LLC Archives - Wetherington Hamilton, P.A.

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Starting Your Business – Which Corporate Form Should You Use?

August 5, 2015/in Articles, General/by Ted Hamilton

What are the Differences Between an LLC and the S Corp or C-Corp?

For those of you that have ever thought about using a corporation when starting your business, including owning rental property, the first question that comes to mind is whether to form an LLC or a Corporation.

To begin with, you should incorporate (either LLC or Inc.) if you own a business that has any risk of personal liability. In most circumstances, both types of incorporation will insulate you from personal liability for someone getting injured at your business or your products causing injury.

The differences between an LLC and a Corporation fall into a few categories which we will discuss below:

LLCs ARE MANAGED DIFFERENTLY THAN A CORPORATION

LLCs are managed by managers. These managers can either be owners or can be non- owners. Unlike a corporation, there are no officers or board of directors to report to in an LLC so the control of the Corporation is not as directly in the hands of the owners as in an LLC.

THE C CORPORATION FORM OF OWNERSHIP HAS THE OPTION OF NOT BEING A PASS-THROUGH ENTITY

Corporations can either be established as a C Corporation or an S Corporation for income tax purposes. Using a C Corporation allows the Corporation to retain profits and losses and then pay taxes on these and be taxed as a “separate entity.” Thus, unlike an S Corporation or LLC, in a C Corporation, profits of the corporation don’t automatically pass through to the personal tax returns of the shareholders.

THE SINGLE MEMBER LLC, UNLIKE THE S CORPORATION, IS A COMPLETE “PASS THROUGH ENTITY” FOR TAX PURPOSES.

All of the income and expenses from the business gets reported on the single member LLC operator’s personal income tax return. In a single owner S corp, the owner pays himself or herself a salary plus receives dividends from any additional profits the corporation may earn. Thus, the single owner S Corporation, is not merely a “pass through” entity for tax purposes. As a result, the single member LLC shows all income and expenses on their personal tax return. Further, in a single member LLC, the LLC does not file a business tax return which could save some money in tax preparation at tax time.

S CORPORATIONS CANNOT HAVE NON-U.S. CITIZENS/RESIDENTS AS SHAREHOLDERS and CANNOT BE OWNED BY C CORPRATIONS, OTHER S CORPORATIONS OR LLCS.

Unlike an LLC, all of the S Corporation’s shareholders must be U.S. Citizens/residents. This issue may become larger as more and more foreign nationals seek to purchase real estate in the U.S. This may also be a substantial reason to ensure that real property holding companies are formed as LLCs. Finally, an S Corporation cannot be the subsidiary of another corporation. Thus, if you are considering the sale of your company stock to another company, you will want to consider the LLC or the C Corporation form of ownership.

THE ENTIRE NET INCOME OF AN LCC IS TREATED AS SALARY TO THE OWNER FOR TAX PURPOSES

The owners of an LLC are taxed on the entire net income of the LLC. This means that the all of the company income is subject to the 15.3% self-employment tax contributions towards Medicare and social security. In an S Corporation, only the wages of the S-Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a “distribution” which is taxed at a lower rate if at all!

THE S CORPORATION HAS A LIFE DISTINCTIVE OF THE OWNERS

Unlike an LLC, the S corporation continues its existence even after the death of an owner, the sale of the shares, or if an owner leaves the company. If any of these events happen in an LLC, it is possible the LLC will end its existence.

The decision as to which form is best for you and the potential tax consequences of each requires the advice of your attorney. If you don’t have an attorney or wish to discuss these options, please feel free to give our office a call. Unlike the online sites, we can speak to your questions directly and for a surprisingly reasonable fee can ensure you are ready to move your business forward.

Theodore J Hamilton, Esq.

The New Florida Limited Liability Company Act

January 22, 2014/in Articles, General/by Ted Hamilton

In the spring of 2013, the Governor of the State of Florida signed a new Limited Liability Company Act which took effect on January 1, 2014. Until January 1, 2015, Limited Liability Company’s (LLC’s) formed in Florida before January 1, 2014 will continue to be subject to the current law under Chapter 608 unless they elect to be governed by the new law after that date. The new law will apply to all LLC’s filed after January 1, 2014. After January 1, 2015 all LLC’s must adhere to the law. Some of the important changes included in the law are as follows:
• Defines more precisely the duties of members and managers and eliminates in the process the notion of “Managing Member”;
• Gives LLC’s the ability to assign authority or restricted authority to certain persons or groups in the LLC and authorizes the filing of Statements of Authority with the Florida Department of State to such effect;
• Adds more “non-waivable rules” regarding Operating Agreements. For Example, an Operating Agreement cannot call for waiver of certain rules including member’s right to seek judicial dissolution in certain situations and prohibiting indemnity rights for certain kinds of misconduct by the person seeking indemnification;
• Adding new provisions regarding service of process on all LLC’s and creating a new section of the Florida Statutes Chapter 48 that addresses such service of process;
• Retains the Olmstead Amendment made to the LLC Act two (2) years ago;
• Clarifies the rights and duties of the transferee of a membership interest;
• Changes the voting rights of members in certain circumstances;
• Disassociated members now have the right to disassociate at any time.

