Starting a new business can be exciting but also a burden if not properly planned. You need to be prepared to work hard and expect the unexpected. Some of the basic information to start with can include, but certainly is not limited to the following:
- Type of entity - Sole Proprietor, Corporation, Partnership, Limited Liability Company, etc.
- License - local business license, state license, etc.
- Funding - who is providing start-up money and how much is needed?
- Taxes - what federal, state and local taxes apply?
Please keep reading for a basic explanation of entity types and some of the licenses required in Florida.
Forms of Business
If you do nothing you are considered a Sole Proprietor. You will receive 1099s and W-2s in your own name and social security number. You will be required to report your income and expenses on your personal 1040 tax return as a Schedule C for the 1099 income and the W-2 as wages. The Net Profit from your business will be subject to federal income tax and social security tax. This is a simple form of business with the least requirements for starting a new business. However, as your Net Profit increases so will your taxes.
You can become a Corporation. A corporation is a separate entity from an individual. There are two types of corporations:
- 1120 Corporation: A corporation which pays taxes on Net Profit.
- 1120S Corporation: A corporation which passes Net Profit to the individual shareholder’s 1040 tax return.
Generally, an 1120S Corporation is best for an individual or small group of individuals because Net Profit is taxed only at the individual tax bracket rather than a corporate tax bracket and then again as a dividend on the shareholder’s tax return (double taxation). This works well for individuals with higher earning potential or a small group of individuals such as a production company.
A Partnership is a separate entity from an individual and includes two or more individuals or companies. A Partnership files Form 1065 and the Net Profit is treated like a Sole Proprietorship. The Net Profit from your business will be subject to federal income tax and social security tax.
An LLC is a limited liability company. This form of entity evolved in the 1980s to help limit the downside of a business partnership. The downside of a business partnership could happen when one or more partners enter an unauthorized transaction or commit a criminal act. The end result was that ALL the partners (members) were liable. The concept of the LLC was to limit the innocent partners (members) to only their investment in the LLC. The LLC form of business was tested in the past few years and Does Not limit the liability of the members.
Keep in mind that for a small business you are responsible for all transactions. Professional Liability Insurance is a good way to prevent potential mishaps.
We can help you determine the best form of business for your situation. We prepare Florida Corporations and LLCs for our clients. Our Fees for incorporation are competitive and we will offer you a generous discount.
Call us at (386)-668-3328 if you have any questions.