The Small Business Administration states “A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.”
The “owners” of an LLC are referred to as “members.” Members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs.
LLCs are not taxed as a separate business entity from its members (owners). Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses of their business on their own personal federal income tax returns, in the same manner that owners of a partnership would.
Forming an LLC
The first thing to do when forming an LLC in Florida is to choose a business name. The SBA states that “there are 3 rules that your LLC name needs to follow: (1) it must be different from an existing LLC in your state, (2) it must indicate that it’s an LLC (such as “LLC” or Limited Company”) and (3) it must not include words restricted by your state (such as “bank” and “insurance”).” Your business name will be automatically registered with the State of Florida when you register your business with the Florida Department of State.
When registering your business with the State of Florida you shall have to file the Articles of Organization of your business with the Florida Department of State. The “articles of organization” is a simple document that legitimizes your LLC and includes information like your business name, address, and the names of its members.
The SBA suggests that an LLC have an Operating Agreement. Florida does not require your business to have an operating agreements. However, we recommend that your business have an operating agreement if your business is a multi-member LLC. An Operating agreement will structure your LLC’s finances and organization, and will provide your business with rules and regulations that will allow it to run smoothly. At a minimum, your operating agreement should include the percentage of interests owned by each member, the allocation of profits and losses of the business between its members, the member’s rights and responsibilities and other provisions that will bring harmony to the business through its life and upon dissolution.
You should have an operating agreement when running your LLC. An operating agreement is necessary to run your business for the following reasons:
- It will help Courts determine that you were responsible in forming your LLC and therefore the Courts will be inclined to respecting your personal liability protection.
- It will allow for the business to run smoothly, for it will set out the rules that will govern how your business’ profits will be split up, how major business decisions will be made by your business, and the manner in which your business will handle the departure or the addition of members.
- It will help avert misunderstandings among the owners over the finances and the management of the business.
- It will also allow the members to create their own operating rules rather than they being governed by the default rules of the State of Florida’s LLC laws.
An LLC must obtain Federal, State and Local Licenses and Permits to operate its business. After you register your business with the State of Florida, your business must obtain business licenses and permits that pertain to the business.
In the eyes of the federal government, an LLC is not a separate tax entity from its members/owners, so the business itself is not taxed. Instead, all federal income taxes are passed on to the LLC’s members and are paid through their individual personal income tax. In Florida, an LLC can be taxed as follows:
- A limited liability company (LLC) classified as a corporation for Florida and federal income tax purposes is subject to the Florida Income Tax Code and must file a Florida corporate income tax return.
- An LLC classified as a partnership for Florida and federal income tax purposes must file a Florida Partnership Information Return (Florida Form F-1065) if one or more of its owners is a corporation. In addition, the corporate owner of an LLC classified as a partnership for Florida and federal income tax purposes must file a Florida corporate income tax return.
- A single member LLC disregarded for Florida and federal income tax purposes is not required to file a separate Florida corporate income tax return. The income must be reported on the owner’s return if the single member LLC is owned, directly or indirectly, by a corporation. The corporation must file Florida Form F-1120, reporting its own income and the income of the single member LLC, even if the only activity of the corporation is ownership of the single member LLC. While the federal government does not tax income on an LLC, some states do, so check with your state’s income tax agency.
The federal government does not recognize an LLC as a business entity for taxation purposes, so all LLCs must file as a corporation, partnership, or sole proprietorship tax return. Certain LLCs are automatically classified and taxed as a corporation by federal tax law. Most businesses can choose their LLC business entity classification.
In Florida, you can combining the Benefits of an LLC with an S-Corp. To do so you would have to request S-Corp status for your LLC. You’ll have to make a special election with the IRS to have the LLC taxed as an S-Corp using. You must file for the election prior to the first two months and fifteen days of the beginning of the tax year in which the election is to take effect. If the S-Corp election is made, then the LLC remains a limited liability company from a legal standpoint, but for tax purposes it can be treated as an S-Corp.
Advantages of an LLC
The SBA states that the following are the advantages of forming an LLC:
- Limited Liability. Members are protected from personal liability for business decisions or actions of the LLC. This means that if the LLC incurs debt or is sued, members’ personal assets are usually exempt. This is similar to the liability protections afforded to shareholders of a corporation. Keep in mind that limited liability means “limited” liability – members are not necessarily shielded from wrongful acts, including those of their employees.
- Less Recordkeeping. An LLC’s operational ease is one of its greatest advantages. Compared to an S-Corporation, there is less registration paperwork and there are smaller start-up costs.
- Sharing of Profits. There are fewer restrictions on profit sharing within an LLC, as members distribute profits as they see fit. Members might contribute different proportions of capital and sweat equity. Consequently, it’s up to the members themselves to decide who has earned what percentage of the profits or losses.
Disadvantages of an LLC
The SBA states that the following are the disadvantages of forming an LLC:
- Limited Life. In many states, when a member leaves an LLC, the business is dissolved and the members must fulfill all remaining legal and business obligations to close the business. The remaining members can decide if they want to start a new LLC or part ways. However, you can include provisions in your operating agreement to prolong the life of the LLC if a member decides to leave the business.
- Self-Employment Taxes. Members of an LLC are considered self-employed and must pay the self-employment tax contributions towards Medicare and Social Security. The entire net income of the LLC is subject to this tax.