An Overview of Common For-Profit Business Organizations in Florida
Welcome to Florida! According to the U.S. Census Bureau, Florida was the fastest growing state in 2022. The last time the state held that title was in 1957. If you’re new here and interested in starting a business but don’t know where to start, or you’re a lifelong Florida resident and looking to start a new venture, don’t worry! We’ve got you covered. Here is a basic overview of common business organizations under Florida law. While the information in this article covers legal subjects, it is not legal advice and is being presented for educational purposes only. With that out of the way, let’s begin!
The Big 4 of Business Organizations
Sole Proprietorships
A Sole Proprietorship is created any time someone goes into business by themselves without creating a business entity with the Division of Corporations of the Florida Department of State. So, in that sense, it can be considered the default business organization.
While a Sole Proprietorship is easy to create, it is far from the ideal business organization. This is because the owner of a Sole Proprietorship is personally liable for the business’ debts, liabilities, and obligations. So, if you own a business as a Sole Proprietorship and someone wins a lawsuit against your business, they could take your personal assets to satisfy the judgment.
In most other business organizations, the owners of the business are not personally liable for the business’ obligations. So, their personal assets could not be taken to satisfy a judgement against the business. This major disadvantage of Sole Proprietorships is why it is a highly disfavored business organization.
Partnerships
A Partnership is created whenever two or more people go into business together without creating a business organization with the Division of Corporations, just like a Sole Proprietorship. The main distinction between a Sole Proprietorship and a Partnership is the number people that own the business. A Sole Proprietorship has one owner; a Partnership has more than one owner. The owners of a Partnership are called Partners.
So, what distinguishes a Partnership from a Sole Proprietorship with employees? The answer is the intent of the Partners when forming the Partnership. For a Partnership to be created, the Partners must intend to operate a business as co-owners and share in the profits of the business. If two people start operating a business and one of them is paid an hourly wage or a salary, and not the business’ profits, a Partnership has likely not been created. This arrangement is a Sole Proprietorship with one person working for another.
Just like a Sole Proprietorship, the Partners are personally liable for the debts and liabilities of the business. This liability is joint & several, meaning each Partner is responsible for 100% of the Partnership’s obligations. Additionally, a Partnership is liable for the losses and other negligent actions of its Partners.
Due to there being no legal entity between the Partnership and the Partners, a Partnership does not pay taxes. Instead, the income and losses are divided between the Partners in proportion to their ownership interest or as stated in the Partnership Agreement. A Partnership Agreement is an Agreement between the Partners about how the Partnership will be run.
Partnerships are governed by the Revised Uniform Partnership Act, which is found in Part II of Chapter 620 of the Florida Statutes.However, if there is a Partnership Agreement between the Partners, most of Revised Uniform Partnership Act does not apply. The flexibility of Partnership management makes them a popular business structure in some industries.
Corporations
A Corporation is created by filing a document called the Articles of Incorporation with the Division of Corporations. The filing fees for creating a new Corporation in the State of Florida are approximately $70.00. A Corporation is governed by two documents, the Articles of Incorporation, which is the previously mentioned registration statement filed with the Division of Corporations, and its Bylaws, which are an internal list of rules that establish how the Corporation must be run.
Unlike a Sole Proprietorship or Partnership, a Corporation is considered a separate person in the eyes of the law. Corporations have many rights, including to buy, hold, and sell property, enter into contracts, and to sue and be sued in their own name.
Investments in Corporations have Limited Liability Protection. This means that, absent any wrongdoing, the owner of a Corporation’s personal assets cannot be used to satisfy the Corporation’s debts and liabilities. The most an owner can lose is the value of their investment in the Corporation. The introduction of Limited Liability Protection encouraged investment and entrepreneurship, which made Corporations a popular business structure when they were introduced in the early 1900s.
An ownership interest in a Corporation is called a Share. The Articles of Incorporation must state the total number of shares the Corporation is allowed to issue. If the Corporation plans to have types of shares with different rights, the Articles of Incorporation must include a list of the types of shares, the number of each type of shares issued, and a description of the preferences, limitations, and rights of each type of Share.
