This document provides guidance to Joe Smith on setting up his web design business in Florida. It discusses the key considerations in choosing a business structure, including management, tax implications, and liability protection. It recommends Joe start as a sole proprietorship doing business as "Web Design Services" for simplicity. As the business grows and hires employees, converting to an S-Corporation is suggested to reduce payroll taxes. Later, if the business becomes very large, dropping the S-election or going public may make sense. The document provides an overview of various business structures and their implications.

1. Legal and Tax Implications When Setting Up a Business in FloridaNeil I. RumbakRumbak Law, P.A.nrumbak@rumbaklaw.comJake AdamsSouth Florida Remote Accountingjake@sflra.comSeptember 22, 2011

2. You Are Not an Island.Refrain from doing things aloneDelegate and focus on what you’re good atSeek advice from attorneys, accountants, insurance agents, business and marketing consultants, bankers, insurance brokers, etc.A Couple of Tips Regarding Starting Your Business…N

3. A Couple of Tips Regarding Starting Your Business…Attend Seminars, Training Workshops, ReadSmall Business AdministrationFlorida Small Business Development Center NetworkInternal Revenue ServiceFlorida Department of RevenueRumbak Law, P.A.’s Website(www.rumbaklaw.com)N

4. sunbiz.orgLots of information about business formalitiesCan extensively research other businessesFile necessary documents to form business entitiesFile annual reports (information including entity name, principal place of business, mailing address, name and address of registered agent, names and titles of officers, directors, managers)Pay feesStarting Point: Florida Department of State Division of CorporationsN

5. Joe Smith is a web designer who is employed full time but is thinking about starting his own businessJoe knows nothing about business but is determined to be successfulLet’s help Joe decide his path to setting up his first business Why are you forming a business?J

6. The first thing Joe wants to do is look professional and have a good imageJoe’s first client asks to write Joe a check, but Joe is embarrassed to ask for the check written out to him individuallyJoe decides he wants his clients to be able to write checks to Web Design ServicesJoe Smith, Web DesignerJ

7. Joe knows about corporations, but is unfamiliar with the other optionsWeb Design Services, Inc?J

8. Joe decides he wants to start easy and inexpensivelyJoe advertises the name in the newspaper and registers the name with State of Florida for $90.00, valid for 5 yearsJoe opens a bank account as Joe Smith, DBA Web Design ServicesJoe can now accept checks and payment as Web Design ServicesJoe Smith, DBA Web Design ServicesJ

9. Picking a Name for Your BusinessSearch Sunbiz and the US Patent and Trademark Office (tess2.uspto.gov) to see if the name you want/similar names are takenConsider a Fictitious NameName under which a person/entity transacts business in Florida other than the person or entity’s legal nameWhy a Fictitious Name?Perhaps the official name of your business is not as attractive as a fictitious nameRequired in most cases when you/your entity transact business in Florida under than your legal name/your entity’s legal nameMay have a few different businesses under one entity and want a distinct name for eachJ

10. Two years into his business, Joe is starting to get some big contracts and he is concerned about his legal protection from his businessJoe decides to form Web Design Services, LLC to provide himself with legal protectionWeb Design Services, LLCJ

11. After Joe forms his LLC, he starts to get more work than he can handle on his own and begins to hire employeesAs Joe is starting payroll, we advise Joe to Incorporate under the Small Business Election (S-Corp) to pay less Social Security and Medicare taxes (as we will discuss later)Changing from LLC to Inc requires changing EIN numbers and bank accountsWeb Design Services, Inc.J

12. Joe wants to know…when should he drop the S election?You automatically lose your S election if the IRS disqualifies you under their rulesWhen corporate officers can benefit more from company provided fringe benefits than the tax benefits of the S-Corp electionWhen he wants to take his company “public” or when large amounts of capital are needed to grow the business Web Design Services, Inc.J

