There are many things members of family owned businesses need to know. Whether you are opening a new business or operating an established family owned business, you must take a good overall look at the structure of your business. It is in our nature to immediately consider our best friend, cousin, uncle or even brother and sister a trustworthy partner, but you never know what different circumstances may occur during the business term.
It is very important that once you consider going into business or adding a family member to your Company, that you structure your assets in the Company carefully, to protect everyone’s interest. You have to be clear on what each individual role will be and what responsibilities each member has. Such clarity can avoid future conflicts as long as it is expressed from the beginning and written in the Corporate Documents.
Also ask yourself, how qualified is this person for the position? Do we share common goals? How much experience do they have? Do you feel confident in sharing equity with this person? Can we keep a professional life and integrity of the company separate from our personal lives? How can I evaluate them? What to do if it does not work out? Do we have a succession plan?
Having a stable business structure will protect you now and in the future and also will provide you with a sense of security.
Choosing your business structure could have both legal and tax implications, that why it is so important to structure your business according to Federal and State laws.
In Florida there are a variety of different corporate entities with both advantages and disadvantages.
Below are just a few corporate entities that Florida offers:
- Limited Liability Company:””A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. The “owners” of an LLC are referred to as “members.” Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.”
- Corporation (C-Corp):”A corporation (sometimes referred to as a C corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs. Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.
- Corporation (S-Corp):”An S corporation (sometimes referred to as an S Corp) is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. An S corp is a corporation with the Subchapter S designation from the IRS. According to the IRS, S corporations are “considered by law to be a unique entity, separate and apart from those who own it.” This limits the financial liability for which you (the owner, or “shareholder”) are responsible. Nevertheless, liability protection is limited – S corps do not necessarily shield you from all litigation such as an employee’s tort actions as a result of a workplace incident. What makes the S corp different from a traditional corporation (C corp) is that profits and losses can pass through to the your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed. There is an important caveat, however: any shareholder who works for the company must pay him or herself “reasonable compensation.” Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as “wages.””
- Partnership:”A partnership is a single business where two or more people share ownership. Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business. Because partnerships entail more than one person in the decision-making process, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement.”
If you are interested in setting up a corporate entity, it is important to consult with a Florida Business Law Attorney, one who has set up business entities as well as understands them.