Florida Law
Florida Small & Privately Held Business Law
Small & Privately Held Business Law
A small business is one that is owned by a single individual or small number of persons. Some states have specifically adopted laws to encourage and support the development of small businesses. For example, the Florida Small and Minority Business Assistance Act created a small business advisory council and provides for various programs to benefit small businesses. Attorneys who specialize in helping small businesses can help people starting or restructuring companies decide how best to organize. They also can help owners understand the consequences of the various organizational structures for governmental regulation, day-to-day operation, and tax purposes. This chapter discusses the legal aspects of starting, operating, and selling small businesses.
Organization
One of the first and possibly most important decisions
a person starting a small business will make is how
to organize the business. There are many ways to organize
small businesses, including sole proprietorships, partnerships,
franchises, corporations, and limited liability companies.
Sole Proprietorship
The simplest form of small business is the sole proprietorship,
in which the business is owned, managed, and controlled
by one person. A sole proprietorship may have employees,
but only the owner is in charge of the business. The
owner receives the business profits and losses. The
owner also is personally responsible for any debts
the business may incur. Income, expenses, and losses
are reported on the business owner's individual federal
tax return.
A sole proprietorship is relatively easy to organize. The business owner is responsible for obtaining appropriate licenses, if any, and tax identification numbers, and must register the business name. There are no specific state filing requirements in Florida for this business option.
The benefits of the sole proprietorship include having complete control over the business, ease of the initial set-up, and having business profits taxed at the individual taxpayer rate, which is lower than the rate charged to corporations. The primary drawback to sole proprietorship is the personal responsibility for debts and liabilities of the business. For example, if a business owner does not pay the business' debts, the creditors may access the owner's personal assets, such as his or her personal checking account, house, or car. A business owner may obtain insurance to minimize this drawback. Other drawbacks include lack of continuity (when the business owner dies, the business ceases to exist) and tax issues, such as not being able to deduct health and life insurance premiums on the sole proprietor's federal income tax return as business expenses.
Partnership
A partnership is formed when two or more people who
have not filed for incorporation agree to carry on
a business together and to share profits and liability.
A partnership is relatively easy to form and some partnerships
are valid even without a written agreement setting
forth its terms.
There are two types of partnerships: general and limited. State and federal tax codes make a number of distinctions between limited and general partnerships. Neither kind of partnership has to pay federal income tax; instead, each partner pays tax at the individual tax rate on his or her share of the profits.
In a general partnership, each partner has an equal voice regarding how the business is run. Florida courts have ruled that a partnership can be formed simply by the act of two people running a business together, even if they never had a formal, written agreement to do so. Usually, however, the partners draw up an agreement that specifies how partnership decisions will be made, when and how the partners may withdraw profits, and how the partners will be required to contribute to the business. A chief advantage to forming a general partnership is that it is relatively inexpensive to start, because there are no filing or registration requirements, even if the partners create a written agreement. In a general partnership, each partner is equally liable for the debts of the business.
A limited partnership sets limits on the power as well as the liability of the partners. A limited partner is prohibited from managing or making day-to-day-decisions concerning the business but is shielded from most debts incurred by the company. More legal formalities must be met under this type of arrangement than in a general partnership. In Florida, a limited partnership may be formed only in accordance with the Florida Revised Uniform Partnership Act. Limited liability companies are discussed further below.
Corporation
A corporation differs from a partnership in that it
is treated as a separate legal entity in and of itself
rather than as a collection of individuals. A corporation
is owned by one or more shareholders and is managed
by a board of directors, elected by the shareholders.
The corporation must meet certain legal requirements
spelled out in its articles of incorporation.
The corporation is taxed as a separate entity. Under both state and federal tax laws, the corporation reports its income, losses, and expenses on a corporate income tax return. One of the biggest drawbacks to incorporating a business is double taxation. Double taxation occurs because a corporation's income is taxed before dividends are paid to shareholders, but shareholders also have to report the gains as taxable income on their own individual federal tax returns.
All corporationseven small corporationsare expected to adhere to certain formalities, such as holding regular meetings of the board of directors and of the shareholders. However, the small size of most close corporations and the tendency for shareholders to take active roles in their operation and management often mean that many small and close corporations ignore such formalities. The failure to observe corporate formalities is unwise.
