What type of Entity Should you choose for your New Company?
Every situation has it’s own unique facts, and the type of entity you choose may be very important under your circumstances, but generally the most important thing about the entity you create is the contract it is based on. Allow me to explain:
Title XXXVI of the Florida Statutes defines the types of business entities recognized by Florida. These include corporations, limited liability companies, partnerships, and professional associations. Each of these entities has some features that are unique. For example:
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Partnership
Florida follows the Uniform Partnership Agreement, found here. In a partnership, the majority wins. If you have two partners, the dissenting partner can prevent action altogether. To get out of deadlock you have to dissolve the partnership and close the business. Partners have a right to inspect the books and records.
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Corporation (For more information, click here)
A corporation is a person, in the eyes of the law, that can own property and operate in perpetuity, owned and controlled by its shareholders in accordance with its shareholders’ agreement. These are either “closely held” by a small group of investors, or “publicly traded” if shares can be traded on an open exchange, like the NASDAQ.
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Limited Liability Companies or LLC’s (For more information, click here)
LLC’s are a legal entity created in the last 30 years, whose features vary by state but available in some form everywhere. They have some features of a corporation and others of a partnership. Management is flexible, because either all members can manage the entity, or there can be a designated manager member or members. The most important thing to agree on in the operating agreement is how voting will be done, because it can be “pro-rata” or “per capita.” Members have a right to inspect the books and records, as in a partnership.
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Professional Associations (For more information, click here)
Professional associations are basically partnerships among professionals of the same variety. For example, if you and a bunch of your architect friends wanted to start an architecture firm, you might choose to start a P.A. It is basically a partnership.
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Benefit Corporations (For more information, click here)
This is a new entity in Florida as of 2014. The purpose of this company, aside from the primary purpose, (meaning the type of product or service the company is providing to customers) is creating “general public benefit.” This type of entity must file an annual report explaining “the ways in which the benefit corporation pursued general public benefit during the year and the extent to which the general public benefit was created.” “Public benefit” means a positive effect, or the minimization of negative effects, taken as a whole, on the environment or on one or more categories of persons or entities, other than shareholders in their capacity as shareholders, of an artistic, charitable, economic, educational, cultural, literary, religious, social, ecological, or scientific nature, from the business and operations of a social purpose corporation.
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Social Purpose Corporations (For more information, click here)
This type of entity is also new in Florida as of 2014. The purpose of this entity is creating a specific public benefit, within a list of approved categories. This company also files an annual report explaining the ways in which the social purpose corporation pursued a public benefit during the year and the extent to which a public benefit was created.
If you are happy with the statute’s definitions of your rights and responsibilities in your type of entity, then you may not need to go further. However, there are many interesting variations that you can create, by adopting features of one type of entity within the framework of another entity. Furthermore, there are provisions that may be very important to your safety and financial security, like an indemnification clause to require the company to defend its management in the event of a lawsuit. It is wise to consult an attorney to understand what your risks are before selecting a corporate entity for your business. If you did not at first, it is not fatal. It may still be possible to change the form of your company.
