Corporate governance is the structure that provides businesses with a framework for growth and problem-solving. Even small, family-run niche businesses can benefit from a specific corporate structure.
Governance structures determine your personal liability, taxes paid, and the recordkeeping required. It can also impact decision making, accountability, and risk management. It can be simple, such as a sole proprietorship, or robust, including a board of directors and shareholders who have a say in the business’s function and direction. The governance structure you choose will affect your ability to raise money, grow, and innovate.
An experienced business attorney who understands the pros and cons of corporate structures and their effects on taxes can save you time choosing the appropriate designation to match your future goals.
Benefits of Corporate Structure for Small Businesses
By creating an entity with a board of directors, shareholders, and managers who have specific areas of professional expertise, a corporation becomes less reliant on an individual or partnership to self-sustain. Creating a corporate structure improves the ability to borrow and expand, to act professionally when issues arise, and to chart a course into the future.
Key roles in corporate structures include:
- Board of directors. These people are selected for their expertise and reduces reliance on individual owners. They recruit managers, provide strategic vision, and monitor risk.
- Shareholders. This group elects board members and helps to steer the company to profitability by maintaining focus on long term goals.
- Management. The primary role of this group is to work toward the company’s goals (set by the board of directors) on a day-to-day basis.
- Audit committee. A subset of the board of directors, this group ensures that the corporation meets its fiduciary duties for reporting and allocating profits and losses.
Which Corporate Governance Structure is Best for Your Small Business?
Will your business grow over time, or remain a small entity? Your goals dictate the best corporate governance structure for you. This list describes business structures and their best use:
- Sole proprietorship. No business entity filing is necessary for this structure as it is indistinguishable from your personal accounts. That means you are personally liable for everything. This structure can be a first step for many people, who change their designation and add employees as the business takes off.
- Partnership. This form is governed by a partnership agreement and can either be two or more people such as a doctor’s practice or group of attorneys. Principals choose between limited liability or limited partnership. Partners are protected in a limited liability partnership and are not held responsible for other partners’ actions. A limited partnership has one primary partner, the general partner, who has unlimited liability.
- Limited Liability Company. A hybrid structure that borrows from both partnerships and corporations, principals avoid corporate taxes but must pay self-employment taxes. Profits and losses are reflected on individual tax returns. Some states have onerous requirements for LLCs, but Florida requires only an annual report and filing fee. In Florida, LLCs can opt to be taxed as C- or S-corporations.
- C Corporation. These entities are separate from their owners so provide maximum liability protection, yet they come with additional requirements for reporting and taxation, including filing for incorporation and naming corporate officers. Under a C Corporation designation, the company pays income tax on profits and again on dividends to shareholders. It’s a structure often used by companies that plan to go public.
- S Corporation. Called a “pass-through,” this structure has limitations, including no more than 100 shareholders. Profits and losses are passed to the shareholder’s individual tax returns. Florida is a popular state to incorporate under this designation because there is no individual income tax.
- Nonprofit Corporations. There are strict rules for nonprofits as they do not pay state or federal taxes. Nonprofits are not allowed to show income but otherwise have structures similar to C Corporations.
Setting Up an Effective Governance Structure for Your Florida Business
Selecting the right corporate governance structure is a foundational decision that impacts your company’s future. Whether launching a new venture or reevaluating your current structure, the business experts at WKFK Law can help you make informed, strategic choices tailored to your business goals. Call for a consultation today.
