Every aspiring business owner wants to begin their new venture with the proper foundation. Without an appropriate structure, a new business owner will have difficulty focusing on the entity's real business of generating revenue and profits. In addition, the failure to properly structure the business entity can easily cause a series of chronic problems that affect the entity's bottom line for years to come.
In recent years, the Florida limited liability company (LLC or company) has emerged as an ideal investment vehicle and business entity for both business owners and real estate investors. As you can expect, there are numerous business and legal issues to consider when forming a new Florida LLC.
The purpose of this article is three-fold. First, it explains why the Florida LLC has become a popular investment vehicle. Second, this article provides an explanation of the most important business and legal issues that must be addressed when forming a Florida limited liability company. Finally, this article explains why it is important to have the counsel of an experienced and knowledgeable attorney when forming your Florida entity so that you can avoid costly mistakes that could cripple your new business from the outset.
WHY THE FLORIDA LLC HAS BECOME AN IDEAL INVESTMENT VEHICLE AND BUSINESS ENTITY
Florida has become a haven for both investors and entrepreneurs. One of the major factors that have contributed to the Sunshine State's popularity is the favorable laws that govern limited liability companies. A LLC is a hybrid business entity having characteristics of both a traditional corporation and partnership. The primary corporate characteristic is limited liability. The primary partnership characteristic is the availability of pass-through taxation (i.e., no double-taxation).
In recent years, Florida has become the undisputed king of the LLC. The Florida Secretary of State registered 135,851 new limited liability companies in 2007. This entity offers an attractive combination to savvy investors - some protection from creditors and lawsuits and freedom from federal and state taxation.
PREFERRED INVESTMENT VEHICLE FOR FOREIGN NATIONALS
The limited liability company is the preferred investment vehicle for foreign nationals who want to invest in Florida real estate or establish a business presence in Florida. It's also the preferred investment vehicle for passive investors who want the benefits of limited liability along with the tax advantages of partnership taxation.
One or more persons may form a limited liability company in Florida. "Person" means either an individual or an entity. There are no restrictions or prohibitions in relation to the nationality of an individual. Therefore, a foreign individual or entity can be the sole member of a Florida LLC. As will be explained later, a foreign national can obtain an Individual Taxpayer Identification Number from the Internal Revenue Service for the purpose of paying United States Federal income tax.
The company's business activities can be extremely broad. Florida law defines a limited liability company's business as every trade, occupation, or profession and other lawful business, purpose, or activity, whether or not carried on for profit.
Unless its articles of organization or operating agreement provide otherwise, each Florida LLC has the same powers as an individual to do all things necessary to carry out its business and affairs. These powers include the power to acquire, own, hold, improve, use and otherwise deal with real or personal property wherever located, enter into contracts, borrow money, invest or reinvest its funds, and otherwise conduct its business.
PROFESSIONAL LIMITED LIABILITY COMPANIES
Florida law allows licensed professionals to organize a special category of LLC. A professional limited liability company is organized for the sole and specific purpose of rendering professional service and that has as its members only other professional limited liability companies, professional corporations, or individuals who themselves are duly licensed or otherwise legally authorized to render the same professional service as the limited liability company. Thus doctors, attorneys, architects, real estate brokers and other licensed professional can obtain the same protection afforded by the LLC form.
Under Florida law, a professional company is organized and operated in the same manner as a traditional LLC with the caveat that a professional limited liability company must comply with several specific requirements designed to restrict membership to licensed professionals and maintain the integrity of the licensed profession. For example, a professional limited liability company is prohibited from issuing any of its capital stock to anyone other than a professional corporation, a professional limited liability company, or an individual who is duly licensed or otherwise legally authorized to render the same specific professional services as those for which the corporation was incorporated. In addition, no shareholder of a professional LLC may enter into a voting trust agreement or any other type agreement vesting another person with the authority to exercise the voting power of any or all of that person's stock.