Someone that owns a Share of a Corporation is called a Shareholder. The Corporation is designed so that Shareholders do not have to be involved in the day-to-day operations of the Corporation nor do they have to be involved in making high-level business decisions. The main rights afforded to Shareholders are to receive the Corporation’s profits in the form of dividends, to elect of the Board of Directors at the Annual Meeting, and to vote in Special Meetings, if any.
In a Corporation, making high-level business decisions is the responsibility of the Board of Directors. They have a duty to make these decisions with the best interest of the Shareholders in mind. Among the decisions typically made by the Board of Directors is approving major transactions like mergers or acquisitions, approving corporate strategy, and hiring and overseeing the Corporation’s Officers, who oversee the Corporation’s day-to-day operations. A Corporation’s Officers are usually the C-Suite positions like the CEO (Chief Executive Officer), COO (Chief Operating Officer), and CFO (Chief Financial Officer).
Since a Corporation is considered a separate person from its Shareholders in the eyes of the law, its earnings are subject to income tax. Currently, the federal tax rate for Corporations is 21%.Even Florida, which is famous for its tax-friendly business environment, taxes the income of Corporations at 5.5%. Corporations are subjected to what is commonly referred to as “double taxation.” The first level of taxation is the above-described corporate income tax. The second level of taxation occurs when a Corporation issues dividends to its Shareholders. The dividends are taxed to the Shareholders as capital gains income.
Unlike a Partnership, which has great flexibility in terms of management, a Corporation has a strict set of formalities and procedures that must be followed to preserve its Limited Liability Protection. These are found in the Florida Business Corporation Act, which is Part I of Chapter 607 of the Florida Statutes. Also, unlike a Partnership, one person can act as the Shareholder, Board of Directors, and Officer of a Corporation.
Limited Liability Companies
A Limited Liability Company (“LLC”) is created by filing a document called the Articles of Organization with the Department of Corporations. The filing fees for creating a new Florida LLC are $125.00. An LLC is governed by two documents, the Articles of Organization, which is the previously mentioned registration statement filed with the Division of Corporations, and an Operating Agreement, which is an agreement between the owners of the LLC on how the LLC will be run, like a Partnership Agreement.
The owners of an LLC are called Members, which an LLC can have one or more of. An LLC can also have Managers.These are people who run the day-to-day operations of the LLC but are not owners of it. If an LLC does not have Managers, it is a Member-Managed LLC, and the Members will be involved in the day-to-day operations of the business. If an LLC has Managers, it is a Manager-Managed LLC, and the Members do not need to be involved.
As a business organization, An LLC is best understood as a hybrid between a Sole Proprietorship or a Partnership and a Corporation. Like a Corporation, an LLC is a separate person in the eyes of the law, has Limited Liability Protection, and possesses the same powers as a Corporation, including to buy, hold, and sell property, enter contracts, and to sue and be sued in its own name.
Despite the fact an LLC is considered a legal person separate from its Members, it does not have to pay corporate income tax. Instead, the Members of an LLC divide profits and losses of the business according to the Operating Agreement and pay taxes accordingly, like Partners in a Partnership.
Also like a Partnership, the Members of an LLC are given great flexibility in the management of their business. In most cases, the Members are governed by the terms of their Operating Agreement instead of the Florida Revised Limited Liability Company Act, which is found in Chapter 605 of the Florida Statutes. However, while an LLC has fewer administrative formalities than a Corporation, there are still some that need to be observed to maintain Limited Liability Protection.
Other Less Common Business Organizations
Limited Partnership
As the name implies, a Limited Partnership is a type of Partnership. Like all Partnerships, there is more than one Partner in Limited Partnership. However, unlike a regular Partnership, which has one type of Partner, each of which is jointly & severally liable for the debts and liabilities of the Partnership, a Limited Partnership has two types of Partners. These two types are Limited Partners and General Partners.
