A limited liability company (“LLC”) is a business structure that combines some of the flexibility and tax benefits of a partnership, but with the limited liability feature of a corporation. An LLC is a distinct and separate legal entity from its owners, who are referred to as the LLC’s members. Accordingly, the LLC has its own obligations, powers, privileges, and rights under Florida law –separate from its members, and it can be sued and can sue others.
In Florida, an LLC may be formed and organized for any lawful purpose. However, if the LLC will be a professional limited liability company (“PLLC”) then a single specific professional purpose must be listed. (For example, the practice of law, accounting services, practicing medicine, etc.) Non-professional companies are not required to list a purpose, but may do so.
The LLC continues to be the preferred entity of organization in Florida. According to the Florida Department of State (the “Department”), as of January 16, 2018, there were 1,152,051 active limited liability companies in Florida, in comparison to 761,133 for-profit corporations, with 263,545 of those active Florida LLCs organized just this past year in comparison to 101,115 for-profit corporations organized this past year. (If you’re interested in any of the stats, check them out here.)
Benefits of LLCs
So let’s take a look at some of the potential benefits of an LLC.
First, LLCs are user friendly. Forming an LLC is fairly straightforward. To get it started, one or more persons may form an LLC by executing, acknowledging, and delivering the LLC’s articles of organization to the Department of State – which can be conveniently done electronically through Sunbiz.org, which is the official business entity index and commercial activity website for the State of Florida’s Division of Corporations. Florida makes it really convenient to take care of most of your LLC’s business online, including the annual report obligation, which adds to the LLC user friendliness factor.
Second, and perhaps one of the top advantages, is the limited liability. When doing business as an LLC, the LLC’s members are not personally liable for the LLC’s obligations. As would be expected, limitation on liability is a very attractive feature to members and to future investors.
Third, there is greater flexibility for management and the ability to customize its management approach. There is no limit to the number of owners. This is also where you will hear a lot of the jargon to describe some of the management options (such as manager-managed single-member, member-managed single member, multiple member manager-managed, or multiple member member-managed). These labels basically cover the different LLC management scenarios that may play out given that the LLC members have the option to either be directly involved in the management of the LLC (member-managed), or alternatively, to agree to place that power in “hired managers” or in centralized management, including board of directors. The requirements to record management functions are also less stringent, and members are not required to hold annual meetings or record minutes. (Although not “required” it is often helpful to get in the habit of doing these things as good business practices.)
Fourth, the option to elect pass-through taxation is another huge benefit. Taxes are usually somewhere in our minds when making business decisions. It is never necessarily to get over on the IRS, but instead to make sure that the tax treatment is fair, reasonable, not excessive, and just overall the best treatment possible based on your life and business circumstances. Just to touch on how this works, is that LLCs can elect to be treated as partnerships for federal tax purposes. This means that the LLCs can pass through its items of income, gain, loss, and credits to its members without any taxation at the entity level. Involving your accountant is always a great idea for tax and accounting planning for your LLC.
Disadvantages of LLCs
Now let’s take a look at some of the drawbacks of LLCs. Many of the disadvantages have a “flip side” or have potential improvements on the horizon, so do not despair.
First, there are higher formation and ongoing administrative compliance costs than with partnership and sole proprietorships. However, these costs are not significantly different from the annual costs of Florida corporations, and in fact actually slightly cheaper. (For example, currently the Florida LLC annual report filing fee is $138.75 in comparison to the Florida corporation annual report filing fee of $150).
Second, there may be occasional uncertainty on how particular LLC legal issues may play out it in court, because there is a smaller body of case law regarding LLCs given that it is a newer entity form, despite its increasing popularity. Since the LLC has quickly become a very popular entity choice, this disadvantage will likely fade in due time. Also, the Florida Revised LLC Act (the “Act”), which updated and modernized the original Florida LLC Act, was signed into law on January 1, 2014. As of January 1, 2015, all Florida LLCs are governed by the revised Act.
Third, an LLC operating in multiple states may experience (a minor to significant) lack of consistency in treatment and procedures when doing business in different states. This is because LLCs are state law creations, and there may be a lack of uniformity among state statutes governing LLCs. This is also gradually getting better because the FL Revised LLC Act takes into account many components of uniform LLC law projects, such as the Revised Uniform Limited Liability Company Act (“RULLCA”) and the ABA Revised Prototype LLC Act – to name a couple, to help Florida LLC law stay current with popular LLC trends and legal treatment across the country and in influential jurisdictions (such as Delaware).
Lastly, there can be limited flexibility in ownership transfers of interests in the LLC. Your business and personal goals may make this point more of an issue to some more so than others. The ability to transfer LLC membership interests is typically more difficult than the transfer of ownership of stock in a corporation. This may be a point of contention with certain investors. It is also important to note that although the Florida Revised LLC Act contains “default” rules on how members can transfer their membership interests, these “default” rules are subject to and can be changed by the terms of the LLC’s operating agreement.
The Operating Agreement
The LLC operating agreement will be one of the most important documents your company creates and owns. Although it is not a legal requirement to have an operating agreement, it is highly beneficial to have one. It is beneficial and important to have an LLC operating agreement so that the members of the LLC, as well as outside companies and businesses (for example banks, investors, future members), know what the internal rules are for your company.
Depending on your own level of knowledge and expertise, you should consider having a business lawyer assist you in preparing your operating agreement.
Make sure you pick the right business entity. Make sure your interests are protected.
**** This article is for educational purposes only and to provide a general understanding of the law, not to provide specific legal advice. By reading this blog post you understand that there is no attorney client relationship between you and TLA LAW. This blog or any article on the website should not be used as a substitute for obtaining competent personalized legal advice from a licensed attorney in your state.****