from the Depths Of Obscurity an entrepreneur, a sole-proprietor, an individual… For Hire

Incorporating: A balancing act

(a comprehensive informative observation)

Incorporating in Florida

This is the story behind the creation of FirstSteps Headquarters Inc., from concept to reality and the resulting impact upon the community. Even though job creation has slowed, there is work to be done. Performing work and providing services invites governance and the ensuing tax and liability implication of such. To protect personal assets corporate entities are created to buffer personal assets from litigation and help protect investment aspirations from taxation. “A professional may choose to incorporate to limit liability on personal assets held outside the business entity. Dependent on the form of corporation undertaken, income earned by the business can allow for certain provision within the tax code. Choosing the right business structure is dependent on creating the right recipe of government oversight with liability and tax treatment.” from Tax Obligations of the Profession.

We have our cause and it is time to enact the movement. But first we must check with big brother and comply with the rules set out before us. In finding out compliance issues we check with our local state authority via the internet. Upon visiting http://www.myflorida.com, which serves as an information hub for Florida governance, businesses are directed to the Florida Division of Corporations http://www.sunbiz.org for processing. Sunbiz.org lays out the groundwork for optimal business creation within the state and explains potential federal intervention, http://www.irs.gov.

Legal Structures

In registering a business for Florida operation the incorporator must carefully select a business structure that optimizes the relation between liability protection and tax obligation. For example FirstSteps Headquarters Inc. was incorporated as an S-corporation because of the flexibility it allows for an up-and-starting company relying on its innovative partners acting independently to ensure the success of the business. So our partners report expenses incurred and their income earned through the business on individual tax returns. In making a decision for corporate structure the following legal structures are available to entrepreneurs.

* “A sole proprietorship is simple…owner…is entitled to all profits but…accepts unlimited liability. Income earned…is reported on owner’s tax rate.” [1] In Florida the income earned is reported on Schedule C or Schedule CZ, note also homestead laws limit liability reparation. [2]

* Partnerships are similar to sole proprietors but allow for two or more owners. “Each partner holds unlimited liability…and files taxes on the income earned through the partnership on their respective income tax returns.” [1] These types of businesses must file with the Florida Department of State Division of Corporations and incur registration and renewal fees: designating a registered agent $35, filing fee for new partnership $965, partnership renewal $500 annually. [2] Florida also allows for limited partnerships (LLP), owners acting in managerial roles are liable where as owners acting solely as investors are not. [1]

* “Limited Liability Companies (LLC) are a mix between partnerships and corporations. A LLC becomes a separate entity apart from the owners and allows for the taxing status of a partnership or corporation” [1] with the IRS. Filing occurs with the Florida Department of State, Division of Corporations and incurs the following fees: filing a new LLC $125, annual renewal is $138.75.

* “Corporations are taxable entities and the incomes earned by these businesses are subject to double taxation. Corporate losses do not outreach the amount invested by the shareholder. The formation of a board of directors is required to manage the business and filing fees apply.” [1] There are two different forms corporations can undertake: “In a C-corporation, the corporation rather than individuals pays taxes and assumes liabilities” [2] with a state tax rate of 5.5%; “An S-corporation allows up to 75 shareholders to share income and expenses and to report them on their individual income tax returns.” [2]

Sources:
[1] Tax Obligations of the Professional, Last Edited 3/4/2010
[2] http://www.floridatrend.com/, Published 3/1/2010 in Florida Small Business

Complying as a S-corporation

At the federal level…

A special provision differing S-corporations from other corporations is that the corporate entity isn’t liable for federal income tax and files federal form 1120S, note that some investment incomes and capital gains may still be subject to taxation. Other obligations include: withholding employee taxes (federal income tax, Medicare tax, and Social Security tax) which are levied through the Electronic Federal Tax Payment System or through Federal Tax Deposit Coupons reported in the Employer’s Quarterly Federal Tax Return; quarterly payment to the Federal Unemployment Compensation program, Federal Unemployment Tax Act (FUTA), allowing for tax credits and other provisions reported annually on federal form 940.

At the state level…

S-corporations usually are not required to pay state corporate income taxes in Florida but are subject to reporting other taxes such as: Unemployment Tax paid quarterly using form UCT-6 with Florida Department of Revenue, Sales Tax relinquish on the first day of each month through form DR-1 found on the Florida’s e-file site, Discretionary Surtax also due the first of each month is reported on form DR-15, Out-of-State Purchases are reported by the buyer if the seller fails to do so using form DR-15MO, and Tangible Personal Property Tax paid annual April 1 using form DR-405 with the county property appraiser.

Resources and useful publications for small business: http://www.irs.gov/businesses/small/index.html, http://dor.myflorida.com/dor/, and Publications 15, 334, 583 1518, and 4591.