Shareholders are not liable for the corporation's losses nor for any claims against the company. Sometimes, individuals take advantage of this fact, using the corporate entity to insulate themselves from personal liability and the consequences of their actions. In such cases, when creditors find themselves unable to pursue their claims against close corporations, creditors may ask a court to ignore the organization's corporate status and impose liability upon the shareholders. Courts are likely to take this action, called "piercing the corporate veil," when shareholders have failed to regularly conduct the business like a corporation, when the business has a seriously inadequate financial base for operation, or when it would be unfair to creditors not to do so.
Professional Service Corporation
Professional service corporations are formed by professionals
such as doctors, lawyers, and accountants primarily
to save money on their taxes through pension plans
and deferred-income programs. A professional service
corporation is much like any other corporation, with
a few differences. It is possible for only one person
to form a professional service corporation, the professional
service corporation may engage in only one category
of professional service, and only individuals licensed
to practice in that particular profession may own shares.
The shares cannot be transferred easily. Although forming
a professional service corporation does not shield
the individual from liability for professional negligence,
it may shield an individual from liability for negligence
by other persons with whom he or she associates. In
Florida, professionals also may organize as a "professional
limited liability company," which is similar in
operation to a professional service corporation.
Franchise
A franchise is an agreement, sometimes in the form of
a contract, that allows the franchisee (the person
buying the franchise) to use a marketing system that
has been designed by the franchisor (the manufacturer
or seller). The business is closely associated with
the trademark or commercial identity of the franchisor
and the franchisee must pay a fee for the use of the
marketing system.
Some predict that by the year 2000 more than one-half of all retail stores in the United States will be franchises. There is generally less of a financial risk associated with the purchase of a franchise because the marketing strategy has proven successful. It is often easier for a franchise to obtain financing than it is for an independent business.
While a franchise fee does not guarantee success in business, the purchaser of a franchise usually can expect some services and support from the franchisor. Among other things, the purchaser might receive help choosing a site for the business, in the form of feasibility studies of the location and the demographics of the area where he or she hopes to locate the business. A franchisee might receive help in negotiating a lease for the business and financial assistance with the start-up and initial operating costs. Finally, a franchisor often provides a franchisee with training, support, advertising, and product discounts.
In Florida, a franchise is broadly defined as an agreement between two or more persons, involving a commercial relationship and giving the franchisee a right to do business using the franchisor's goods or services. In addition, the franchisee's independent business constitutes a component of the franchisor's distribution system, and the franchisee relies on the franchisor for the basic supply of goods. Florida also regulates the sale of "business opportunities," which may include some franchise relationships.
There is a wide variety of state regulations with which franchises must comply. Information regarding Florida franchises may be obtained by contacting the Florida Department of Agriculture and Consumer Services, and more information about franchises in general may be found in the Franchise & Dealership Law Chapter.
Limited Liability Company
Companies in Florida have yet another option for organization.
They can organize as a "limited liability company,"
which allows them to take advantage of some of the
favorable tax treatment of a partnership while preserving
the limited liability of a corporation. A limited liability
company must have at least two members and must be
organized under Florida's Limited Liability Company
Act. The company is required to file initial articles
of organization with the Florida Department of State
and to file an annual report with certain information.
The name of the company must end with "limited
company" or "L.C." The company may engage
in any lawful business.
A limited liability company limits the amount an investor can lose from a lawsuit against the company or from other losses. Generally, a member is not personally liable for the debts, liabilities, or obligations of the company, and the member's loss is limited to the amount he or she invests in the company. Although a limited liability company generally is treated as a partnership for federal income tax purposes, it is treated as a corporation for Florida state tax purposes.
Buying or Selling a Small Business
Buying or selling a business is like buying or selling
anything else, only much more complicated. In many
small businesses, family concerns can influence, even
dominate, business decision making. The decision to
buy or sell a business may be motivated by a divorce,
death, or personal animosities between business associates,
so emotions may affect otherwise prudent business judgment.
The advice of professionals is critical before buying
or selling any business, especially a small business.
Transferability
The ease of transferability of ownership varies depending
on how a business is organized. The assets of a sole
proprietorship are easy to transfer. A sole proprietorship
can be sold by selling all the assets of the business
to another person, who then becomes the new sole proprietor
of the business.
A partnership is not easily transferable. Unless otherwise specified, no person may become a partner unless all of the other partners agree. Thus, if a partner sells his or her share in the business to someone who is not already a partner, the purchaser does not become a partner but merely earns the profits that the former partner would have received. To avoid this situation, most partnership agreements specify the conditions under which partnership status is transferred. Sometimes partners have buy-sell agreements between themselves. Buy-sell agreements may be mandatory, requiring the remaining partners to buy out the interest of a departing partner, or optional, giving the remaining partner or partners the right of first refusal when one partner wants to sell his or her interest.
