In Florida, there are several ways that a new business can legally organize, including sole proprietorships, corporations, partnerships, and more. Many businesses find that registering as a Limited Liability Company (“LLC”) is the best route for them. [1] Becoming an LLC in Florida has a number of different advantages and disadvantages—both at the federal level with regard to taxation and at the state level regarding the LLC’s legal status—depending on your circumstances and goals.
Below we have detailed some common pros and cons of organizing as an LLC. Please keep in mind, this blog is not intended as legal advice for your unique situation. Additionally, most elements of a typical LLC can be modified by agreement, and your perception of whether these factors are advantages or disadvantages is entirely dependant on your unique goals and needs. The pros and cons detailed below refer to typical scenarios involving LLCs, but every business is unique and it is unlikely your situation will be so straightforward. If you have questions about whether or not an LLC designation is right for you, please contact our attorneys to set up a consultation.
Advantages
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Liability Protection
Generally speaking, the single most important reason to organize as an LLC is to achieve liability protection for LLC members. An LLC is considered a standalone entity, unique from its members. Thus, the LLC, rather than the investors themselves, will be solely responsible for the company’s liabilities in most cases. This enables LLC members to protect their personal property, like their home and other assets, from the ramifications of adverse legal action or judgment against their business.
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Structural Flexibility
For instance, Florida requires Corporations to meet rigid regulatory standards such as holding regular board meetings and keeping minutes. Members of an LLC may usually structure the business as they see fit. Likewise, Florida allows an LLC to share profits among members as the members choose. If an LLC has two members, there is no requirement that the members split profits equally.
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Taxation
A company’s tax election—filed with the IRS—is an entirely separate status from their recognition as a legal entity by the state.[2] That being said, one of the key benefits of operating an LLC is the fact that you have freedom to choose how your business will be taxed by the federal government.
LLCs with fewer than one hundred members are allowed to elect to be taxed under Subchapter S of the Internal Revenue Code, meaning they benefit from “pass-through taxation.” With this treatment, the profits and losses of the business will “pass-through” to the personal tax returns of the owners, thus avoiding the “double taxation” that results from typical treatment under Subchapter C of the Internal Revenue Code.
Under Subchapter C, the entity profits are taxed, and then the income to the shareholders is taxed again as “capital gains.” This treatment may be desirable if LLC members are in a higher tax bracket, and prefer that the profits distributed to them be taxed at the capital gains rate, which is lower than standard income.
Disadvantages
LLCs are highly beneficial for business owners in many ways. However, there are of course some key disadvantages that are worth noting as well. Once again, keep in mind that most of these factors can be modified by agreement in Florida and are dependent on your unique needs and goals as a business owner.
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Changing owners
Since corporations are owned through shares, changing owners is generally as simple as selling those shares. With an LLC, however, it is not always an easy process to change owners. An operating agreement (which you want to have) needs to be clear on how to handle changes in ownership. If one of the owners wants to sell their stake in the company, the agreement must state under what circumstances they can sell, if at all. This can be cause for disputes and other issues when it comes to changing the ownership of an LLC.
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Cost
LLCs pay more annual fees and higher filing costs by comparison to general partnerships or sole proprietorships.[3] For this reason, some owners may prefer not to spend the money to organize as an LLC. However, they do so by also foregoing the liability protection afforded by an LLC.
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Case law
The concept of an LLC is relatively new compared to corporations and partnerships. As a result, there may be less legal precedent to draw from. For the most part, the rights and responsibilities of participants in corporations and partnerships are clear, although that will not necessarily enable anyone to predict how a court will rule in a legal dispute. In cases involving LLCs, less case law to draw from may mean that the outcome is more unpredictable. Lack of predictability is never a positive thing for a business owner.
If you are considering organizing your business as an LLC, or any form of incorporation, please do not hesitate to contact the law firm of Muir & Associates right away, and let us guide you every step of the way to ensure you are in compliance with all relevant laws and regulations.
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