Five Types of Business Associations

Almost all businesses in the United States are “small” businesses. Over half of these organizations have between zero and four employees. These business owners often believe their business association options are limited or nonexistent. But under state and federal law, the smallest business in Florida has the same business association choices as the big boys. All these choices have some pros and cons, which are outlined below.

For a St. Petersburg estate planning lawyer, a business association is an important component of an overall business succession plan, especially if the organization is a family business that the current owner wants to stay in the family. So, in addition to traditional estate planning documents, like wills and trusts, we also focus on business planning that helps owners maximize their resources now and avoid transfer problems later.

Sole Proprietorship

This business association is, by far, the easiest form to set up. Most SPs just need an EIN number, which the IRS generates for free online, and perhaps a business name certificate, which is also easy to obtain. These businesses are also easy to manage. The owner unilaterally makes all decisions and keeps all profits.

Now for the bad news. Capital expansion is usually out of the question, unless the SP has significant individual resources. Many banks believe that SPs are “fly by night” organizations, and there’s no way to access capital from partners, shareholders, or other stakeholders.

The liability risk is significant as well, since the SP owner is personally responsible for everything. Business insurance partially offsets this risk. Finally, individual tax rates, which apply to SP revenue, are usually higher than corporate tax rates.

Normally, SPs are ideal for gig workers, artists (painters, writers, actors, etc.), and small-scale operations (barber shops, coffee shops, etc.) with no plans to expand. All other owners should at least consider something else.

Partnership

A partnership of two or more people requires a little more paperwork, such as a partnership agreement, which a St. Petersburg estate planning lawyer usually draws up. The partnership can be:

• General (all partners are share and share alike) or
• Limited (GPs who run the business and LPs who invest money and have limited liability).

A partnership benefits from the “two heads are better than one” effect. Partnerships also have access to resources for expansion. But, in any business or personal relationships, disagreements are inevitable. Furthermore, partnerships have basically the same liability and tax drawbacks discussed above.

Limited Liability Company

The LLC is the go-to organization for many small businesses. LLCs, which are easy to set up, combine the flexibility of partnerships with the liability protection of corporations. Speaking of flexibility, can choose to be taxed as a sole proprietorship, partnership, or corporation, depending on the number of members (owners) and elections made with the IRS.

We mentioned that LLCs are relatively easy to set up. That’s true, but LLC setup is much more time consuming than SP or partnership setup. Furthermore, the ongoing administrative costs are significant. Finally, LLCs with more than two or three members often suffer from the “too many chefs spoil the broth” effect.

Despite these significant cons, we steer most small businesses to LLCs, especially if it’s a family business with one or two stakeholders.

Corporation

Most people believe that only large businesses can incorporate. That’s not true. Corporations are available for all sizes of businesses. But the mode is clearly designed for large entities.

Liability limitation and access to capital are the two biggest advantages of corporations. The corporation is a separate legal entity. That entity, not individuals, is responsible for all debts and other liabilities. Furthermore, since shareholders buy shares, capital is relatively easy to raise.

However, corporations are more complex to set up and maintain than other business forms. They must adhere to stricter regulatory requirements, such as regular board meetings and annual reports. Additionally, corporations are subject to double taxation. The corporation itself is taxed on its profits, and shareholders are also taxed on dividends they receive. So, we believe that small businesses should only incorporate in limited situations.

Connect With a Savvy Manatee County Lawyer

Proper estate administration is just as important as proper estate plan creation. For a confidential consultation with an experienced estate planning lawyer in Bradenton, contact Drude Tomori Law. After-hours visits are available.

Source:

pewresearch.org/short-reads/2024/04/22/a-look-at-small-businesses-in-the-us/