However, members who disassociate may be liable to the LLC for wrongful disassociation.

• Durivative Actions. Under the new law, a member may now maintain a durivative action if the other members do not take action within a reasonable time, not to exceed ninety (90) days. Furthermore, a demand is unnecessary if demand would be either futile or irreparable injury would result in waiting for other members to take action. The new act also provides procedures for the appointment of special litigation committee to investigate any durivative actions.
There are many other sections not addressed in this article. Please do not rely only on this article for legal advice. It is meant as a brief summary of the changes in the statute. Ultimately, a review of your LLC documents is recommended in light of the new law for all Florida Limited Liability Companies. If you have any further questions or would like further details on the law, please contact Theodore J. Hamilton at extension 14 in our office.

Limited Liability Companies in Florida

September 23, 2013/in Articles, General/by Ted Hamilton

For those intending to form a closely held operating business in Florida, the entity of choice, in most cases, will be a limited liability company (LLC) that elects to be taxed as a Subchapter S corporation.

Following the issuance of “check the box” regulations in 1997, eligible entities (including eligible LLCs) have been able to select their federal tax classification. Eligible entities, such as the LLC, may elect to be taxed as a C corporation, an S corporation, a partnership, or, in the case of single member LLCs, a disregarded entity. As a result, since 1997 practitioners have been able to select the best combination of state law attributes and federal tax treatment to achieve a legal structure suited to the particular needs of a business.

The LLC constitutes a hybrid structure that marries the benefits of an LLC (a function of state law) with those of an S corporation (a function of federal tax law). This marriage achieves three principal benefits: 1) protection of the owners’ interests in the company from their personal liabilities (“asset protection”); 2) protection of the assets of the owners from the liabilities of the enterprise (“limited liability”); and 3) the lowest federal employment tax liability for owners employed by the business. The LLC is the only Florida entity that provides all three of these benefits.

Asset Protection Benefit

Among the most material of these benefits is the protection provided by F.S. §608.433(4), which safeguards the membership interest of an LLC owner from loss by limiting a creditor to the remedy of a “charging order.” While a charging order provides a creditor with the rights of an assignee, which entitles a creditor to receive distributions to which the debtor-owner would otherwise have been entitled, the debtor-owner will continue to own its membership interest in the LLC and, otherwise, operate its business without interference from the creditor. The creditor cannot vote on business matters, inspect or copy business records, nor exercise any of the debtor-owner’s rights with respect to the management of the business. Conversely, the owners of a corporation (both S and C) have no similar benefit, as their creditors are not limited in their remedies to a charging order. Accordingly, the Florida LLC provides a distinct measure of “asset protection,” while the Florida corporation provides none.

Limited Liability Benefits

Of the limited liability entities in Florida offering both asset protection and limited liability, LLCs offer the most secure limited liability shield – a shield equivalent to that of a corporation. F.S. §608.701 provides that in any case in which a party seeks to pierce the veil of an LLC, the court must apply the same case law as would apply to the piercing of a corporate veil under similar circumstances. As a result of the Florida Supreme Court case Dania Jai-Alai Palace, Inc. v. Sykes, 450 So.2d 1114 (Fla. 1984), which held that a corporate veil could not be pierced without a showing of fraud or an improper purpose, the limited liability shield of a Florida corporation is among the most difficult to pierce in the United States. Mere disregard of corporate formalities, inadequate capitalization, informal loan transactions, and similar poor practices will not justify piercing the corporate veil in Florida.

Federal Tax Benefits

Why should a closely held operating business formed as a Florida LLC elect taxation as an S corporation? Taxation as an S corporation offers two principal advantages. First, the Internal Revenue Code of 1986, as amended, provides that the profits and losses of an S corporation flow through to the owners in a manner similar to a partnership, thus avoiding double taxation. Second, employee-owners may be able to reduce federal employment taxes by as much as 15.3 percent on the portion of their income equal to or below $87,000 per year, and 2.9 percent on income in excess of $87,000. This tax strategy, which is a function of reducing wages and increasing distributions, is only available to entities taxed as S corporations.

Finally, until 2003, C corporations enjoyed an advantage over S corporations, since C corporations were the only federal income tax entity where the health insurance costs of owner-employees were fully deductible. Pursuant to Code §162(l), beginning in 2003, regardless of the taxing entity chosen, all self-employed individuals can deduct 100 percent of the amount paid for accident and health insurance premiums.

Conclusion

Because of superior asset protection, limited liability, and tax savings, a substantial majority of Florida operating businesses will be best served by an LLC.

*Adapted from The LLC Envelope, Florida Bar Journal, December 2003.