Business Law 101 / Types of Business Entities
By Albert L. Kelley, Esq.
Now it is time for one of the big decisions: what type of business entity will own the business? This may be dictated by circumstances, but usually you can plan this out. The simplest structure is the sole proprietorship. This is simply an individual doing business. There is no requirement to register the entity with the state, although you may need to register the business name, unless you are using your own name (In Florida, it is criminal to operate a business without registering the name). There are no requirements for meetings. It is just the owner doing what the owner chooses. Unfortunately, it also means the start-up capital is limited to what the owner has or can borrow. While a sole proprietorship is a simple structure, it includes tremendous liability. If anything happens, the individual owner is personally liable. A judgement against the business is a judgment against the owner. While you can get liability insurance, any damages over and above the insurance is collected from the business owner.
A similar structure is the general partnership. In a general partnership, two or more people work together to operate the business. Like with a sole proprietorship, a general partnership does not need to be registered with the Department of State, although the business name will still need to be registered. And similar to the sole proprietorship, all partners have personal liability for anything the business does, or anything your partner does in furtherance of the business. The one advantage a partnership has over the sole proprietorship is the additional capital. Instead of relying on the savings of one person to start the business, a partnership allows multiple people to pool their funds.
If you like the concept of the partnership, but don’t like the liability, there is a business entity called the Limited Partnership. Limited Partnerships must be registered with the Department of State. With a Limited Partnership, there are essentially two classes of partners. First you have the General Partner. This is the person who actually runs the business. When the Limited Partnership is registered with the Department of State, the General Partner must be identified as well. Then you have Limited Partners. Limited Partners are essentially silent owners. While they have an ownership interest in the business, they have no management authority over the business, and their identity does not need to be revealed in the State filings. And because they have no management authority, they have no liability for activities of the partnership outside their ownership interest. The general partner however, remains fully liable.
Next you have corporations. A corporation is a separate entity from its owners. Corporations are formed by filing Articles of Incorporation with the Department of State. They are owned by shareholders, managed by Directors and run by officers. The shareholders have no personal liability for the activities of the corporation, outside their investment in the stock.
Finally you have the Limited Liability Company. This is very similar to a Corporation. It is created by filing Articles of Organization with the Department of State. It is owned by Members, and run by Managers. The Members liability is limited to their investment in the company. In our next column we will discuss the types of corporations and the differences and tax issues between Corporations and Limited Liability Companies.
Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University. He is also the author of “Basics of Business Law” “Basics of Florida’s Small Claims Court” and “Basics of Florida’s Landlord-Tenant Law” (Absolutely Amazing e-Books). This article is being offered as a public service and is not intended to provide specific legal advice. If you have any questions about legal issues, you should confer with a licensed Florida attorney.