If you’re considering starting your own business, there is one crucial, preliminary decision which you will have to make, which has the potential to determine your business’s prospects of success: which business structure will you use to organize your new venture? The type of legal entity you select will have various consequences for both you personally and for your business, which is why it is vital for you to consult a business familiar with business legal entities if you’re going to be forming a new company and are considering using a corporation or LLC business structure.
What business structures are available?
In Florida, four types of business structures are available: sole proprietorships, partnerships, corporations, and Limited Liability Companies (LLCs). Each have their own implications for the taxes you will pay, whether you will have the protection of limited liability or not, the degree of regulation your company will face, and what type of registration process you will need to follow. The structure selected will also determine how many members (owners) the company may have, the management structure required, and how business decisions are to be made, among other things. An LLC lawyer will be able to assess the particular needs of your business, and advise on the company structure which will be optimally suited to your new venture.
What are LLCs?
LLCs are a relatively new business entity, and are essentially a hybrid of the corporation and partnership business structures. By combining elements of both, the LLC is able to accommodate a variety of business needs, making it a highly flexible business structure. An LLC may be formed by filing articles of organization with the Florida State Department, upon the acceptance of which a separate legal entity is formed. However, since the business structure is fairly complex, and relatively new, it is strongly recommended that you consult a qualified LLC lawyer to handle the minute legal details of incorporation. This will ensure that you are indeed protected by limited liability and that no loopholes have been left open which could cause you to be personally liable down the line.
Advantages of LLCs
LLCs are ideal for small business owners who want to protect their personal assets through the limited liability afforded to corporations, but want to enjoy the administrative simplicity and tax benefits of partnerships. Let’s take a look at these advantages in greater detail:
- Pass-through taxation
The default for multi-member LLCs is that members enjoy pass-through taxation, which means they report their share of the LLC’s profit or loss on their individual tax returns, in the same manner as what is referred to as an “S” corporation. Taxes are thus paid at the individual level, and the double-taxation applicable to C corporations (taxation at the corporate level and again at the individual level after the issue of dividends) is avoided. Single member LLCs may choose to be taxed as if they are sole proprietors, reporting all income or loss on Schedule C.
- Limited liability
Since a separate legal personality is created by the formation of an LLC, liabilities are incurred by the company itself and not by the owners in their individual capacities. This means that your personal assets will be protected if the company is liable for any debts or damages. The benefits of limited liability cannot be underestimated: it could mean the difference between losing you home and other assets should the company fail, and keeping them.
- Flexibility and fewer formalities
LLCs typically have no limits on membership or the number of subsidiaries, and members have the freedom to structure the management and profit distribution of the LLC as they choose. LLCs are also not formally required to obtain corporate resolutions for business decisions. Also, foreign nationals can be members of an LLC, whereas they cannot be a shareholder of a subchapter S corporation.
Disadvantages of LLCs
Although LLCs have many benefits, it is important to be aware of the potential disadvantages they may bring.
LLCs generally have higher registration and ongoing fees than sole proprietorships and partnerships.
- Flexibility of ownership transfers may be limited
Members must determine upfront in the LLC’s operating agreement whether ownership in the company may be transferred, and if so under what conditions and with what permissions. If members decide that approval is required for transfer, it will be more difficult to leave the LLC than it would be to leave, for example, a corporation. This could have major implications for you should the business not work out. This is all determined by the operating agreement entered into between the members of the LLC when it is formed.
- Uncertain case law protection
There is uncertainty as to the general legal principles applying to LLCs as there has not been much litigation concerning LLC structures.
Consult an experienced business lawyer so that you can make the best choice for your business
Considering LLCs do come with some disadvantages, it is highly important that you seek advice to determine if LLCs are the right business structure for your business’s particular needs. If you do decide to form an LLC, having an experienced lawyer at your side to advise on how to navigate the flexibility afforded by LLCs will go a long way to ensuring an optimal business structure is developed. Give your business the best start in life.