13. Florida business structures include:Sole ProprietorshipCorporationGeneral PartnershipLimited PartnershipLimited Liability Partnership Limited Liability Limited Partnership Limited Liability CompanyProfessional CorporationProfessional Limited Liability CompanyNot for Profit Corporation Business Structures N

14. We will focus on these:Sole ProprietorshipLimited Liability Company (LLC)CorporationS CorporationC CorporationWhich Business Structure Makes Sense for You?N

15. Registering your Business EntityWith help from a lawyer or accountantRecommend getting assistance from a trusted source before and during registrationDo it yourselfThe Company Corporation @ incorporate.com (includes startup papers)File directly at Sunbiz.orgAfterwards, register for your employer Identification number (EIN) through IRS.gov at no cost to youN

16. Which Business Structure?Federal and State Tax OverviewLLCs can choose their tax structureJ

17. Which Business Structure?Florida Legal IssuesN

18. Main issues to focus on:Management of business by owners or a board?Federal tax consequencesIncome TaxSocial Security/Medicare taxesPersonal protection from/Exposure to Liability from the businessCan business interest be taken from you to satisfy your personal liabilities?Which Business Structure Makes Sense for You?N

19. Which Business Structure?In determining which business structure is right for you, keep these issues in mind:Social Security/Medicare TaxesSocial Security Taxes:

20. 10.4% (as opposed to 12.4% previously and in 2012) on earnings up to $106,800

21. Medicare Taxes:

22. 2.9% on all earnings (for all years)

23. Thus, in 2011, 13.3% (as opposed to 15.3% previously and in 2012) combined Social Security and Medicare taxes are paid on the first $106,800 of earningsN

24. Main issues to focus on:Management:However you wantFederal Tax ConsequencesIncome Tax: Flows to personalSocial Security/Medicare Taxes: On all earnings, but adjusted before income taxesYou are exposed to liability from the businessSole proprietorship assets can be taken to satisfy your personal liabilitiesSole Proprietorship N

25. Sole ProprietorshipPayment into Social Security & Medicare15.3% (13.3% in 2011) tax on 92.35% of business incomeDeduct ½ of SE Tax as an adjustmentLet’s see how this would work:That’s $.2449 in tax on every dollar at $40,000 that you earnJ

26. LLC Federal Tax ConsequencesLLCBut can elect to be taxed as an S or C Corporation no matter how many membersN

27. Main issues to focus on:Management: You manage the business how you want to manage itDefault Federal Tax Consequences:Income Tax: Flows to memberSocial Security/Medicare Taxes: On all earnings, but adjusted before income taxesPersonal protection from business liabilityMembership interest can be taken from you to satisfy your personal liabilities only if if the creditor proves that distributions will not satisfy the liabilities within a reasonable time Single Member LLCN

28. Main issues to focus on:Management: You and the other owners (members) manage the business how you want to manage itDefault Federal Tax ConsequencesIncome Tax: Flows to membersSocial Security/Medicare Taxes: On all earnings, but adjusted before income taxesPersonal protection from business liabilitiesMembership interest cannot be taken from you to satisfy your personal liabilitiesMulti-Member LLCN

29. CorporationA Florida corporation is an incorporated entity in Florida. Its default tax treatment is as a C Corporation. A small business may elect S Corporation status, which generally is a preferred tax structure for small businesses.To be an S Corporation, must elect on a Form 2553 (Election by a Small Business Corporation) and file it with the IRS within 2 months and 15 daysN

30. Can only be an S corporation if (among other things):No more than 100 shareholdersNo shareholder can be a nonresident alienUsually, all shareholders must be individualsNo more than one class of stockS CorporationN

31. Main issues to focus on:Management generally controlled by a board of directors, but you can be the boardFederal Tax ConsequencesIncome Tax: Flows to shareholderSocial Security/Medicare Taxes: On wages, but not dividendsPersonal protection from business liabilitiesMembership interest can be taken from you to satisfy your personal liabilitiesS Corporation

