a quick breakdown of each with some advantages and drawbacks:

1.Sole Proprietorship: A sole proprietorship is the simplest form of business organization, where the owner is solely responsible for all aspects of the company. This structure does not require legal documentation and is easy to set up, making it an ideal choice for small businesses and self-employed individuals.

Advantages:

• Simple to establish and manage
• Low startup costs
• Direct control over business decisions
• No ongoing business formalities like in a partnership or corporation

Drawbacks:

• Unlimited personal liability for debts and losses
• Limited access to funding if you want to receive outside monies to grow your business

2.Partnership: A partnership is a business formed by two or more individuals who share ownership and management responsibilities. Partnerships can be either general or limited, with general partners responsible for all business liabilities, while limited partners are only liable up to their investment amount.

Advantages:

• Shared financial and management responsibilities
• Access to additional capital and skills
• Simple to establish

Drawbacks:

• Potential for disagreements between partners
• Unlimited personal liability for general partners

3.Limited Liability Company (LLC): An LLC is a hybrid business structure that combines the limited liability of a corporation with the tax benefits and flexibility of a partnership. LLCs provide personal asset protection for their members while allowing them to choose how the company is taxed and managed. LLCs are now the most commonly formed type of business in the U.S.

Advantages:

• Limited personal liability
• Flexible tax options
• Minimal formalities and paperwork

Drawbacks:

• More complex setup than sole proprietorships or partnerships
• Varying state regulations

4.Corporation: A corporation is a separate legal entity from its owners, providing them with limited liability protection. Corporations are more complex than other business structures and require adherence to strict regulations, making them suitable for larger businesses with multiple shareholders.

Advantages:

• Limited personal liability
• Easier access to funding for growing the business
• Transferable ownership

Drawbacks:

• Complex setup and management due to yearly formalities
• Double taxation on profits (unless opting for an S Corporation)

5.S Corporation: An S Corporation is a type of corporation that enjoys pass-through taxation, meaning profits are taxed at the shareholder level and not subject to corporate taxes. To qualify for S Corporation status, a company must meet specific Internal Revenue Service (IRS) requirements.

Advantages:

• Limited personal liability
• Pass-through taxation
• Transferable ownership

Drawbacks:

• Strict eligibility requirements
• Limited number of shareholders allowed

What is an LLC or limited liability company?

A Limited Liability Company (LLC) is a flexible business structure that combines the best features of sole proprietorships, partnerships, and corporations. It allows business owners, called members, to protect their personal assets while still enjoying the simplicity of operating a small business.

There are several reasons why many entrepreneurs choose to form an LLC:

1. Limited Liability Protection: The most significant benefit of an LLC is that it provides its members with limited liability protection. This means that the member’s personal assets are not at risk if the business faces legal issues or incurs debts.
2. Tax Flexibility: LLCs offer various tax options, allowing members to choose the most suitable tax structure for their business. An LLC can be taxed as a sole proprietorship, partnership, S Corporation, or C Corporation.
3. Management Flexibility: Unlike corporations, which require a strict management hierarchy, LLCs can be managed by their members or designated managers, making it a more flexible business structure.
4. Less Administrative Hassle: LLCs have fewer ongoing compliance requirements than corporations, making them easier to maintain and manage.

1. Managing and Maintaining Your LLC

To ensure the ongoing success and compliance of your LLC, consider the following:

1. Keep Personal and Business Finances Separate: Maintain separate bank accounts and records for your LLC to protect your limited liability status.
2. Hold Regular Meetings: Schedule periodic meetings to discuss important decisions and maintain clear communication among members.
3. File Annual Reports: Most states require LLCs to file an annual report to keep their business information updated.
4. Pay Taxes and Fees: Stay current with your federal, state, and local tax obligations, as well as any applicable fees and license renewals.

How is an LLC formed?

Forming a Limited Liability Company (LLC) involves a series of steps that vary by jurisdiction. In the United States, the process typically includes the following:

1. Choose a name: Select a unique name for your LLC that complies with the naming rules in your state. Most states require the name to include “Limited Liability Company,” “LLC,” or “L.L.C.”
2. File Articles of Organization: This is a formal document that establishes the LLC and outlines its basic information, such as the name, address, purpose, and management structure. You’ll need to file the Articles of Organization with the Secretary of State or a similar state agency and pay the required filing fee.
3. Choose a registered agent: Designate a registered agent responsible for receiving legal documents and correspondence on behalf of the LLC. The registered agent must have a physical address in the state where the LLC is formed.
4. Create an Operating Agreement: Although not always required, creating an Operating Agreement is highly recommended. This document outlines the ownership structure, management roles, responsibilities, and LLC operating rules. The Operating Agreement can help prevent future disputes among members and can also help provide creditor protection for the LLC.
5. Obtain an Employer Identification Number (EIN): Apply for an EIN from the Internal Revenue Service (IRS) for tax purposes. This is necessary if your LLC has employees or you choose to be taxed as a corporation.
6. Register for state and local taxes: Depending on your state and local tax regulations, you may need to register for specific taxes, such as sales and use tax, employment taxes, and franchise taxes.
7. Obtain necessary licenses and permits: Depending on your industry and location, you may need to obtain various licenses and permits to operate your business legally. Research your local requirements and ensure you have the necessary documentation.
8. Maintain ongoing compliance: After your LLC is formed, you must comply with ongoing requirements, such as filing annual reports, paying taxes, and renewing licenses and permits.