There are also a prohibitions against a person being admitted as a member of a professional LLC unless that person is a professional corporation, a professional limited liability company, or an individual, each of which must be duly licensed or otherwise legally authorized to render the same specific professional services as those for which the limited liability company is organized. Finally, no member of a professional limited liability company may enter into any type of agreement vesting another person with the authority to exercise any of that member's voting power in the professional limited liability company.
ADVANTAGES OF LLC
The key advantages of a Florida limited liability company are the following:
1. Taxation. For United States Federal income tax purposes, a LLC is treated as a partnership unless the members elect to have the limited liability company taxed as a sole proprietor, corporation, or C corporation. Taxation as a partnership results in the pass-through of income and deductions attributed to each member which are then reported to the Internal Revenue Service on that owner's tax return. Thus, the LLC itself is not taxed. Unlike a corporation, there is no double taxation (taxation on the entity's income prior to any dividends or distributions to the shareholders and then taxation of the dividends or distributions once received as income by the shareholders).
2. Limited liability. A Florida limited liability company's members are protected from some liability for the acts and debts of the company in the same manner than a corporation's shareholders are shielded from personal liability for the corporation's acts and debts.
3. The LLC has far fewer formalities than a corporation. There is much less administrative paperwork and record maintenance requirements than a traditional corporation.
4. The entity is an ideal investment for passive investment owners who want to maintain flexibility and convenience, shield themselves from personal liability, and avoid double taxation.
5. Attractive investment vehicle for foreign investors. A LLC has a distinct advantage over a S-corporation since a S-corporation can only have 100 shareholders and those shareholders must be United States citizens and not corporations.
DISADVANTAGES OF LLC
You should be aware of the following potential disadvantages of forming a Florida limited liability company:
1. The structure of the entity and the roles of its principals may be unfamiliar. For example, a limited liability company is owned by its members and managed by a manager or managing member. A corporation is owned by its shareholders and is governed by a board of directors and officers.
2. Since Florida law allows a LLC to operate with either a written or oral operating agreement, members who conduct business without a written operating agreement will likely encounter many problems.
3. It may be more challenging to raise investment capital for a new company since some investors may be more comfortable with more traditional corporate structures.
4. Creditors will often require members of new entities to personally guarantee the limited liability company's loans. Thus, the members will be personally liable for the loan obligations of the limited liability company.
5. The principals of a Florida LLC use many different titles - member, manager, or managing member. For this reason, it may be difficult to determine who actually has the requisite legal authority to contractually bind the limited liability company.
FLORIDA LLC NAME REQUIREMENTS
Florida law sets specific requirements for the name of a limited liability company. These basic requirements are that a LLC name:
1. Must contain the words "limited liability company," the abbreviation "L.L.C.," or the designation "LLC" as the last words of the name of every limited liability company formed under the provisions of this chapter. The word "limited" may be abbreviated as "Ltd.," and the word "company" may be abbreviated as "Co." Omission of the words "limited liability company," the abbreviation "L.L.C.," or the designation "LLC" in the use of the name of the limited liability company shall render any person who knowingly participates in the omission, or knowingly acquiesces in the omission, liable for any indebtedness, damage, or liability caused by the omission.
2. May not contain language stating or implying that the company is organized for a purpose other than that permitted in Chapter 608, Florida Statutes, and its articles of organization.
3. May not contain language stating or implying that the company is connected with a state or federal government agency or a corporation or other entity chartered under the laws of the United States.
LLC FORMATION PROCESS
In order to form a Florida limited liability company, articles of organization must be filed with the Department of State by one or more members or authorized representatives of the limited liability company. The articles of organization are the initial, amended, and restated articles of organization of a LLC.
The articles of organization are filed with the Florida Secretary of State Division of Corporations and must specify the name of the limited liability company, principal and mailing addresses, Registered Agent information, Manager(s) or Managing Member(s) and a statement concerning the effective date of the limited liability company.
