A limited liability company is somewhere in between a corporation and a partnership. The operating rules for a corporation are generally found in the Florida Statutes, while the operating rules for a partnership are generally found in the partnership agreement. A limited liability company finds some of its operating rules in the Florida Statutes and some in its operating agreement. A limited liability company is generally formed by one or more individual owners (members) filing articles of organization with the Florida Secretary of State. As part of the formation there are other corporate records that must be created and kept as part of the corporation's official records (such as an operating agreement, minutes and maybe membership certificates). It would be a big mistake for two or more individuals to go into business together as members in a LLC without a written operating agreement.
Assets are typically owned by the LLC and deployed in the business venture. Problems can arise when business assets are not properly designated as being owned or not being owned by the LLC. Care needs to be given to each asset used by the business to make clear who owns the particular asset in question.
Liabilities, such as for office supplies and the like, are generally the responsibility of the LLC, as opposed to the members. In the event a LLC fails, the individual members are typically not responsible for the unpaid debts of the business.
Typically a LLC is operated under the legal name of the LLC. The members may wish to use a business name different from the name of the LLC, and may protect the use of the business name by making a fictitious name filing with the Florida Secretary of State.
A new LLC can usually be created and assets transferred to it in a tax free transaction. The profits and losses from the operations of a LLC can be taxed in a number of ways, and part of the formation process includes identifying the tax status for the entity, and reporting this to the IRS. For example, if there is only one owner of the LLC, it can be ignored as a taxable entity for tax purposes, and its profits and losses reported on the owner's individual income tax returns. Or the LLC can elect to be taxed as a corporation or S corporation. If there are two or more members, the LLC can elect to be taxed as a partnership, corporation or S corporation. The tax form used to report the profit and losses of a LLC each year depends on the election made by the LLC (Form 1040, 1065, 1120 or 1120S, as the case may be). This flexibility of being able to elect the entity's tax status and its liability protection for the members has made the LLC a very popular business vehicle.
Whether or not a LLC must file and/or pay Florida income taxes depends on the tax status elected by the LLC for federal income tax purposes. If it is treated as being ignored or a partnership, then there is no income tax obligation (a LLC taxed as a partnership with a corporate type partner must file and information return each year). If the LLC elects to be treated as a corporation or S corporation, it must file and pay Florida income taxes. A LLC must keep separate books and records for its financial activities. Depending on the tax status election, the State of Florida may impose an income tax on the profits or losses of a LLC doing business in the State of Florida. A LLC obtains an Employer Identification Number for use with its business' bank accounts and tax returns. The collection and remittance of sales and use taxes, as well as ad valorem (property) taxes, are generally the same for any type of business entity, including a LLC.
A LLC may have real estate associated with its business operations. As with other assets, the LLC typically owns any real estate used incident to the business operations of the corporation. If the property is owned by one of the members, another business entity or a third party, the LLC typically pays rent to the owner for its use of the real property. Depending on the tax election, LLCs can be a very effective vehicle to own real property.
Sale or Exchange
LLCs typically own all of the assets used in the business, and any sale or exchange of the business can be a sale or exchange of the assets and liabilities of the business or of the membership interests of the LLC.
All businesses need to actively manage their business risks, including LLCs. The assets and liabilities of the business belong to the LLC, and the individual members are generally not responsible for any company debts. Nevertheless, a LLC must obtain appropriate insurance coverage (hazard, liability, workers' compensation, and the like). Any unexpected claims that are not covered by insurance can quickly consume any equity the members have in a LLC. One of the major benefits of a LLC is that the members are not generally responsible for the LLC's debts. Where there are two or more unrelated member/owners of a LLC, there can also be some potential asset protection for the member's equity interest in the LLC as it relates to obligations and claims unrelated to the LLC.
In the event of a member's death, disability, or bankruptcy, the LLC may generally continue its business. In the event of death, the member's interest in the LLC (rather than the LLC's assets) generally becomes part of the deceased member's probate estate, and is ultimately distributed in accordance with the terms of the member's last will and testament. Regardless of the nature and extent of the business' assets and liabilities, it is possible to keep the LLC and its business in tact. As part of the formation of a LLC with more than one member, it is very important for the members to come up with a business succession plan that includes consideration of the death, disability, bankruptcy, retirement, and or other withdrawal of a member from the LLC.
Termination and Winding Up
A LLC may be terminated and its affairs wound up. The members should consider the income tax consequences to the termination and winding up before they decide to actually end the business operations.
A tiered LLC business structure can be very useful. Proper use of tiered LLC ownership can separate various different business activities and associated risks and costs from each other.
Additional resources provided by the author
Go to http://dor.myflorida.com for a summary of the filing and paying consequences of the various business entity choices in Florida. Or you can go to http://www.irs.gov for a summary of the filing and paying consequences of the various business entity choices for federal income tax purposes.