If I form an LLC, am I protected from all the debts of the LLC?

In Florida, an LLC can protect from creditors by limiting personal liability for business debts. If your LLC faces financial trouble or is sued, your personal assets (such as your home, car, and personal savings) are typically not at risk. Creditors can only pursue the assets of the LLC itself, not those of its members.

Charging Order Protection in Florida

Florida has strong charging order protection laws for LLCs, further strengthening the protection from creditors. A charging order is a legal remedy allowing a creditor to attach an interest in an LLC to satisfy a debt. However, a charging order is the sole remedy for a creditor seeking to collect from an LLC member’s interest in Florida. This means creditors cannot force the LLC to liquidate its assets or dissolve the business to pay off the debt.

Exceptions to LLC Protection in Florida

While an LLC in Florida does provide considerable protection, it’s essential to be aware of certain exceptions:

1. Personal Guarantees: If you personally guarantee a loan or debt for your LLC, you will be held liable for that debt. In this case, creditors can pursue your personal assets to satisfy the obligation.
2. Fraudulent or Illegal Activity: If a member of an LLC is found to have engaged in fraudulent or illegal activities, the limited liability protection may be forfeited, and personal assets may be at risk.
3. Piercing the Corporate Veil: If the LLC is not properly maintained or members commingle personal and business assets, a court may “pierce the corporate veil” and allow creditors to access personal assets.
4. Single-Member LLCs: Florida courts have been less consistent in protecting single-member LLCs than multi-member LLCs. However, recent legislation has strengthened protections for single-member LLCs, but it’s crucial to follow proper legal procedures and maintain a clear separation of personal and business assets.

What is a corporation?

A corporation is a legal entity that exists separately from its owners, known as shareholders. This business structure allows a company to operate independently and conduct various transactions, such as owning property, entering contracts, and borrowing money, without directly involving its owners. The most common types of corporations are C corporations, S corporations, and Limited Liability Companies (LLCs) taxed as C corporations and S corporations. Each type has different tax implications, ownership structures, and management styles.

Key Features of a Corporation

1. Limited Liability: One of the most significant advantages of a corporation is the limited liability it provides its shareholders. This feature protects the shareholders’ personal assets from the corporation’s debts and legal obligations, ensuring that their personal property cannot be seized to cover the company’s liabilities. The liability protection is often stronger than a partnership but usually significantly weaker than an LLC.
2. Perpetual Existence: A corporation enjoys a continuous existence, which means it can continue operating even if the shareholders change or pass away. This perpetual existence makes it an attractive option for long-term stability.
3. Transferability of Shares: Shares in a corporation can be easily bought, sold, or transferred without affecting the company’s operations. This feature simplifies investors to invest in corporations and for owners to exit or change their ownership stake.
4. Centralized Management: Corporations typically have a hierarchical management structure, with a board of directors overseeing the company’s operations and a management team executing day-to-day tasks. This centralized management ensures clear lines of authority and efficient decision-making processes.
5. Taxation: How corporations are taxed varies based on their structure. C corporations face double taxation, as profits are taxed at the corporate level and again when distributed to shareholders. S corporations and LLCs, however, avoid double taxation by allowing profits to pass through to shareholders, who are then taxed at their individual income tax rates. S corporations are often popular choices as they can significantly reduce self-employment taxes.

Advantages and Disadvantages of a Corporation

Pros:

• Limited liability protection for shareholders
• Perpetual existence ensures business continuity
• Ease of raising capital through share issuance
• Transferability of shares facilitates investment and ownership changes
• Centralized management for effective decision-making

Cons:

• Double taxation for C corporations
• Potentially complex regulatory requirements and paperwork
• Potential loss of control as ownership expands and new shareholders join
• Shareholders may have limited input in daily business operations

How do you form a corporation?

Step 1: Choose a Business Name

Selecting a unique and memorable name for your corporation is crucial. Ensure that another company does not use the name by checking your state’s Secretary of State website. Once you’ve found an available name, it’s wise to register a matching domain for your website.

