Florida is known for its warm climate and sunshine. And, if you’re an entrepreneur thinking about starting a new business, Florida also offers one of the nation’s most business-friendly legal climates, including a varied range of business entities or “structures” as we’ll refer to them in this article.
THE LLC STRUCTURE FOR FLORIDA SMALL BUSINESSES
Each type of business structure, which include corporations and limited partnerships, has its own strengths and weaknesses and the best choice will depend upon the goals and circumstances involved. However, in general, the limited liability company (“LLC”) model is increasingly the preferred structure for small to medium-sized businesses. Designed as a “best-of-both-worlds” approach, LLC’s combine attractive features of partnerships and corporations, allowing business owners to enjoy the protections of incorporation and the efficiency of a partnership or sole proprietorship.
Advantages Offered by the LLC Structure
Perhaps, the greatest advantages to the LLC model is that it is simplified and streamlined to be accessible to small businesses that don’t have large budgets for corporate attorneys. And, just as importantly, LLC’s offer limited liability protection to their members. This means that a member’s liability for business debts or other obligations cannot exceed the individual member’s stake in the LLC.
Corporations also have limited liability protection, but general partnerships and sole proprietorships do not. Thus, if one partner runs up large debts in the course of a partnership, even without the other partner’s knowledge, the second partner is legally liable for the debts, and his or her personal assets can potentially be attached by the business’s creditors. This is not the case with an LLC.
Another big advantage of LLC’s is what is referred to as “pass-through taxation.” Rather than the business itself paying income taxes and filing a separate return, business profits “pass through” and are taxed on the members’ individual returns according to their respective interests, like with a partnership. This simplifies the tax-preparation process and avoids “double taxation,” where a corporation pays taxes on its profits and then shareholders are taxed again on their portions. Of course, an LLC can choose to be taxed like a corporation and file its own return. And sometimes this makes sense. But for new entities and non-complex businesses in particular, pass-through taxation is usually preferable to corporate taxation.
One of the goals behind the LLC structure is to enable new businesses by reducing some of the barriers to getting started. With this in mind, LLC’s require a lot less paperwork at startup and during ongoing operations than corporations.
A Florida LLC has to register with the Secretary of State and file annual reports, but the forms are much simpler than what is required of corporations, and the fees are substantially smaller. LLC’s also have fewer regulatory requirements for their governance and have to observe fewer formalities – such as annual shareholder meetings – than corporations.
The limited liability company concept was originally developed with small businesses in mind, but these days even medium and large businesses are opting to organize as LLC’s. However, not all types of businesses can use the LLC structure. Banks, insurance companies, and some professional entities, for instance, are generally not permitted to organize as LLC’s.
How Do LLC’s Function?
LLC’s are owned by their members (as opposed to the shareholders who own corporations) and can be managed by either the members as a group or by an appointed manager, who can, but does not have to, be a member. An LLC can have numerous members or just one, and the structure allows for a great deal of flexibility in deciding how ownership interests and decision-making authority are allocated among the members. In Florida, LLC’s are member-managed by default, but the members can choose to be manager-managed.
Florida law assumes that all members of an LLC have authority to take routine actions on behalf of the business, with a majority vote required for anything outside normal operations. So, by default, any one member can enter an LLC into a binding contract relating to day-to-day operations, but a majority vote would be necessary to liquidate all or most of the business’s assets, for example. The members, though, can vote to limit or expand individual members’ or a manager’s authority.
The primary governing document of an LLC is its “Florida operating agreement” – basically, a constitution for the business. The flexibility inherent in the LLC structure comes in large part from the ability to tailor an operating agreement to the specific objectives and nature of the business. Operating agreements address structural issues such as how ownership interests and voting rights are allocated, how a manager is chosen (if the LLC is manager-managed), and how ownership stakes can be acquired or transferred.
And, operating agreements can also address procedural issues like how the business makes decisions, who can make binding contracts on the LLC’s behalf, and what happens when the members can’t agree on something. An operating agreement might establish a protocol for when a member dies or wants to exit the business, though these issues are often covered in a separate Florida buy-sell agreement between the members.
FLORIDA LLC LAW
Florida is generally considered one of the more business-friendly states in the U.S. due to its comparatively less intrusive regulatory climate and the absence of any state income tax or Florida inheritance tax. Federal income taxes still apply, and there are other state taxes, like the sales tax, which may come into play. But an LLC does not have to pay any income tax to the State of Florida, regardless of whether it elects to be taxed as a partnership or corporation.
The Florida statute governing LLC’s specifically is the Florida Revised Limited Liability Company Act, codified at Fla. Rev. Stat. §605.0101, et. seq. The law, which substantially overhauled Florida’s prior LLC statute and became fully effective as of January 1, 2015, is designed to provide a modernized framework as advantageous to business as what is offered by other pro-business states.
Among its many revisions, the revised law clarifies that the internal operations of Florida-registered LLC’s must be governed by Florida law. So, an LLC cannot organize in Florida but elect to be governed by the laws of Delaware. The law also restricts members’ limited liability in situations involving intentional misconduct or knowing violations of law and expressly protects members’ right to review LLC business records.
It’s worth noting that an LLC doing business in Florida does not necessarily have to be a “Florida LLC.” An entity registered in another jurisdiction, referred to as a “foreign LLC,” can transact business in Florida if it obtains authorization from the Florida Secretary of State, a process which is fairly simple and requires only a relatively small fee. Likewise, an LLC organized under Florida law (a “Florida LLC”) does not necessarily have to maintain its principle place of business in Florida, though any LLC transacting business in Florida must have a registered agent with a physical address in Florida who can accept service on the LLC’s behalf.
Another important point is that Florida LLCs are used for various purposes including LLCs for Florida pre-Medicaid planning, LLC’s for Florida asset protection and LLCs for holding Florida real estate investments.
By reducing transaction costs and paperwork and increasing flexibility, Florida’s limited liability company framework makes the advantages of Florida incorporation accessible to small business owners in Florida and potential entrepreneurs. An attorney with experience in Florida’s commercial laws can provide advice on whether the LLC structure is right for your business and help you through the process of getting a new enterprise up and running.
Steve Gibbs, Esq.