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.
WHAT TO AVOID:
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:
- Debt is intentionally and knowingly incurred when the entity is insolvent;
- Annual shareholder, the board of directors’ or membership meetings are not held and/or other corporate formalities are ignored;
- Corporate records are not maintained;
- Shareholders/members use corporate funds for personal reasons, thereby endangering the entities financial stability;
- Commingling of corporate activity and/or funds and those of the person or persons who control the entity; and
- A failure to maintain separate offices, the company has little or no other business and is only a facade for the activities of the dominant shareholder/member who is, in fact, the corporate “alter ego.”
PIERCING THE CORPORATE VEIL
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.