Step 2: Appoint a Board of Directors

The Board of Directors oversees the corporation’s management and makes critical decisions. Choose individuals with relevant expertise and an excellent reputation to serve on your board. Often with small corporations, the corporation’s shareholders will also serve as the board of directors.

Step 3: Draft and File Articles of Incorporation

Articles of Incorporation are the official documents that establish your corporation. They contain essential information, such as the company’s name, address, purpose, and stock structure. File these documents with your state’s Secretary of State office and pay the required filing fee. In Florida, these documents are filed with the Florida Division of Corporations.

Step 4: Create Corporate Bylaws

Corporate bylaws are the internal rules and procedures governing your corporation. They should outline the rights and responsibilities of shareholders, directors, and officers and specify how meetings and elections are conducted.

Step 5: Obtain an Employer Identification Number (EIN)

An EIN is a unique identification number the Internal Revenue Service (IRS) assigns to your corporation. It is required for tax filing and reporting purposes. You can apply for an EIN online on the IRS website.

Step 6: Open a Corporate Bank Account

To maintain your corporation’s separate legal identity, you must open a dedicated bank account for your business. This account will be used for all financial transactions, including receiving payments and paying expenses. It is imperative not to comingle personal and corporate assets.

Step 7: Issue Stock Certificates

Stock certificates represent ownership in the corporation. Issue these certificates to the initial shareholders, keeping a detailed record of the ownership structure.

Step 8: Stay Compliant with Ongoing Requirements

After forming your corporation, ensure you meet all ongoing legal and tax requirements. This may include holding annual meetings, filing annual reports, and paying taxes.

What Is a Nonprofit Corporation?

A nonprofit corporation is formed to serve a specific social, educational, religious, or charitable purpose rather than generate profits for its owners or shareholders. The primary goal of a nonprofit corporation is to promote the public interest, improve communities, and contribute to the common good. These organizations use surplus revenue to further their mission and objectives instead of distributing it among shareholders or owners.

Nonprofit corporations possess several distinguishing features setting them apart from for-profit entities. Here are some of the key characteristics:

1. Tax-exempt status: Many nonprofit corporations are granted tax-exempt status by the Internal Revenue Service (IRS), which means they are not required to pay federal income tax on their earnings. This allows them to allocate more funds toward their mission and objectives.
2. Public benefit orientation: Nonprofit corporations exist to serve the public interest, address social issues, and provide necessary services to communities. Their primary focus is to benefit society, not to make a profit.
3. Governance structure: Nonprofits have a board of directors responsible for overseeing the organization’s mission, strategy, and financial management. The board ensures the nonprofit operates ethically and transparently, fulfilling its mission and legal requirements.
4. No private ownership: Nonprofit corporations have no owners or shareholders. Any surplus revenue is reinvested into the organization to further its mission rather than being distributed as dividends or profits.

Nonprofit corporations benefit society and the individuals involved in their operations. Some of the key advantages include:

1. Tax benefits: As mentioned earlier, many nonprofit corporations are granted tax-exempt status, allowing them to allocate more resources toward their mission.
2. Limited liability protection: Like for-profit corporations, nonprofit corporations offer limited liability protection for their board members, officers, and employees. This means that individuals involved in the organization are not personally responsible for the nonprofit’s debts or liabilities.
3. Access to grants and funding: Nonprofit corporations are often eligible for various grants and funding opportunities from governments, foundations, and private donors, helping them to achieve their mission and objectives.
4. Enhanced credibility: Forming a nonprofit corporation can lend credibility to an organization, as it demonstrates a commitment to a specific cause or purpose.

Does forming a corporation personally protect me from its debts?

In most cases, forming a corporation provides limited liability protection, which means that the corporation’s debts are separate from your personal finances. Shareholders are typically not personally responsible for the corporation’s liabilities, and their exposure is limited to the value of their investment in the corporation. This is one of the primary reasons many people choose to form corporations for their businesses.

However, there are some circumstances where you could still be held personally liable for a corporation’s debts:

1. Personal guarantees: If you personally guarantee a loan or other financial obligation for the corporation, you may be held personally liable if the corporation fails to fulfill that obligation.
2. Piercing the corporate veil: If a court determines that the corporation has not operated as a separate legal entity, it may “pierce the corporate veil” and hold shareholders personally liable for its debts. This can happen if the corporation is inadequately capitalized, fails to follow corporate formalities, or engages in fraudulent behavior.
3. Taxes: In some cases, individuals involved in the management or operation of the corporation could be held personally liable for certain tax obligations, such as unpaid payroll taxes.
4. Personal negligence or wrongdoing: If you commit an act of negligence or engage in illegal activities while acting on behalf of the corporation, you could be held personally liable for any resulting damages, even if the corporation itself is also held responsible.