A key step in starting a new business is choosing the right business entity for your company. Forming a separate business entity when embarking on a new business venture is crucial to limiting liability for the owners. The separate business entity, not the individual, performs the work. The two types of business entities that operate as separate legal entities are known as Corporations (also known as INCs) and Limited Liability Companies (also known as LLCs).
What are the different types of business entities that I use?
I use both Corporations and Limited Liability Companies in all of my activities. The benefits of limiting risk and exposure far outweigh the small cost of incorporating in the different states. In my opinion, limiting risk when operating a business or owning real estate is paramount to long-term success. As all the businesses operate as separate entities, one torpedo (a lawsuit for example) can’t sink the ship.
A corporation is probably the best known business entity of all of the different types of business entities. Ownership is comprised of different shareholders (or even just one single shareholder) that own different shares of stock in the company. In larger corporations (like publicly traded corporations for example), a board of directors hires and oversees management. Management in turn, hires and oversees employees that work for the company.
A corporation is a separate legal entity that exists separately from its shareholders. This legal entity can buy property, open bank accounts, sue or be sued, and enter into contracts. Stockholders can sell or transfer their stock to others and the corporation is perpetual, continuing on even in the change of ownership. As it is a separate legal entity, there is limited personal liability for the shareholders who own the company stock.
Every state is different, but I will use Florida as an example. In the State of Florida, it costs $70.00 to start a company ($87.50 if you want an optional certificate of status and certified copy of your filing). You can file online and have your confirmation in 2-3 business days during non-peak periods.
Limited Liability Company
Limited Liability Companies (LLCs) are sometimes referred to as the “easy” companies in that you typically don’t have to have all of the corporate formalities of corporations. LLCs are not required to have board meetings, stockholder meetings, or management meetings and all of the associated complexities.
Instead of stockholders, LLCs have members (or even one single member) that own membership interests. These members have limited personal liability, as the LLC is a separate legal entity. LLCs can buy and own real estate, secure loans, open bank accounts, enter into contracts, and virtually anything a separate legal entity can perform.
Using Florida as an example again for filing, it costs $125.00 to open a new LLC ($160.00 if you want the optional certificate of status and certified filing copy). You can file online and have your confirmation in 2-3 business days during non-peak periods.
Other types of business entities
There are other types of business entities that exist that do not limit one’s liability, and have other complexities. I personally don’t see the benefits of any of these types of entities and I generally avoid them, but here is an overview of each type.
A general partnership divides the responsibilities among all of the general partners (minimum of 2 partners). Each of the general partners is responsible for the partnership’s debt and have unlimited liability. Each of the general partners can act on behalf of the entire partnership.
Limited Liability Partnership
A Limited Liability Partnership (also known as an LLP), is a hybrid of a general partnership and a corporation. In this structure the general partners operate the business (and have unlimited liability), and the limited partners invest money with no say in the day to day operations, and have limited liability exposure.
Some larger partnerships reduce risk by having a corporation act as the general partner, limiting the liability to the general partner corporation. They can still use the limited partner model to raise capital while reducing liability exposure.
In the State of Florida, it costs $1,000 to file a new limited partnership ($1,061.25 if you want to have the optional certified copy and certificate of status).
I don’t consider a sole-proprietorship a company.
In Florida it is even described as an “unincorporated business”. It is operated by one person and there is no distinction between the “business” and the owner. The owner is exposed to unlimited liability and has no benefits of any corporate structure.
In Florida, you must register the “fictitious name” that your sole proprietorship is operating under at a cost of $50.00 ($90.00 if you want the certified copy of fictitious name registration and the certificate of status for fictitious name registration). It actually costs $2.50 more to file for a sole proprietorship in Florida than it does for filing for a new corporation!
Corporations and LLCs versus other types of business entities
Although each person’s situation is different, for me the benefits of reduced liability, simplicity and low cost make LLCs the primary choice for my businesses. LLCs are easy to form, easy to manage and they protect you in the long run.