The Pros and Cons of Organizing as an LLC in Florida

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.

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. 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. The most common ones appear below.

PROS

An LLC designation offers many distinct advantages.

Easy to Set Up

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.

Pass-Through Taxation on Profits and Losses

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.

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.

Ownership and Management Flexibility

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.

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.

Liability Protection

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

Although an LLC presents several advantages for small business formation, some disadvantages need to be considered first.

More Expensive to Establish and Run

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.

Ownership is Difficult to Transfer

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.

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.

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. 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. To schedule a consultation, please contact us.