Business Law 101

Matthew John Monaghan

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Why Form a Limited Liability Company (LLC) instead of an S Corporation?

For many years people have owned an operated their businesses as a Florida corporation which elects to be taxed under sub chapter S of the Internal Revenue Code. This is commonly known as an "S-Corporation or S-Corp".

While an S-Corp has the advantage of not paying any tax at the entity level it does have disadvantages because of the severe restrictions on the eligibility of shareholders and classes of stock which can be issued.

Problems with S-Corp:

  1. S-corps cannot have more than 100 shareholders. If you plan to "go-public" or expand your capital needs this will be a problem;
  2. S-corps cannot have corporation, partnership, trust, or non resident alien shareholders;
  3. S-corps cannot have more than one class of stock. If you plan to have more than a basic capital structure this may also become a problem.
  4. S-Corps are required to file an annual tax return.

Tax Advantages of Limited Liability Company:

A limited liability company is another form of business entity available in Florida. It is commonly known as an "LLC". An LLC provides its owners the same level of protection from the liabilities of the business that a corporation does. Typically an LLC will elect to be taxes as a Partnership for Federal Tax purposes.

An LLC taxed as a Partnership has several advantages over a typical S-Corp including:

  1. An LLC can have as many owners as it wants, there are no limits.
  2. Anybody can be an owner of an LLC, including non-US citizens, corporations, trusts and another LLC;
  3. An LLC can have multiple classes of stock.

Other LLC advantages.

An LLC can be structured in almost any way the owners desire. While the operations and business structure of corporations are largely controlled by statutes the owners of an LLC can do it their own way. An LLC can be structured like a partnership wherein all owners have equal control and share the profits equally. Alternatively an LLC can have both voting and non voting members. This is especially attractive to parents who want to transfer the value of the business to their children while still controlling the business during their own lifetime.

What is a Single Member LLC?

A single member LLC is an LLC with only one owner, similar to a sole proprietorship. A single member LLC is very simple to form and operate. A single member LLC can elect to be a disregarded entity for IRS purposes and is not even required to file its own separate tax return. All of the income and expenses of the single member LLC are simply reported on the form 1040 tax return of the owner. This can save time and money.

What if I already have a Corporation but I want to become a Limited Liability Company (LLC)?

Florida law allows a corporation to "Convert" into a LLC. Upon conversion the new LLC will simply step into the shoes of the former corporation and for all purposes it will be the same legal entity as before the conversion. Upon conversion legal title to all assets and property will automatically vest in the new LLC and all liabilities, debts and claims against the old corporation automatically attach and follow over to the new LLC. All of the former shareholders of the corporation automatically become owners/members of the new LLC in the exact same percentages (unless the shareholders agree otherwise).

Conversion into an LLC is very similar to a merger from a legal standpoint. It can be quite complicated once a corporation has established itself with business operations, assets, and numerous shareholders. However, if the corporation is new or has very few shareholders conversion can be relatively simple.

Our attorneys will complete the following steps are required to convert a corporation to a LLC under Florida law:

A. A written Plan of Conversion is drafted, the plan must be in compliance and contain all of the provisions required by Section 607.1112 of the Florida Business Corporation Act, including the terms and conditions of the conversion, including the manner and basis of converting the shares, obligations, or other securities, or rights to acquire shares, obligations, or other securities, of the domestic corporation into the partnership interests, limited liability company interests, obligations, or other securities of the other business entity, including any rights to acquire any such interests, obligations, or other securities, or, in whole or in part, into cash or other consideration;

B. The Directors and Shareholders adopt and approve the plan and authorize the conversion;

C. A Certificate of Conversion and LLC Articles of Organization are filed with the division of Corporations and appropriate filing fees are paid.

D. Have your accountant notify the IRS of the conversion and elect partnership tax status.

Then you are finished and you continue on as a LLC enjoying all the LLC benefits.

What do I need to have done to start up a new Limited Liability Company?

Florida law requires that certain formalities be followed in order for you to enjoy the limited liability protection afforded the owners of a Limited Liability Company (LLC). In addition following these formalities helps prevent disputes and allows owners to flush out the details of their business relationship. The following items must be completed by our attorneys:

  1. Draft and File Limited Liability Company Articles of Organization. This is the initial step in the process. The Articles of Organization state the name of the LLC, the address, the name and address of the registered agent, and the name of the manager or managing member(s).
  2. Draft and Execute Initial Organizational Minutes. This is a written record of your first meeting wherein you elect the managing members, agree to the original certificate issuance, authorize a bank account and the signatories, adopt the Regulations, and other important matters.
  3. Issuance of Membership Certificates. These are written certificates that state who the owners are and how much they own. The certificates must contain a legend referencing any restrictions on transferability (see below).
  4. Adopting and Executing LLC Operating Agreement and Regulations. This is the engine of the LLC and controls all aspects of the company's operations, its capital, management, and members. The Regulations normally contain restrictions on the transfer of ownership and provide owners with a right of first refusal to purchase additional shares. The Regulations can also address death and disability buyout provisions. This document can become very complex depending on the nature of the business and the people involved. Many people start off with a simple document and then amend it later as the business grows.
  5. Obtain Federal EIN. This is the identification number of your business for the IRS. You will also select how you want to be taxed. Most LLC's elect to be taxed as a partnership.

What do I need to have done to start up a new Corporation?

Florida law requires that certain formalities be followed in order for you to enjoy the limited liability protection afforded the owners of a Corporation. In addition following these formalities helps prevent disputes and allows owners to flush out the details of their business relationship. The following items must be completed by our attorneys:

  1. Draft and File Articles of Incorporation. This is the initial step in the process. The Articles of Incorporation state the name of the corporation, the address, the name and address of the registered agent, and the name of the directors.
  2. Draft and Execute Initial Organizational Minutes. This is a written record of your first meeting wherein you elect the board of Directors, President, Secretary, Treasurer, agree to the original certificate issuance, authorize a bank account and the signatories, adopt the Bylaws, and other important matters.
  3. Issuance of Stock Certificates. These are written certificates that state who the owners are and how much they own. The certificates must contain a legend referencing any restrictions on transferability (see below).
  4. Drafting and Adopting Bylaws. The bylaws are the document that controls the general governance of the corporation, its shareholders, directors and officers.
  5. Adopting and Executing a Shareholders Agreement. This agreement controls relationships between the shareholders and normally contains restrictions on the transfer of shares. A shareholders agreement can address death and disability buyouts and provide shareholders with a right of first refusal to purchase shares upon transfer. A shareholders agreement can also control all aspects of the corporation's operations, its capital, management, and owners. This document can become very complex depending on the nature of the business and the people involved. Many people start off with a simple document and then amend it later as the business grows.
  6. Obtain Federal EIN. This is the identification number of your business for the IRS. You will also select how you want to be taxed. Most corporations elect to be taxed as a Subchapter S corporation (S-Corp).

If I form a Corporation or a Limited Liability Company using my business name will I own the exclusive rights to my business name?

In general the answer is no. In order to "own" the exclusive national rights to use a name, slogan, or trademark in business or commerce you must file for a Federal Trade name or Federal Trademark.

If I file for a Fictitious Name Will I own the exclusive rights to my Fictitious Name?

In general the answer is no. In order to "own" the exclusive national rights to use a name, slogan, or trademark in business or commerce you must file for a Federal Trade name or Federal Trademark. A Fictitious Name Registration simply allows you to operate your business under a name different than the name you filed under your Articles of Incorporation or Articles of Organization.

Additional Resources

Cantwell & Goldman, P.A.

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