There is no one Florida legal structure that works best for all Sarasota and Manatee county businesses. The most favorable choice depends on a number of factors, including the number of owners, your tax situation, citizenship and whether or not you have employees. As a result, every new Florida business must determine its form of operation: Limited Liability Company, Corporation ("C" or "S"), Sole Proprietorship, or General or Limited Partnership. There are a variety of tax and non-tax considerations that impact this decision. We can assist you with the establishment of your new Sarasota and Manatee county business entity: Limited Liability Company (LLC), Florida Corporation, Florida Partnership, and Florida Limited Partnership (FLP). Continue reading to learn more about the advantages of each type of entity.
LIMITED LIABILITY COMPANY (“LLC”):
A Florida Limited Liability Company is formed by filing its Articles of Organization with the Florida Division of Corporations. When establishing a Florida LLC, it is advisable to have at least two members and an operating agreement (see below). Can be either Member-managed or Manager-managed.Liability is limited to how much each member puts into the company (personal investment) except for any business debt that is personally guaranteed (business loan or line of credit). Management may be exercised by one or more managers who need not be members or by one or more of the members. The types and number of members are unrestricted unless S-status is elected.
Single Member LLC: May elect to have the entity disregarded for tax purposes or to be taxed as a corporation.
Multi-Member LLC: May elect to be taxed either as a corporation ("C" or "S") or a partnership (income is taxed directly to the members). Provides asset protection to each member as a creditor may only obtain a charging lien against their ownership interest. An S-corporation election may reduce exposure for federal self-employment tax but also deprive it of certain tax benefits under IRC 754 (allows a partnership a step-up in the tax basis of its assets to their fair market value in the event of the death of a member or subsequent buyouts between members). An S-election may not be advisable when raising capital because of the limitations on the issuance of preferred equity.
Operating Agreement: Outlines each owner's (i) responsibilities, (ii) share of the profits, (iii) who may be a member of the entity, (iv) what happens if a member desires to leave, and (v) what happens when a member passes away.
Tax: The taxation of a Florida Limited Liability Company interest is determined by how the LLC elects to be taxed. A single-member LLC will be taxed as a disregarded entity and its sole member and considered to be self-employed and subject to tax on the net earnings of the LLC (the same as a sole proprietorship). A multi-member LLC that is taxed under the default classification of a partnership will also have its members classified to be self-employed and subject to tax on the net earnings of the LLC. In contrast, an LLC that elects to be taxed as a corporation (a C corporation or S corporation election) may have its member paid as an employee (subject to withholding) of the LLC.
Personal Liability: A debt, obligation, or liability of an LLC is solely a debt, obligation, or liability of the LLC. A member or manager is not personally liable, by way of contribution or otherwise, for a debt, obligation, or liability of the LLC solely by reason of being or acting as a member or manager. Potential routes to liability for members include (i) written obligation to make future contributions; (ii) 2-year clawback for improper distributions; (iii) responsible person liability for U.S. taxes and for Florida sales or use taxes; or (iv) tortious conduct individually committed by a member or manager.
C - CORPORATION:
A Florida corporation subject to tax as a separate legal entity (double taxation). Dividends (distributions out of earnings and profits) are subject to tax at the shareholder level. Shareholders are not personally liable (unless they issue a guarantee) for corporate obligations. Managed and controlled by its officers and directors.
S – CORPORATION:
A pass-through Florida legal entity with no corporate-level tax. After the corporation is formed, all the stockholders must sign and file Form 2553 with the Internal Revenue Service (“IRS”) within seventy-five (75) days of the formation date to elect S-Corporation treatment for tax purposes. Shareholders report and pay tax on their pro-rata share of income, losses, deductions, etc. Stock owners reduce his/her tax bill by paying themselves a reasonable salary (subject to payroll taxes) and a dividend (distributed free of employment tax). Shareholders are subject to tax on net recognized built-in gain during a 10-year recognition period after S corporation status takes effect. The entity may only have one (1) class of stock (nonvoting stock is not deemed a second class of stock) with identical rights to distribution and liquidation proceeds and less than one hundred (100) shareholder (no corporation, partnership, or LLC). Special Shareholder Rules: (i) not more than one hundred (100) shareholders; (ii) every shareholder must be an individual (other than a non-resident alien), an estate, an eligible trust, or certain tax-exempt organizations; (iii) the personal assets of a shareholder will not be subject to any legal claim or judgment simply by virtue of being a shareholder. A husband and wife and all lineal descendants and their spouses are treated as a single shareholder.
S-Status: Must be elected by all shareholders within seventy-five (75) days of the formation date or any time during the preceding taxable year. The election may be revoked only with the consent of shareholders owning more than half (1/2) of the corporation’s stock on the day of the revocation. An S-election will reduce exposure for federal self-employment tax and state entity-level tax.
Tax Return: Files IRS Form 1120S and reports on the Schedule K-1 the amount of income, loss, deduction, etc. allocated to the shareholders.
Not a separate Florida legal entity. No formation requirements are necessary. Income earned by the business (less expenses) is taxed directly to the owner. The owner is liable for all of its debts and receives no personal liability protection. The owner will have complete control over the business and its operation.
"shareholder" who holds "shares of stock" in the entity
Limited Liability Comp
"member" or "interest owner who holds "interest" or a "membership" in the LLC
"directors" and "officers"
Limited Liability Comp.
"managers" or "company officials"
Annual and Special meetings
Limited Liability Comp.
No meetings required
Judgment creditor of a shareholder can foreclose on the shareholder's shares and take ownership of them
Limited Liability Comp.
Judgment creditor against a member's interest can only get a "charging order"
Limited to 100 shareholders and restrictions
Limited Liability Comp.
No limitations on the number or types of owners
The following is a brief list of the many factors that must be avoided in the State of Florida to prevent a creditor from piercing the entities corporate veil and pursuing collection from its shareholders or members:
When a corporation or limited liability company becomes insolvent, the business owner often is worried that the creditors will try to "pierce the veil" of the entity and sue the individual owner for all the business’s debts. Florida courts have made it difficult for creditors to pierce the veil of a corporation or LLC to hold owners responsible for corporate obligations. Creditors who contract with a business entity could pierce the veil and sue the owners only if they show that (i) the corporation or LLC was established for an illegal purpose, or (ii) if the owners were using the corporation to evade what is really a personal obligation (e.g., using a corporation to incur debt to personal consumption). Most successful efforts to pierce a corporate veil occur when a "mom and pop" business owner intermingles personal and business finances, such as when they pay personal bills from a corporate account. The corporate veil is pierced in that case because the corporation is the legal alter-ego of the controlling owner. There is a famous Florida Supreme Court case on piercing the corporate veil called the Dania Jai-Alai case.
This website has been prepared for informational purposes only and does not constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask me to send you free written information about my qualifications and experience.