Summer is here! A nostalgic reminder of summer vacations, summer jobs and lemonade stands. Even as kids, we all had an entrepreneurial spirit in us. Today it may be setting up e-shop on Etsy.com or starting that house-flipping company. No matter where your interests and creativity may take you, there are some very important threshold considerations to become familiar with before starting a business.
Now, it’s safe to say the limited liability company, or the “LLC” is the most commonly used organizational structure. But it may not be the best one for your potential business. In order to determine which structure is right for you, it’s imperative (not suggested) that you see an attorney. Employment and tax law are intimately entwined in operating a business, and neither are areas that a layman should self-teach. So whether you are contemplating starting your own company, or are incorporated already, here are some major reasons to enlist legal help:
• January 1, 2014, the Florida Revised Limited Liability Act (“the New Florida Act”) came into effect. This has an immediate impact on any LLC formed on or after January 1, 2014. For the remainder of calendar year 2014, already-existing LLCs will continue to abide by the Florida Limited Liability Company Act (the “Existing Act”), but the Existing Act will be repealed beginning January 1, 2015, at which point the New Act will govern all Florida LLCs and those who otherwise do business with them.
• The New Florida Act and the Existing Act are considered the default statutes, which govern in the absence of any Operating Agreement of members of the LLC. This being said, an Operating Agreement, while not required, is extremely important. Certain terms of your Agreement may replace terms of the Acts, which could be of major benefit to your company. Each company is different and its operational structure must be laid out to best benefit the members and the business.
• One of the benefits to an LLC is pass-through taxation, where members report their share of the profit or loss on individual tax returns, thus avoiding double taxation (when income is taxed twice: once at the corporate level and again at the individual level). Any tax due is then paid at the individual level. If there are several members of your LLC, an informational tax return is required (otherwise known as partnership tax). Single member LLCs report income or loss on a Schedule C. Don’t be fooled – this can be a VERY complicated area of law! There are also hidden benefits in partnership taxation that only a tax attorney may be able to discern.
• Some additional benefits to the LLC are flexibility and fewer formalities. There are no shareholders in an LLC, formalities such as taking meeting minutes and voting are not necessary (although there still exists a fiduciary relationship to other members). Further, there are various types of distributions of profits that can be used in an LLC. Again, an Operating Agreement drafted by an attorney can best address these issues.
• There are downsides to LLCs, however, they really depend on what type of business you wish to operate and how you wish to operate that business. Changing members and otherwise transferring ownership can prove to be difficult, and LLCs can be expensive to form and maintain. Please note, just because your LLC is listed as “inactive” on Sunbiz.org, does not mean you cannot be sued! There are certain litigation strategies that can be implemented to protect an LLC from litigation, but again, this is a topic for your lawyer.
• Make sure that your “business purpose” is broadly stated. Any specification in this area upon filing your LLC could result in “ultra vires” actions, or actions taken beyond the scope or power of the LLC, exposing one to independent liability.
So, should you start your own LLC? Probably not. These considerations are just the tip of the iceberg when dealing with organizational structures of businesses. But there’s no reason to be scared! With a little legal guidance and some start up money, you can soon get that summer lemonade stand into full swing.