Choosing a Business Structure as a Florida Contractor

Content Area A of the Business and Finance exam, Establishing the Contracting Business, is 11% of the questions, and its first task is "Determining the Business Organizational Structure." The outline lists business structure laws, fiduciary duties of officers and directors, open vs. closed corporations, and the tax advantages and liabilities of each structure. Florida adds two layers on top: the contractor licensing rules for business organizations in Chapter 489, and the Fictitious Name Act.

The structures at a glance

Sole proprietorship

One owner, no separate legal entity. Simple and cheap, but the owner is personally liable for every business debt and judgment. Business income and losses go on the owner's personal return.

Partnership

Two or more owners carrying on a business together. In a general partnership, each partner can bind the partnership and each is personally liable for its debts. A written partnership agreement is not legally required for a partnership to exist, but without one, disputes over profit shares, authority and exits are hard to settle.

LLC

A limited liability company combines limited liability with flexible taxation.

• Liability. Under F.S. 605.0304, an LLC's debts and obligations are solely the company's. A member or manager is not personally liable for them solely by reason of being or acting as a member or manager. The statute also says that failing to observe formalities is not, by itself, a ground for imposing liability on a member. (Members can still be liable for their own wrongful acts or personal guarantees.)
• Tax. According to the IRS, a domestic LLC with at least two members is classified as a partnership unless it files Form 8832 and elects to be treated as a corporation. A single-member LLC is disregarded by default (treated as part of its owner's return) unless it elects otherwise.

Corporation

A separate legal entity owned by shareholders, managed by a board of directors, and run day to day by officers.

• Fiduciary duties. Under F.S. 607.0830, a director must act in good faith and in a manner he or she reasonably believes to be in the best interests of the corporation, and must use the care an ordinarily prudent person in a like position would reasonably believe appropriate when making decisions.
• Open vs. closed. An open (publicly held) corporation sells stock to the public on an exchange. A closed (closely held) corporation has a small number of shareholders, often family or insiders, and its stock is not publicly traded. Most contracting corporations are closely held.
• C corporation tax. The corporation pays tax on its income, and shareholders pay tax again on dividends: the "double taxation" problem.
• S corporation election. The IRS describes S corporations as corporations that elect to pass corporate income, losses, deductions and credits through to shareholders, which allows them to avoid double taxation on corporate income. To qualify, a corporation must, among other things, be domestic, have no more than 100 shareholders, have only one class of stock, and have only allowable shareholders (individuals, certain trusts and estates; not partnerships, corporations or nonresident aliens).

Florida licensing: the qualifying agent

A state contractor's license belongs to an individual. A business entity contracts through a licensed individual who qualifies it.

• Qualifying the entity. Under F.S. 489.119(2), an applicant who wants to engage in contracting as a business organization (partnership, corporation, LLC or other legal entity) must apply for certification or registration as that organization's qualifying agent. A certified roofing contractor who forms an LLC must apply to qualify the LLC before contracting in its name.
• If the qualifier leaves. The organization must notify the department and has 60 days from the termination of the qualifying agent's affiliation to employ another qualifying agent (F.S. 489.119). Operating a business organization engaged in contracting after 60 days without a new primary qualifying agent is prohibited by F.S. 489.127(1)(g).
• License number on paperwork. F.S. 489.119(5)(b) requires the registration or certification number to appear in each offer of services, business proposal, bid, contract or advertisement used in the practice of contracting.

Workers' comp and the officer exemption

Your choice of structure affects workers' compensation. In construction, only corporate officers (including LLC members owning at least 10%) can elect exemption, no more than 3 per corporation or affiliated group, and each must own at least 10% of the stock (F.S. 440.02). A sole proprietor or partner has different rules. See workers' compensation.

Fictitious names: F.S. 865.09

A fictitious name is any name under which a person transacts business in Florida other than the person's legal name. "Joe Smith" doing business as "Smith Roofing" is using a fictitious name. So is "Smith Roofing, LLC" doing business as "Gulf Coast Roofing."

Note what the penalty does not do: failing to register does not void the business's contracts, and the business can still defend itself in court (865.09(9)(b)).

Registration is for public notice only. It does not give the registrant ownership of the name or protect it as a trademark.

How to choose

On the exam, match the structure to the stated priority:

• Lowest cost and simplest: sole proprietorship.
• Liability protection with pass-through tax and flexible management: LLC.
• Plan to raise capital from many investors: corporation.
• Corporate liability protection without double taxation, within the shareholder limits: S corporation.

Practice business structure questions

Our Florida Business and Finance Exam Prep includes original questions on entity types, qualifying agents and fictitious names, with explanations and 90 days of practice across the full exam. Related: contractor license discipline and the B&F exam overview.