Limited Partners receive Limited Liability Protection from the obligations of the Limited Partnership. This is true even if they participate in the management and control of the Limited Partnership. This is because Limited Partners are intended to be more like silent investors than day-to-day operators.
General Partners, the other type of Partner, do not receive Limited Liability Protection. General Partners in a Limited Partnership are akin to Partners in a regular Partnership. General Partners are jointly & severally liable for 100% of the Limited Partnership’s obligations.A Limited Partnership is liable for the losses and other negligent actions of its General Partners.
Limited Partnerships are governed by the Florida Revised Uniform Limited Partnership Act of 2005, which is found in Part I of Chapter 620 of the Florida Statutes, unlike Partnerships and Limited Liability Partnerships, which are governed by the Revised Uniform Partnership Act, found in Part II of Chapter 620.
A Limited Partnership is formed by filing a Certificate of Limited Partnership with the Division of Corporations. Unlike other business entities, which are intended to be cost-effective, it costs $1,000.00 to file a Certificate of Limited Partnership.
Limited Liability Partnership
A Limited Liability Partnership is a regular Partnership in which every Partner receives Limited Liability Protection. Unlike the Limited Partnership, which had two defined classes of Partners, each with different responsibilities, liabilities, and duties to the Limited Partnership, a Limited Liability Partnership has one class of Partners, each of which having the same rights, liabilities, and duties to the Limited Liability Partnership.
Limited Liability Partnerships are formed by filing a Statement of Qualification with the Division of Corporations.Unlike the unusually high price tag on the Certificate of Limited Partnership, filing a Statement of Qualification will run you about $25.00.
Limited Liability Limited Partnership
A Limited Liability Limited Partnership combines the General/Limited Partner distinction of a Limited Partnership while granting Limited Liability Protection to every Partner, including the General Partners.
Thus, unlike a Partnership or a Limited Liability Partnership where every Partner has a fiduciary duty to the Partnership, a Limited Liability Limited Partnership can have Limited Partners who don’t have a fiduciary duty and General Partners who do have a fiduciary duty while offering all of them the benefit of Limited Liability Protection.
Under Florida law, there are two ways to form a Limited Liability Limited Partnership. The first is to select the option to form a Limited Liability Limited Partnership when completing the Certificate of Limited Partnership. The Second is to use a Limited Liability Partnership as the General Partner of the Limited Liability Limited Partnership.
Social Purpose Corporations & Benefit Corporations
Earlier, it was stated that the Board of Directors have a duty to make their high-level business decisions with the “best of the Shareholders in mind.” Over the years, this phrase has been understood to mean that the Board of Directors must put the interest of their Shareholders above all others. This translates to making to decisions that will lead to Shareholders receiving the most profit. This concept, named Shareholder Primacy, is a core premise of corporate law in the United States. In fact, the Florida Business Corporation Act gives Shareholders the right to sue other Shareholders, Directors, and Officers of a Corporation to protect their interests to make receive the most profit from the Corporation. This type of lawsuit is called a Shareholder Derivative Action.
Over the last sixty years, a concept called Corporate Social Responsibility has increased in popularity among businesses and the general population. Corporate Social Responsibility is the idea that businesses should be active and ethical members of their communities striving to minimize the social costs associated with their operations. Corporate Social Responsibility is not a government mandate, it is a form of self-regulation. Businesses are expected to adjust their operations to follow these ethical norms. For a Corporation, this means valuing the needs of the community on par with the best interests of the Shareholders.
Corporations wanting to operate in a socially responsible manner consider Shareholder Primacy and the threat of a Shareholder Derivative Action as serious deterrents. To address these concerns, the Social Purpose Corporation and the Benefit Corporation were created. Florida passed legislation allowing Social Purpose Corporations and Benefit Corporations in 2014.
Under Florida law, the difference between a Social Purpose Corporation and a Benefit Corporation is how much of the Corporation’s activities must be dedicated to the public’s benefit.