32. S CorporationYou may be able to pay less Social Security/Medicare taxes by declaring onlyreasonable compensation as wages, and any dividends would not be subject to Social Security/Medicare taxesReasonable compensation is determined on a case-by-case basis, but factors include:

33. Training and experience

34. Duties and responsibilities

35. Time and effort devoted to the business

36. What comparable businesses pay for similar servicesN

37. S CorporationJ

38. Tax Consequences:Income to corporation subject to federal and Florida income taxDividends to shareholders subject to federal income taxSocial Security/Medicare taxes: Shareholder pays on wages, but not dividendsIf the vast majority of the activities of a C Corporation involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, it may be taxed at a flat 35% corporate income taxC Corporation N

39. Benefits of a C CorporationRetained Earnings: Money held in the corporation instead of being distributedOwners can save on taxes by keeping profits in the company and deciding on distribution dates Fringe Benefits: The corporation can expense some or all costs of fringe benefits provided to employees, the board of directors, and owners. This can save thousands on corporate taxes.J

40. Enter into agreements that will govern the internal workings (ex., management, voting rights, meetings, record keeping, tax issues) of the entityNo specific document for a sole proprietorshipBylaws and Shareholder Agreements for CorporationsOperating Agreements for LLCsWhy Necessary?Required for corporationsTo avoid disputes among ownersEfficient management of businessAgreements Governing Internal Workings of EntityN

41. Professional Licenses: List of professions is more extensive than you may think. Go to the Florida Department of Business & Professional Regulation website (www.myfloridalicense.com/dbpr/) for more information…Realtors, CPAs, doctors, and lawyers need licenses, but so do, among many other professionals, agents for athletes, boxers, boxing promoters, and talent agenciesAlcoholic Beverage and Tobacco LicensesHotels and RestaurantsKeep an Eye Out for Necessary Licenses N

42. The sale of tangible personal property sold at retail, stored for use or consumption, or leased or rented in Florida is subject to a 6% tax by the state (dor.myflorida.com/dor/taxes/sales_tax.html)Rental of certain real estateAdmissions to eventsNote that a discretionary sales surtax may also be required in certain counties Broward and Palm Beach do not have a discretionary sales surtaxSales TaxN

43. Cities and Counties may require business to pay fee and acquire a business tax receipt to engage in business within that areaRequirements and fees for each cityBroward CountyIf you do business in Broward County, you need a Broward County Business Tax ReceiptFor each location where you’re operatingFor each category of businessIncludes home-based companies and one-person businessesBusiness Tax Receipts N

44. The Heart of the Sole Prop. TaxAll income and expenses listed on Sch. CName

45. Social Security #

46. What do you do?

47. Does your business have a name?

48. Where is it located?

49. Do you offer credit terms?

50. It’s your business, yes?

51. Is it new?

52. How much did you make?

53. Did anyone return anything ?

54. Cost of goods sold…tricky…The truth is: if you already do your own taxes now, you can do your own taxes! J

55. Cost of goods sold (COGS)Cost: The amount it cost you to acquire your goods to sell

56. You started the year with all your goods you ended the year with, yes?

57. How much in goods did you have on January 1st?

58. How much of goods did you buy to resell?

59. Did you pay anyone to handle your products?

60. What did you spend making goods yourself?

61. How much worth of goods did you have on December 31st?Use if you made (manufactured) or purchased goods to sell J

62. Sole Proprietor ExpensesYou can expense anything ordinary and necessary in your course of businessMost expenses are listed in otherJ

63. Taxing a Sole Proprietorship or LLCNow we have income and expenses…As a “pass through entity” the business is not taxed on profits, the owner isSch. C line 31 net profit and loss, is carried to your 1040 line 12, business income or lossJ

64. Reporting income from a S-Corp or LLCPart II of your 1040 schedule EJ

65. Thank you for attending thisseminar!www.rumbaklaw.comwww.sflra.com