City of Miami - Economic Initiatives

The legal structure of your new business will determine the income tax form you will file. There are four basic taxes levied by the federal government: Income Tax, Self-Employment Tax, Taxes for Employers, and Excise Taxes.

To learn more about small business taxes you can visit http://www.irs.gov/businesses/index.html

The information that follows in this section only serves as a brief introduction to help you begin the process and is in no way a substitute for professional advice.

When you are considering the business entity you will form, you can begin by considering the following:

The size and nature of your business
The number of equity owners
The formality and level of structure you are willing to work with
The business's vulnerability to lawsuits
The tax implications for your business
The ease of transfer you wish your business to have to a family member, employee or outside purchaser.
The business's expected profit or loss
The need for re-invested earnings
The desired amount of personal liability
The options for generating capital

Sole Proprietorship

This is the simplest kind of business structure to establish and the vast majority of small businesses start out as sole proprietorships. It is run by the individual without outside investors, which is why the business owner is then called the sole proprietor. The business becomes an extension of the business owner.

Easiest and least expensive type of business ownership
The sole proprietor is in complete control, within the legal parameters, to make decisions
The formality and level of structure you are willing to work with
Profits flow through the owner's personal tax return
Easy to dissolve
Terminated at death of the proprietor
The proprietor has unlimited liability that extend to the actions of employees or agents acting on behalf of the proprietor. They are liable for business related debt and it may place personal assets at risk.
Can be difficult for raising funds and many times are limited to using funds from personal savings or consumer loans
May be difficult to attract talent with experience in larger companies or organizations
All the demands of running the business fall on the shoulders of the sole proprietor

Partnerships

General Partnership

A general partnership is when two or more persons enter an agreement to share ownership and operate a business together. Similar to a Sole Proprietorship the owners are liable for the business, and there is little distinction between business and owner. While a formal written agreement is not necessary when forming a partnership, it is strongly advised; otherwise any dispute will be settled according to the law of the state where the partnership is primarily located.

They are relatively easy to establish
There are no taxes paid at the business level, instead the individual partners are taxed on the income they receive from the business
The partnership may have a limited life, depending on the agreement made by the partners
Each partner is jointly or severally liable for any business debt or claim similar to a sole proprietorship

Limited Partnership (LP) and Partnership with Limited Liability (LLP)

A Limited Partnership is more complex and formal than general partnerships. They limit the liability of the partners while also limiting their management decisions, which makes them more attractive to short-term investors. The limits to the liability depend on the partner's investment percentage in the company.
A Partnership with Limited Liability (LLP) is very similar to a general partnership, but with more liability protection for the partners. They are formed by filing a Certificate of Partnership with the appropriate state office, but not all states recognize these partnerships and others limit them to professional groups.

Corporations

C-Corporation

A corporation is a business entity that is wholly separate from the shareholders who own it and considered by law its own entity. It will not dissolve when ownership changes. As its own entity it can be taxed, sued, or enter contractual agreements. The owners of the corporation are the shareholders who in turn elect a board of directors to oversee major changes or decisions.

A corporation has a separate legal and tax life
A corporation will pay its own tax rates and file taxes annually
Management and control is run by a board of directors
Authority for day to day operation is usually delegated to officers and employees
Shareholders are the owners of a corporation
A corporation may be formed and operated by one or more persons
The process of becoming a corporation takes more time and money than other forms of business entities
A corporation is monitored on the federal, state, and local level often times requiring a lot of paperwork

Sub-Chapter S-Corporation

An S-Corporation is different from a C-Corporation in that profits and losses are filed through the shareholder's personal tax return. The designation of an S-Corporation is created through an IRS tax election. The business remains its own separate entity limiting the owner's personal liability.

The business must first file a corporation application at the state level
The maximum number of shareholders is 75
Shareholders must be either US Citizens or Permanent Resident Aliens
A strict operational process is required that includes scheduled director and shareholder meetings, minutes, records maintenance and so forth

Limited Liability Company (LLC)

A Limited Liability Company is a hybrid of the operational flexibility and tax efficiencies of a partnership with the limited liability of a corporation. The life of an LLC is determined by the date the paperwork is filed. The owners of an LLC are called members and can be one or more persons, corporations, another LLC or even other entities.

A member's liability is limited to personal investment in the business
There is a complex tax filing system associated with an LLC
Tax and liability administration is not the same across state lines
They are easier to form than other types of corporations but more complex than partnerships
An operating agreement may not be required by your state but it is highly recommended for multi-member LLCs.

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