Personal Asset Protection
If your business faces legal challenges, debts, or liabilities, your personal assets - like your home and personal bank accounts - are protected from being seized to address the business-related problems. That’s because the business belongs to the LLC, so its debts belong to the LLC and not you – the LLC’s owner. In fact, you can find this protection right in Florida’s LLC law, which says that a debt, obligation, or other liability of an LLC is solely the debt, obligation, or liability of the LLC, and a member (as owners are called) is not personally liable for a debt, obligation, or other liability of the LLC solely by reason of being a member.
Pass-through taxation
LLCs enjoy pass-through taxation where the members (owners) report their share of the LLC's profit or loss on their individual tax returns. Any tax due is then paid at the individual level. Multi-member LLCs file an informational (partnership) tax return for the LLC, while single-member LLCs report all income or loss on Schedule C. Pass-through taxation sidesteps the double taxation incurred by C corporations when income is taxed at the corporate level and again at the individual level if corporate profits are distributed as dividends to owners (shareholders). In states like Florida, no state personal income tax can be an even bigger advantage.
But another advantage of the LLC when it comes to federal income taxes is that you can decide to have your LLC taxed as a C corporation or an S corporation (if you meet the requirements of subchapter S of the Internal Revenue Code). So, with your tax adviser’s help, you can figure out which of the three income tax alternatives is best for you and elect to have your LLC be taxed in that way.
You may know that S corporations also provide pass-through taxation so you may wonder what the advantage is of the LLC. Well, subchapter S has a number of restrictions, including limiting the number and type of members and the flexibility in allocating financial interests among different classes of owners. Your Florida LLC can have pass-through taxation without those restrictions.
Management flexibility
LLCs can be managed by all members, some of their members, or none of their members. In a member-managed LLC all of the members participate in management. This is a management structure similar to a partnership. A manager-managed LLC may be managed by none of the members or by a combination of members who are acting as managers and non-member managers. This is closer to the management structure of a corporation. Under Florida’s LLC law, your LLC will be considered member-managed unless you specifically provide otherwise in your articles of organization or operating agreement.
Flexibility in sharing profits and distributions
LLCs provide a great deal of flexibility when it comes to deciding how to allocate profits and losses and distributions of income among the members. Each member can receive a share of the profits based on their ownership percentage. For example, if you own 50% of the LLC you’ll get 50% of the profits. Or you can agree to share based on capital contributions – meaning that even if you own 50%, if you contributed 75% of the capital, you’ll get 75% of the profits. The same is true when it comes to sharing distributions. You should be aware that under the Florida LLC law, profits and losses and distributions will be based on contributions, so if you want to share on another basis you’ll have to specify that basis in your LLC’s operating agreement.
Few statutory formalities
LLC laws, in general, have fewer requirements that LLCs have to meet than corporation laws. And this is true of Florida’s LLC law, which doesn’t require meetings to be held or minutes or resolutions kept, making it easier to manage. Holding annual meetings of members and documenting major business decisions is still recommended, however.
Disadvantages of forming an LLC in Florida
When considering forming an LLC in Florida, it's also important to look into its drawbacks. The disadvantages of forming an LLC in Florida as opposed to forming a corporation or not forming an entity at all and operating the business as a sole proprietorship or partnership include:
Limited flexibility in ownership transfers
It’s typically harder to sell or transfer an ownership interest in an LLC than it is shares of corporate stock. Your ownership interest gives you two kinds of rights – management rights and financial rights. Under Florida law you can freely transfer your financial rights (right to share in profits and distributions of income) but the person you transfer them to will not become a member. To transfer your entire ownership interest to someone who will then become a member you will need the consent of all members unless your LLC’s operating agreement provides otherwise.
Self-employment taxes
Social Security and Medicare taxes are collected under the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA). Under FICA, employers and employees split the cost of the contributions. Half of the taxes are deducted from an employee’s wages and the employer pays the other half. But under SECA, self-employed individuals pay the full amount themselves. Members of an LLC who work for the LLC are considered self-employed owners and not employees. They are responsible for paying the full amount of the SECA taxes. (An LLC may be able save on self-employment taxes if it elects taxation as an S corporation. However, a decision like that should not be made without the advice of a tax professional.)
Start up and ongoing fees
You can operate your small business in Florida as a sole proprietorship or partnership simply by starting to do business. Nothing has to be filed to create that sole proprietorship or partnership or to continue its existence. Not so if you want to create a Florida LLC for your business. You will have to file articles of organization with the Florida Department of State and pay a filing fee. Thereafter, your LLC has to file an annual report and pay the annual report filing fee. (Florida corporations also have these start up and ongoing fees)
Complying with the Florida LLC law
Your Florida LLC is created under the Florida LLC law and must comply with that law as long as the LLC exists. And while it’s true that the LLC law is less restrictive than the corporation law, there are still requirements that have to be met. For example, your LLC must appoint and continually maintain a registered agent and office, maintain certain books and records, and file certain documents with the Department of State if you want to make certain changes, such as changing the name or the registered agent.
Obtaining investors
It can be harder for an LLC to find new investors than it is for corporations. People are more familiar with corporate stock, and LLC membership interests can be harder to understand. There are also people who prefer to invest their money in corporations because they like the structure (management by directors and officers, rather than the owners) and the fact that there are more protections for shareholders in the corporation laws than there are for members in the LLC laws. Some investors also don’t like the idea of having to report the business’ profits on their own federal tax return.
Dissolving the business
If you created a Florida LLC and then decide you no longer want to operate the business, you will need to formally dissolve the LLC. Until you do, the LLC remains responsible for annual reports and complying with the rest of the requirements of the LLC law. The LLC will also be listed on the state’s public records as delinquent or administratively dissolved which makes it a target for business identity thieves who can reinstate your LLC without you knowing about it and make purchases, obtain loans, or take other actions that you can be responsible for. Never just abandon your LLC. Always formally dissolve it. The Florida LLC law sets forth how you can do that.
If you’re the only member of your Florida LLC, something you should be aware of is that under Florida law your LLC will dissolve upon your death unless certain steps are taken to admit a new member. You can provide for what you want to happen in your LLC’s operating agreement. If not, the provision in the Florida LLC law will apply. Florida corporations, on the other hand, do not dissolve if the sole shareholder dies.
Learn more
To determine if a Florida LLC is the right path for your business, consult with an attorney or accountant. You can also view the Florida LLC Formation Guide for more information.
