LEGAL BUSINESS ENTITY STRUCTURES
Business Transactions and Corporate Law Lawyers
Choosing the right legal business organizational structure for your commercial enterprise is extremely vital as it affects areas of your business prosperity including but not limited to: ability to obtain financing, marketing and growth, future expansion pursuant to merger or acquisition, as well as future succession. For some Business Plans, you may even need to incorporate two or more business entities to function together. A knowledgeable Business Lawyer will understand your needs, and be able to help you choose the best legal business entity structure to coincide with your Business Plan. If you are already incorporated and require a review of your business entity structure, we provide complimentary business entity structure reviews and can assist you with that as well since most state laws do allow business entities to undergo conversions (changes in legal structure) after they are formed.
Unincorporated Business Legal Business Entity
Have you ever sold a product to another person for profit, or helped a friend with a service you were competent in exchange of a monetary benefit? I am sure the answer to this is “of course.” If you indeed answered yes to that question, you should know that you may have completed such acts as an unincorporated business. Now that doesn’t mean that you should run into the Florida Department of State Division of Corporations Office and incorporate a business every time you have a yard sale! However, you should be aware of such legal business entity structure as well its downfalls. Unincorporated business entity structures result in unlimited liability for its owners. In other words, you may be held personally liable in the event that you are sued as a result of unincorporated business activity. It is never prudent to conduct business activates without the appropriate legal business structure, unless they fall within certain exceptions.
Sole Proprietorship Legal Business Entity
Sole Proprietorships are one step up from the unincorporated businesses, however, they are just as imprudent. Sole Proprietorships are created locally through licensing and permits, without filing any state documents. Similar to the unincorporated business, Sole proprietorships pass their liability to their owners.
General Partnerships are made up of two or more Partners where all the Partners manage and are responsible for the business’s debts and operations. The General Partnership may be created outside of state law. Oftentimes, two or more individuals agree to go into business with each other by signing a Partnership Agreement or through an oral Agreement. Oral Partnership Agreements are extremely difficult to enforce, therefore, it is crucial that any Partnership which has been agreed to orally by one or more of the Partners be immediately dictated into a writing which should be signed by all Partners. The major disadvantage of this legal business structure (like the unincorporated business and Sole Proprietorship) is that General Partnerships also pass their liability onto their Partners and each Partner is liable for the acts of other Partners. You may also run into management issues as each Partner has unrestricted ability to act on behalf of the Partnership.
For many years, Limited Partnerships have been commonly used to structure businesses for financing from venture capitals, incorporate professional practices, as well transfer wealth from one generation to the next. Unlike the General Partnership, the Limited Partnership is created by filing a Certificate of Formation with the Secretary of State. You cannot maintain that you have incorporated a Limited Partnership without completing such filing (state laws vary as to the method of completion as well as fees charged by the state for such service).
Most Limited Partnerships are governed by either the Uniform Limited Partnership Act or the Revised Uniform Limited Partnership Act. For instance, in 2005, Florida adopted its own set of rules and procedure under the Florida Revised Uniform Limited Partnership Act of 2005.
The Limited Partnership has an extremely versatile structure which comprises of two sets of Partners (General Partners and Limited Partners). General Partners participate in the management of the Limited Partnership and are personally liable for the Limited Partnership’s business activities, debts, and other obligations. Limited Partnerships may not manage the Limited Partnership (at the risk of losing their limited liability status). Limited Partners are not personally liable for business activities, debts and other obligations of the Partnership, but are liable to the extent of their capital contribution or financial investment in the business.
There is no requirement that either of the Partners have proportionate Partnership shares and other business entities may be Partners, thereby allowing disproportionate and unique ownership options and great flexibility in planning.
Limited Liability Company
The Limited Liability Company (or “LLC”)is a great business planning tool whether you are a small, medium, or large-sized business. The Limited Liability Company is created by filing the appropriate documents with the Secretary of State.
The Limited Liability Companies can be either Member Managed, or Manager Managed. The advantage to having a Manager Managed Limited Liability Company has the advantage of privacy, as the general public does not know who the owners of the LLC are, only the Managers. In a Member Managed LLC, all Managers have equal authority to bind the company for major decisions. However, In a Manager Managed LLC, only the Managers can bind the Company (absent specific enumeration of powers for Non-Managing members in the Operating Agreement of the LLC.
