What kind of entity formation is right for my start-up business?

Up and down Highway 1 and the A1A along the Space Coast, we’ve all seen businesses with a variety of legal entities attached to the sign; Smith & Sons, Inc., Johnson & Jones, P.A., Wilson Law, PLLC and Anderson Manufacturing Co., just to name a few. But what do those business suffixes mean and how did the owners decide which type of entity was right for them before they opened their doors.

This blog post will present a brief overview of the basics of business entity formation. As always, the right choice for your business will depend upon your goals, your financing structure and how much personal risk you are ready to assume. 

What entities are right for private practices?

Law practices, Certified Public Accountants and medical practices are often organized as limited professional corporations. Some of the more common ones include:

LLC: Limited liability company. LLCs offer the advantage of combining the “pass-through” tax model of a partnership (or sole proprietorship) with the limited liability of a corporation. LLCs are often good options for licensed professionals who have some stake in the initial investment but do not wish placing their personal assets at stake in the event of bankruptcy or litigation. In January 2015, new rules for LLCs in Florida went into effect, so get sound legal advice about the changes that may affect your business.

P.C.: Professional corporation. Medical practices and law firms often Sole proprietorships or businesses operated under the direct involvement of the owner may choose to set up as a professional corporation. PCs (with or withoug the periods) allow a sole proprietor to operate under the state and federal tax rules of a corporation. Decades ago, these were more popular, but with changes in state and federal tax laws, the advantages are disappearing.

P.L.L.C.: Professional Limited Liability Company. This special entity was established specifically for licensed professionals. In Florida, they operate basically under the same tax rules as a limited liability company (LLC) but are restricted to licensed professionals.

P.A.: Professional Association. A PA (with our without the periods) offers much the same tax benefits as a P.C., but allows other professionals to become members of the association. Law firms and medical clinics often set up under P.A.s to allow for licensed professionals to “buy into” the company as investors.

C and S corporations

No matter what entity (above) you select, it is important to know that all business entities filed with the Florida Secretary of State begin their lives as a C corporation. That means that the business is, in effect, subject to double taxation. The business income will be taxed at the corporate level and the shareholders’ dividends will be taxed as income. Removing the double taxation requires an act of formally applying to become an S corporation.

Get the legal help you need

While this blog post gives a very brief overview of various business entity options, there are less common options also available. Don’t make any assumptions until you speak with an experienced business lawyer.