A Social Purpose Corporation pursues a Public Benefit as part of its corporate purpose.A Public Benefit is defined as a positive impact, of an artistic, charitable, economic, educational, cultural, literary, religious, social, ecological, or scientific nature, arising from the Social Purpose Corporation’s business and operations on one or more non-Shareholders.An example of a Public Benefit would be a Corporation that develops vaccines distributing said vaccines at little to no cost in developing nations to combat the spread of disease. A Social Purpose Corporation may choose to, but does not have, to operate according to a third-party standard in the execution of activities to accomplish its public benefit.
A Benefit Corporation pursues a General Public Benefit as part of its corporate purpose.A General Public Benefit means a material, positive effect on society and the environment coming from the business and operations of the Benefit Corporation, as assessed using a third-party standard. Unlike a Social Purpose Corporation, which could limit its Public Benefit to a particular group of people, a Benefit Corporation must consider the effect of its operations on the community at a macro level.
Another difference is the actions of a Benefit Corporations must be evaluated pursuant to a third-party standard, while the actions of a Social Purpose Corporation do not have to be.
The Board of Directors of Social Purpose Corporations and Benefit Corporations are required to prepare an Annual Benefit Report describing how said Corporations pursued a Public Benefit or General Public Benefit and any hinderances in the pursuit of the creation of these Benefits experienced by the Corporations over the previous fiscal year. The preparation of the Annual Benefit Report may be delegated to a Benefits Officer, if said Corporations have one.
To become a Social Purpose Corporation or Benefit Corporation, a statement declaring “the Corporation is a Social Purpose Corporation under Part II of the Florida Business Corporation Act;” or “the Corporation is a Benefit Corporation under Part III of the Florida Business Corporation Act” must be included in the Articles of Incorporation, respectively. The Board of Directors and Officers of Social Purpose Corporations and Benefit Corporations must also adhere to the standard of conduct requirements of their respective Parts to maintain the status of Social Purpose Corporation or Benefit Corporation.
Professional Service Corporations & Limited Liability Companies
Under Florida law, certain kinds of businesses provide “Professional Services.” A non-exhaustive list of jobs that provide Professional Services includes accountants, physicians, architects, surgeons, veterinarians, attorneys, and dentists. If you practice in a Professional Service and want to establish a Corporation or Limited Liability Company for the practice that Professional Service, the law requires you to do so through a Professional Service Corporation or a Professional Limited Liability Company.
These business entities operate in a similar manner to their regular counterparts, however, there are some restrictions. Three of the most notable include:
Series LLC
A Series LLC is a new business organization that is like a Holding Company. In a Series LLC, there are two roles, the Master LLC and the Series. First there is a Master LLC, which is the LLC that files the Articles of Organization. This Master LLC can then create multiple Series under it. The Series are similar to the Subsidiaries in a Holding Company. Each Series under the Master LLC can operate as a business independent from one another and from the Master LLC. Should someone sue one of the Series, the assets of the other Series and the Master LLC are safe from the Defendant Series’ creditors.
Florida law does not authorize the formation of Series LLCs. As of 2023, nineteen states have authorized Series LLCs (Alabama, Arkansas, Delaware, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nebraska, Nevada North Dakota, Oklahoma, South Dakota, Tennessee, Texas Virginia, Utah, and Wyoming) as well as the District of Columbia and Puerto Rico.
You can organize a Series LLC in another state and register that Series LLC in Florida as a foreign LLC. If you do so, your LLC will still be governed by the laws of the state where you organized it. However, Florida’s Revised Limited Liability Act of 2005 may require each Series formed under your Master LLC to register as foreign LLCs if they intend to operate in Florida.
We Can Help You Pick the Right Business Organization
As you can see, Florida law provides for many different business organizations. Each has its benefits and drawbacks, and they aren’t exactly interchangeable. There are situations where one would work better than another.
At TealAcre PLLC, we have corporate and business law attorneys experienced in business entity formation. We will find the best strategy for you and your business goals, helping you establish a foundation to build your empire on. Call us today at (352) 224-9811 to schedule a consultation.