You have this great idea, or you are finally jumping the gun on that hobby-turned-job, or maybe you are simply starting on the great venture of building your business from the ground up—either way, you are forming your own company.
You have the idea, the equipment and you are going to start the paperwork but you realize you have not the slightest clue where to even begin. You are in the right place, you begin here!
First, some background information. Incorporating a company is nothing more than creating a legal entity that is recognized independently from its owners under the law. As an independent entity under the law, a company can be held legally liable for its actions and debts, it is able to enter into contracts, leases and even lawsuits.
Now that you have some background on what a company is, you are ready to select what business structure works best for you.
The most common forms of small companies are Profit Corporations—known as C Corporation, Limited Liability Companies abbreviated as LLC, Subchapter S Corporations—S Corporations, or Non-Profit Corporations.
Corporations, Limited Liability Companies, and Subchapter S Corporations may be created for any lawful purpose, from gardening services to computer tech support. Any of those types of entities provide certain assets protection to the owners but differ in management structure or requirements for their creation.
In simple terms, a Profit Corporation has a more rigid structure than a Limited Liability Company. A corporation is owned by its shareholders, be it one or more, has a Board of Directors and is ran by the President and other officers. Although it sounds complicated, corporations can be very small. The shareholder of the Corporation may be the director and even the President. However, regardless of how small the corporation, corporate formalities must be observed.
For example, under Florida law, corporations must file an annual report every year with the Florida Department of State, Division of Corporations, fear not, we can help you with that too. In order to comply with Florida law, Corporations must have annual meetings of shareholders and keep minutes of those meetings in the corporate book. Our corporate kit includes information and forms to facilitate compliance with the corporate formalities required by law.
However, many prefer Limited Liability Companies or S Corporation to avoid what is generally referred to as “double taxation”. The term Double Taxation comes from the fact that Profit Corporations must pay federal income taxes on their reported income and losses; and the shareholders must also pay taxes on the income they receive from the corporation, ergo the concept that the profit of the corporation is being taxed twice. Limited Liability Companies and S Corporations have what is known as “pass-through” taxation. Limited Liability Companies and S corporations are not directly taxed on the income or losses of the company but the owners are taxed on their individual income tax. Therefore, small companies are generally best served by a creating a Limited Liability Company or S Corporation.
While Limited Liability Companies have similar characteristics to Corporations, many consider them much easier to run because of their structure. LLC are owned by its Members and are directly operated by its Members or Managers. LLC do not have Presidents or officers that manage the day to day business activities of the company; its members or managers oversee all. Limited Liability Companies may have one or more managers. As explained above, LLC also have pass-through taxation, where the Company’s profits and losses are reported directly on Members’ income tax return. LLC must also file an annual report with the Florida Department of State, Division of Corporations before May 1 each year. Like we said, we can help you with that! And a big relief, although recommended for organization purposes, LLCs are not required to hold annual meetings for its members.
Subchapter S Corporation are very similar to Profit Corporations. However, as mentioned above, S Corporations provide certain tax advantages. S corporations are not taxed at the corporate level, instead the corporation’s income or losses are reported directly on the corporation’s shareholders’ income tax. That makes S corporations very attractive to small business owners since they are able to declare business losses directly on their tax returns. That certainly makes it easier for you to decide to spring for that Printer you have been needing! In order to qualify as an S Corporation, the company can have only a few shareholders—up to 100 shareholders. Also, an S Corporation may only have as shareholders natural individuals; that means the company must not have as a shareholder another corporation or entity with only a few exceptions, such as an estate or trust and depending on the circumstances. The company may not have a nonresident alien as a shareholder or have only one class of stock. Bottom line is, the company must be small, owned by individuals who are citizens or resident aliens and have the same type of stock.
Non-profit organizations share the same structure as Corporations but have a few more requirements. Non-profits must have at least 3 Directors and must be created for a good cause, not just any lawful purpose. A general misconception is that Non-Profit Corporations are exempted from paying taxes. No! Non-profit corporations must pay taxes like all other corporations, however, some may qualify for an exemption with the IRS. There are different types of non-profits, and its denomination generally depends on the Non-Profit Organization’s purpose.