Members of limited liability companies may not sell their rights to share in the profits and losses of the company unless there is an agreement among the members that allows it or a majority of the members assent. As with a partnership, the right to participate in the decision making of the company may not be sold unless all of the members agree.
Shares in a corporation are easy to transfer because, by definition, a corporation is made up of shareholders who may transfer ownership of their shares to others. However, in the case of small and close corporations that are not publicly traded, there may not be much of a market for shares. Also, the articles of incorporation may limit how shares are sold, such as by prohibiting their frequent sale.
Non-Compete Agreements
Usually when a business is sold, the buyer wants the
seller to agree not to compete with the business being
sold. Non-compete agreements in this context generally
are enforceable in Florida as long as the buyer agrees
to continue operating that business or a similar business.
Non-compete agreements also are enforced if they are
reasonably necessary for the protection of the employer's
business from unfair or improper competition. Non-compete
agreements are especially important in the context
of small businesses because goodwill and name recognition
may be the most significant items the buyer is paying
for. Without an effective non-compete agreement, the
seller may set up a new business in direct competition
with the old one and transfer the loyalty of longtime
customers to the new enterprise. A buyer may want to
secure non-compete agreements from anyone else who
worked closely with the seller in operating the business
and who might go into competition with the buyer.
Consulting Agreements
Another common component of an agreement to sell a small
business is a consulting agreement. Often, the advice
of the former business owner is a valuable asset for
a new owner during a transitional period. The former
owner can give advice on how business has been conducted,
where supplies are kept, how to operate machinery,
working effectively with suppliers, and generally keeping
customers happy. The seller may be able to realize
certain tax advantages by re-characterizing a portion
of the purchase price as a consulting fee. Such an
agreement should be clear regarding the extent and
duration of the consulting arrangement. The advice
of an attorney can be especially helpful when drafting
a consulting agreement.
Business Succession
Succession may be more complicated for small businesses
than for large, publicly held companies. How a business
is transferred following the death or withdrawal of
an owner depends on how the business was organized.
In a sole proprietorship, the business ceases to exist when the proprietor dies. In a general partnership, the business can continue after one of the partners dies, but the remaining partners must pay the beneficiary of the deceased partner the fair market value of his or her portion of the partnership. If a partner in a limited partnership dies, his or her ownership in the corporation may be inherited and all attendant rights may be exercised by the new owner. In a limited liability company, the company dissolves unless there was prior agreement to continue in the event of a death. Also, if the remaining members of a company with more than one remaining member unanimously consent to continue operations, the company may do so.
Because a corporation is a freestanding legal entity, the death of an owner technically has no effect on the continuation of the business. Many smaller corporations, however, take out life insurance policies on certain key employees, such as the founder or the chief executive officer of the business. The shares held by those persons may be transferred to descendants or, by previous agreement, to remaining key individuals.
Because interests in a small business often lack liquidity and can be difficult to evaluate, they can be difficult to transfer after the death of the owner.
Resources
All of the following agencies provide information on
forming a small business. Anyone considering forming
a small business should obtain registration information
from the Department of State and tax requirements from
the Department of Revenue.
Florida Attorney General, The Capitol, Tallahassee, FL 32399-1050, (904) 488-8253.
Florida Department of State, Division of Corporations, 409 Gaines Street East, Tallahassee, FL 32301, or P.O. Box 6327, Tallahassee, FL 32314, (904) 487-6051.
Florida Department of Agriculture and Consumer Services, The Capitol PL-10, Tallahassee, FL 32399-0810, (904) 488-3022.
Florida Revenue Department, 501 Calhoun Street, Tallahassee, FL 32399, (904) 488-6800.
Internal Revenue Service, (800) 829-4477; Southeast Region: 401 West Peachtree Street, Atlanta, GA 30365, (404) 331-6048; North Florida District: 400 West Bay Street, Jacksonville, FL 32202, (904) 232-2945; South Florida District: One North University Drive, Suite A-312, Plantation, FL 33324, (904) 423-7300.
Small Business Administration, Region IV: 1720 Peachtree Street NW, Suite 496, South Atlanta, GA 30309, (404) 347-4999, Coral Gables District Office: 1320 South Dixie Highway, Coral Gables, FL 33146, (305) 536-5521; Jacksonville District Office: 7825 Bay Meadows Way, Suite 100-B, Jacksonville, FL 32256-7504, (904) 443-1900.
Florida Department of Commerce, Small and Minority Business Advisory Council, (904) 487-0915.