When you’re organizing a new business in Florida, there are several entities to choose from, from sole proprietorships and partnerships to corporations and more. One increasingly popular structure is the Limited Liability Company, or LLC. In fact, Florida is the fifth most favorable state for one.
An LLC is a business entity that combines the strong liability protection of a corporation with the flexibility, simplicity, and tax advantages of a partnership. They can either represent an individual or a group and like all other structures, it has pros and cons that you should be aware of before deciding whether or not an LLC is the best formation for your new company. Let’s review the most common items:
Pros Of Forming An LLC
An LLC designation offers many distinct advantages and there’s a reason why it is a popular option, in not just Florida, but also in other states.
Forming An LLC Is Simple
Compared to corporations, LLCs are simple to set up and run. The paperwork is less complicated, and you are not required to maintain minutes or record resolutions. You can decide on the management structure, something in which we detail below.
Unless you specify otherwise, LLCs are pass-through entities, meaning that all profits go directly to members without being taxed at the company level. Instead, the members include this money on their personal federal income tax returns. Because LLC profits are not regarded as earned income, they are not subject to the self-employment tax. In Florida, these entities are also not taxed by the state.
The same principle applies if the company loses money: all members can claim the loss on their personal returns and lower their tax burdens. This pass-through taxation bypasses the dilemma faced by C-corporations, where profits are taxed first as business income and again on the personal income taxes of each owner after distributions.
In addition, the IRS allows an LLC to decide on its form of taxation: as either a corporation or a partnership. This flexibility allows for the owners to decide which method would provide a higher return on profit. Such a choice must never be overlooked.
Business Ownership And Management Structure
Unlike corporations, LLCs in Florida have no restrictions on the number of members or the management structure. Florida even allows the formation of single-member LLCs, which some states don’t. These companies may also be owned by foreigners and corporate entities.
For individuals, this means that they don’t need a team. A single person can decide to protect their freelance work or private practice — the latter if they are a doctor — by forming one. That way they can avoid freelance taxes, which are often a burden on the taxpayer.
Under the Florida LLC Act, you can opt to have your business managed by owners or designated managers who don’t have to be members. The latter arrangement is more convenient if you and the other owners lack experience in running a business. You can also specialize in other processes where you can excel, such as manufacturing or communications, while other owners and managers can handle the grunt work.
LLCs are like corporations in that they shield you and any other owners from personal liability for business debts. Unless you guaranteed company debts using your personal assets, your liability is limited to the amount you invested in the company. Assets separate from the LLC, such as homes, cars, personal bank accounts, and private investments are generally protected.
If you decide to form a single-member LLC, there is a potential downside: In 2010 the Florida Supreme Court ruled in Shaun Olmstead, et. al, vs. Federal Trade Commission that the owners of single-member LLCs had limited asset protection. In that particular case, the court ruled that their ownership interest can be seized by a creditor to satisfy an unpaid judgment against the single member. This outcome suggests that adding at least one more member will offer better liability protection.
Cons of Forming An LLC
Although an LLC presents several advantages for small business formation, some disadvantages need to be considered first. You always need to think them through and figure out if you have the proper budget.
Although simple to set up, LLCs are more expensive to create and maintain due to initial and ongoing costs. In 2018, the Florida Department of State charges a $100 filing fee and $25.00 Registered Agent fee to create a new LLC, followed by $138.75 to file an annual report. Annual reports submitted after May 1st incur a filing fee of $538.75. Budget for these startup expenses so that you can start on a strong note.
Self-employment taxes and federal payments also spike for LLCs. People who own such a structure may have to pay more to the government every year. Going corporate can provide a better way to cut down on such payments, as long as you have a group.
Difficulty Transferring Business Ownership
There is limited flexibility in an LLC ownership transfer. Members must indicate in the operating agreement whether or not ownership can be transferred and, if so, whether the consent of other members is needed. This requirement can make it difficult for you to pass on your business interests to family members.
Ownership can also be an issue in the case of an LLC owing debt. Florida law has mandated that in the case of a single-owner entity having creditors, the latter can seize ownership of the assets without question. Members and managers aren’t liable and thus can hold onto their interest, but the owners are.
Case Law is Limited
LLCs are relatively new concepts compared to partnerships and corporations. There is, therefore, limited legal precedent to draw from when disputes arise, which means that cases involving LLCs have less predictable outcomes. On one hand, it can mean that you can argue for new cases and create favorable rulings. When you look at the other hand, however, the pendulum can easily swing against you in court.
More recent cases have defined liability as it were for single-owner LLCs, and the same decisions may apply to entities with multiple owners. These factors depend on which plaintiffs bring the owners to court — creditors, federal agents, and such, and how many new lawsuits are filed each year. Statistics can show us the path forward, so keep an eye on the news regarding these structures.
Although LLCs are proving to be popular among small business owners, their advantages and disadvantages should be reviewed with an experienced Florida business law attorney before you make your decision. Such a change is a huge investment in time and proceedings, so you want to make sure that the structure is right for your goals and future. Going corporate, for example, requires more responsibility but has different benefits.
Improve Your Business Structure
At Trembly Law Firm, we would be pleased to meet with you, review your business goals, and help you decide if LLC formation is right for you. We have attorneys at hand who can review your case and help you choose the right structure for your business.
To schedule a consultation, please contact us. Trembly Law wants to ensure that you have all the legal knowledge necessary to make an important business decision.