Selecting the Proper Business Entity In Florida

Selecting the proper business entity requires me as the business lawyer to try to predict the future. Not only must I provide counsel to my clients on what the legal, tax and operational-related implications are for a given entity, but I must anticipate the needs and obstacles that my client may encounter. These considerations are especially important for small businesses.

Choosing the right entity can sometimes even have conflicting goals of asset protection, tax strategy, and operational efficiency. It is not unusual for the business lawyer and the business accountant to offer conflicting advice to our mutual client concerning the selection of an entity because we both provide differing perspectives on solutions for the same questions. Below is an analysis that I usually undertake, however, resolution of the selection question always depends on the particular client’s situation and needs. As we evaluate which entity is right for a client, we consider each of the topics below:

Size of Investment and Growth Potential

Generally, the larger the initial investment and the larger the expected business, the more complex and detailed the entity will be. Some entities are better suited to deal with the myriad concerns that a larger investment entails. Although the future growth of any particular business cannot be foreseen, I advise my clients to analyze the industry before starting the business to determine its reasonably anticipated growth potential, then we can choose the entity that will best accommodate that growth. Usually, for a business that can reasonably anticipate only modest growth, a limited liability companymay be enough. On the other hand, a business that can reasonably expect rapid expansion must be in an entity that facilitates growth such as a corporation

Number and Relationship of Owners

A sole proprietorship, regardless of the entity chosen, raises less concern about conflict of interest because the interests of the owner and the entity are generally aligned. The need for organizational documents is nonexistent. While an employment agreement may be appropriate for a sole proprietorship, it should not involve as many issues as when the entity is owned by other persons in addition to the employee.

In contrast, if there are to be multiple owners, the organizational considerations increase. In addition to the possible conflict between the owners, there is the possible conflict between an owner and the entity, whether during the life of the entity or during an event of termination of the entity. Events of termination that we must address include termination for death of the owner or key person, sale of all or substantially all of the entity’s assets, criminal act by an owner, divorce by an owner, disability of an owner or key person, and such other events as I, in consultation with the client, can anticipate. There are potential positive and negative factors inherent when close relatives are in business together. Therefore, I ask my clients to consider a well-defined exit policy and procedures such as buy-sell agreements, rights of first refusal, ownership interest transfer restrictions, and prearranged redemption agreements. If the relatives are parents, the role of life insurance in the agreements needs to be considered.

Intended Present Ownership and Desired Management Structure

One of my concerns as a business lawyer is how the client intends for the entity to be owned and managed.

Sole-member and multi-member limited liability companies operate differently, and the members will have different liability exposure. An entity that is to be owned and managed by the same person or other single entity, while not requiring the same organizational documents as a multi-member managed entity (such as an operating agreement, partnership agreement, shareholder agreement, or the like), will nevertheless have greater operational formalities that, if not observed, will allow easy piercing of the corporate veil. On the contrary, a multimember entity will require more formal, integrated organizational documents to avoid mutually destructive conflict among the owners and difficulty at break-up or sale of the entity.

Present and Future Business Plans

Although historically, certain types of businesses were organized within certain particular types of entities, the distinctions are becoming less important. Today, nearly any entity may be suited for nearly any business. There are, however, specific rules and statutes that dictate the types of business organizations that attorneys and other professionals may form, and with whom those professionals may practice. When considering the choice of entity issues for a particular client, I become familiar with the particular business or industry in question. There may be very good reasons why particular businesses are so often organized within certain entity structures.