Entities such as a Sub-S Corporation may help to save money on the Social Security taxes. This may be important to small business owners when first starting in business. This type of entity will help for improved cash flow as the outlaid for social security taxes are reduced. A sub-s corporation also provides additional protection from potential lawsuits. Please keep in mind, officers must act with properly in meeting government regulations and keep the minimum amount of insurance when required to do so. Officers who fail to follow reasonable course of actions open themselves to be sued. A corporation can have as few as one shareholder and in many cases ideal for small businesses.
One of the most popular business entities is the sole proprietorship. It is by far the easiest to set up. In most cases, a person just begins operating. If you do not want to use your own name you can apply for DBA. DBA stand for doing business as and an application can be applied at your state registration bureau. For Florida registration, you would contact Sunbiz.org. You would also need permits if you are in a specialty business or a professional. Many small businesses also use QuickBooks or some form of bookkeeping software to record the income and expenses.
LLC’s are a very unique entity. It allows for a choice of how the business files its taxes. A LLC can file as a sole proprietorship, a Sub-S corporation, a partnership (must have 2 or more members), or a C-corporation. A LLC allows a business to evolve to different levels for tax filings. A LLC (Limited Liability Corporation) permits profits or losses to be allocated based on a contract and not necessarily on percentage of ownership. The major drawback to LLC’s is that the rules are not uniform between states.
Choice of entity is an important decision.
If you are not sure, the criteria for becoming a particular type entity depends on the circumstances and the type of business. If you’re in a business that has a high likelihood of lawsuits or type of risk for legal reasons then incorporating might be the way to go. Incorporating helps to prevent a business person from being sued beyond his investment in the business.
An example would be if you set up a corporation in the state of Florida and you are the officer in the corporation. Assume you purchased the legal minimum amount of business insurance. If your company was to be sued for $1 million, your insurance would pay the amount of the coverage and the rest of the settlement would come from the equity in the business. Assuming that insurance coverage was for $250,000 and the equity in the business was $100,000, then the remaining $650,000 would be non-recoverable. But if your business was a sole proprietorship instead of a corporation, then the remaining $650,000 would your personal responsibility. Incorporating has the advantage of protecting a business person from being sued beyond his investment in the business.
In most states, a LLC also works for legal protection. Both the states of Florida and Wyoming have similar rules. These states were the first to initially start the concept of LLCs. In these states, you would have almost the same protection legally as a corporation. However, when you cross state lines there is a problem. Some states interpret that that the LLCs are variation of partnerships and as a result the main partner or the general partner can be sued. Therefore, if a business has a LLC, it is important to check on the rules of each state you do business in.
I hope this article helps to clarify the legal protection of corporations and LLC’s. If you have any questions, please contact your local CPA or accountant. If you are a client or future client, please contact our office at