If you are a small business owner in the state of Florida, one of the best ways to limit your personal liability is through forming a partnership or LLC. These entity structures provide better protection against liability than that of a sole-proprietorship, while also avoiding the double taxation that corporations experience. Additionally, these business entities are not subject to shareholders, so there is no issuance of stock and any profits or losses are distributed solely to the owners. While both LLCs and partnerships share many similarities, there are some differences between the two, as well. Understanding these differences can help you decide which entity type is best suited for your business.
The partnership entity can come in different types depending on the profession of the partners and their management and investment choices. There is no issuance of stock in a partnership like there would be for a corporation, but rather the partners share the profits and losses of the business in proportion to their ownership share. Partner ownership share can vary in amount depending on initial investment and written agreement at the time of formation.
The owners of an LLC entity are referred to as members. Typically, an LLC drafts an operating agreement that details management structure and member responsibilities. This operating agreement is drafted during the formation of the LLC and can prove to be a useful legal document for settling disputes. Additionally, the agreement will detail member ownership percentages and stipulate the course of action in given scenarios.
Both LLCs and partnerships enjoy pass-through tax classifications. The pass-through classification allows the owners to report profits and losses on their own personal tax returns. There is a difference between the two, however. A partnership files a Form 1065 on behalf of the partnership each year, even though there will not be any tax due on its behalf. A Schedule K-1 is provided to each of the partners, detailing the partner’s share of profits and losses that year. The partner then files the Schedule K-1 with their own personal return. An LLC is not a recognized entity for taxing. Single member LLCs are taxed just like sole proprietors and multi-member LLCs are taxed like a partnership. LLCs also have the option of being taxed like a corporation or S-corporation.
This is one of the main differences between LLCs and partnerships, as the two have differing levels of liability protection. In a partnership, each partner shares liability for any debts incurred by the partnership. Additionally, each partner shares liability for the actions of the other partners. In an LLC, the entity is established with the intention of providing its members liability protection. So long as members maintain a clear separation between personal and business affairs, they cannot be held liable for any debts incurred by the business.
A limited liability partnership (LLP) is an entity that allows for partners to be exempt from liability for the action of another partner, but not from liability for any partnership debts. Professionals choose to form LLPs to protect the partners against any malpractice claims made against another partner. An LLP is generally made up of two or more partners, each of whom hold management responsibilities. Because the LLP provides a professional service where the possibility of negligence could have great impact, the state of Florida requires that all LLPs carry insurance. Additionally, LLPs pay $100 per partner in annual registration fees to the state of Florida.
Limited liability companies, on the other hand, can be owned by single or multiple owners. These owners are referred to as members and their management roles can vary within the organization. LLCs pay $125 in registration fees to the Florida Division of Corporations, along with an annual fee of $138.75.
Limited liability partnerships and companies share some similarities when it comes to taxes. Both are classified as pass-through entities, so are therefore not taxed separately from the partners or members. With LLPs, the profits are divided among the partners according to ownership stake or written agreement. Each partner pays income tax according to their distributive share, as well, regardless of whether or not they have withdrawn the profits. With LLCs, the owners are taxed like a partnership if there are multiple owners and taxed like a sole-proprietorship if there is a single owner. Similar to LLPs, those LLC profits are taxed whether or not withdrawal has taken place.
In an LLP, partners are not held individually liable for actions or malpractice of another partner. They are, however, liable for any debt obligations incurred by the partnership. In an LLC, members are not held individually responsible for any liabilities of the business. Only when the member acts outside the realm of business operations can he or she be held liable for their actions.
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