Choosing A Business Entity

Sole Proprietorship

A sole proprietorship is the simplest form of doing business since no separate legal entity needs to be created and no assets are required to be transferred to a distinct entity. All profits are immediately taxed to the proprietor-owner, and the proprietor-owner directly bears all business risks associated with the operation.

Sole Proprietorship

Partnerships

A partnership can be either a general or limited partnership. In either situation, the partnership is an alliance of two or more persons who intend to carry on a business as co-owners for profit. The partnership itself is not subject to federal income taxation. Rather, all of the income, deductions, and other tax attributes are allocated to the partners in accordance with the partnership agreement. In a general partnership, all partners have unlimited personal liability for the debts of the partnership. In a limited partnership, however, those partners designated as limited partners have exposure for liabilities only to the extent of their capital contributions to the partnership.

Limited Partnership

General Partnership

Corporations

A corporation is a separate legal entity that ordinarily is subject to federal income taxation on its earnings. When earnings are distributed to the shareholders of the corporation, the shareholders also are taxed on the receipt of those corporate profits. The shareholders are not personally liable for corporate obligations unless they have independently agreed with some creditor to be liable for those obligations or have engaged in conduct that allows a creditor to pierce the corporate veil.

Under some circumstances, a corporation can elect to be an "S corporation" for federal income tax purposes. That allows corporate income to flow through and be taxed to the shareholders, but not taxed to the corporation.

Regular Corporation

S-Corporation

Limited Liability Companies

An increasingly popular alternative entity choice is the limited liability company ("LLC") which is permitted under the laws of most states, including Florida. Owners of an LLC are called members and are not liable for the obligations of the LLC. An LLC is ordinarily treated as a partnership for federal income tax purposes, but it does not have many of the constraints that are imposed on S corporations.

Sole Proprietorship

Foreign Trusts

A foreign trust, much like a domestic trust, can be used as an entity for holding investment assets. A foreign trust is organized under the laws of a foreign jurisdiction, rather than under the laws of a state in the United States. A foreign trust can be set up to be treated as a domestic trust (referred to as "grantor trust"), or a foreign trust, depending on the planning objectives of the client. A transfer of property to a grantor trust does not result in a taxable event to the client, since the U.S. person is treated as the owner of the trust under the grantor trust rules. A transfer of property to a foreign trust (a "non-grantor trust"), results in a taxable event to the U.S. taxpayer.

Insurance Contracts

An insurance contract can be used to own investment assets. In combination with foreign trusts, foreign insurance contracts designed to comply with Sections 72, 7702 and 817(h) of the U.S. Internal Revenue Code offer substantial tax advantages to U.S. citizens.

Foreign insurance companies not only maintain a portfolio of currently approved investments, but are able to accept premiums in kind, which permits the policy to hold virtually any investment asset.

Once properly owned under an insurance contract, the assets will grow on a tax-deferred basis and the client can access these funds through tax-free loans against the policy.

Domestic Trusts

A trust can also be used as an entity for holding investment assets, but not for the operation of a business. A trust can be a grantor trust or a regular trust (sometimes referred to as a "true trust"). In some situations, ownership interests in a trust may be widely distributed and the ownership units regularly traded on a securities exchange.