The Limited Liability Company is Often paired with the Limited Partnership to deliver a versatile vehicle to procure investments, yet keep an extra layer of protection between you and the Partners (pending you adhere to particular corporate formalities). Real Estate is also another great asset to pair with the Limited Liability Company, and such business entities can be used in your Estate and Trust Planning.
While the Limited Liability Company protects its members from liability, many Courts have determined that two member LLC’s receive a higher degree of protection as there are two individual’s interests at stake. We always advise incorporating multi member Limited Liability Companies, even if the second person’s interest is minimal and they retain no management authority.
The Traditional C Corporation is great for Companies who intend on becoming public in the future. Although, a major downfall of such structure is double taxation. The Corporation can, however, elect to be treated as an S Corporation which passes its tax liabilities through to its shareholders. S Corporations are often family owned businesses, or small corporations which do not exceed 100 shareholders. Corporations oftentimes participate in stock raises in the event that they need additional operating funds and may have the ability to dilute shares.
A Non-Profit Corporation is incorporated for only qualifying specific purposes.Non-profit Corporations are incorporated to provide benefits to the public. This may include charitable organizations or other tax exempt organizations. One of the most common forms of Non-Profit Corporations is the 501(c)(3), which is set up to do charitable, educational, scientific, religious and literary work. Organizing as a non-profit organization does not always grant you the Federal Income Tax Exemption, you also have to qualify as a non-profit organization on the Federal Level.
Professional Entity Structure
The Professional Entity Structure is created and regulated by both state law as well as the licensing board of the particular profession. Usually, the two sets of regulations mirror each other but it is important to look to both state law and professional ethics to determine whether the parameters of how your business entity should be set up.
Universally, state and licensing regulations allow for the creation of a Professional Limited Partnership (“LLP”), Professional Corporation (“PA” or “PC”), or Professional Limited Liability Company (“PLLC”) for members of the same profession. The major stipulation to forming these companies is that the all owners of these businesses must contain the same licensing and certifications to practice and provide the that the business was created to provide to the public. For instance, a Law Firm may only be owned by Lawyers, an accounting firm may only be owned by Certified Public Accountants, and a Dental Practice may only be owned by Dentists.
The Limited Partnership and Limited Liability Company are great structures because they allows for the incorporation of voting and non voting members or partners (which allows a Senior Partner to control the actions of Junior Partners).
Corporate Practice of Medicine
Corporate Practice of Medicine is defined as licensed medical Practitioners (doctors and/or nurses) practicing medicine under the business structure of a traditional Corporation, as opposed to a Professional Corporation or Professional Limited Liability Company as detailed above. The Corporate Practice of Medicine is governed by statute law and although most states prohibit such practice, it is important to annotate that this topic remains controversial as the laws governing such prohibition stem from older laws and cases.
Further, there are a few exceptions to the prohibition of Corporate Practice of Medicine. For instance, New York courts have recognized the ability of hospitals, including general hospitals, public health centers, diagnostic and treatment centers, nursing homes, as well as medical schools, to engage in the practice of medicine, to charge fees and share such fees with licensed professionals. Also, corporation may have a physician or nurse staff member to handle medical emergencies since such services are not provided to the public. Finally, business Corporations may provide management services for licensed medical professionals.
In Florida, medical practitioners licensed as dentists and in the field of optometry must incorporate as Professional Corporations or Professional Limited Liability Companies pursuant to the laws governing such licensure.
If you are a medical practitioner, you should keep yourself updated on the topic as the case law and statutes governing such practice may be overturned in one or more states (as the case usually is) and you and/or your existing business may benefit from such rulings.
Learn more about the different facets of Business Transactions and Corporate Law by visiting the links below:
- Incorporating your Business
- Legal Business Entity Structures
- Business Documentation
- Buy-Sell Agreements
- Business Succession Planning
- Real Estate Transactions
- Corporate Tax
- Corporate Finance
Contact our Law Firm to obtain a Complimentary Preliminary Consultation on how we can assist you with your Estate Planning, Probate, Legal, Business Law, Real Estate, Tax Planning and/or Tax Preparation needs.
Info@HowardSchwartzPA.com | (561) 997 0000