Unless a delayed effective date is specified, the company's existence begins at the date and time when the articles of organization are filed, as evidenced by the Department of State's date and time endorsement on the original document, or on a date specified in the articles of organization, if such date is within five business days prior to the date of filing.
The articles of organization may specify a delayed effective time and date of commencement of the company's existence, and if so specified, the articles of organization shall become effective, and the limited liability company's existence shall commence, at the time and date specified. If a delayed effective date, but no time, is specified, the articles of organization shall become effective, and the limited liability company's existence shall commence, at the close of business on the delayed effective date. Unless otherwise permitted by Chapter 608, Florida Statutes, a delayed effective date for a document may not be later than the 90th day after the date on which the document is filed.
The Department of State's filing of the articles of organization is conclusive proof that all conditions precedent to organization have been satisfied except in a proceeding by the state to cancel or revoke the organization or to administratively dissolve the organization.
Under Florida law a LLC shall not transact business or incur indebtedness, except that which is incidental to its organization or to obtaining subscriptions for or payment of contributions, until the effective date and time of the commencement of the limited liability.
OPERATING AGREEMENT
The operating agreement of a limited liability company is critically important to its success since it determines, defines and allocates the rights and obligations of the members. Although Florida law allows much flexibility in drafting an operating agreement, the document must be carefully drafted to ensure that the expectations of the prospective members are met. The operating agreement is not filed with the State of Florida Division of Corporations and is typically maintained as a private document governing the relationship between the members, managers, and managing members.
The operating agreement is comprised of written or oral provisions that are adopted for the management and regulation of the affairs of the company and that set forth the relationships of the members, managers, or managing members and the LLC. The members of a company may enter into an operating agreement before, after, or at the time the articles of organization are filed, and the operating agreement takes effect on the date of the formation of the LLC or on any other date provided in the operating agreement.
Florida law provides that certain provisions of a limited liability company's operating agreement cannot be waived. Thus, the operating agreement may not:
1. Unreasonably restrict a right to information or access to records;
2. Eliminate the duty of loyalty;
3. Unreasonably reduce the duty of care;
4. Eliminate the obligation of good faith and fair dealing;
5. Vary the requirement to wind up the company's business; or
6. Restrict the rights of a person, other than a manager, member, or transferee of a member's distributional interest.
AVOIDING LIABILITY
Most people work very hard to acquire and build assets such as real estate and businesses. Due to the litigious nature of our society, it is important to proactively protect these assets. Except as provided in Chapter 608, Florida Statutes, the members, managers and managing members of a Florida limited liability company are not liable, solely by reason of being a member or serving as a manager or managing member, under a judgment, decree, or order of a court, or in any other manner, for a debt, obligation, or liability of the limited liability company. The member's, managing member's, manager's , or other person's duties and liabilities may be expanded or restricted by provisions in the company's articles of organization or operating agreement.
Asset protection is an important objective when forming a LLC. It is crucial that you take specific actions to safeguard your assets and business such as:
1. Purchase as much insurance as you can afford to protect all your real estate and business assets. Maintain written proof of insurance showing that your company is a named insured. If you transfer real property to your company, but fail to obtain insurance naming the LLC as an insured, you can expect the insurance company to deny coverage.
2. Hold title to your real estate assets in the name of your limited liability company. If a lawsuit occurs which involves a real estate asset titled in the company's name, the LLC will be the defendant rather than you as an individual. This concept is crucial to real estate asset protection. If real estate is titled in your individual name, all of your personal assets are at risk. To gain the protection provided by your limited liability company, you must actually transfer title to the real estate to the company by conveying the real estate and recording the deed in the county where the real estate is located. It is a complete waste of time, effort and money to form a Florida LLC and then fail to transfer the real estate into the limited liability company's name. Although this problem is quite common, it can easily be corrected.
3. Manage your assets in a professional and reasonable manner. Although a LLC can reduce your exposure to risk, it cannot eliminate it entirely. For example, assume that you properly form a Florida limited liability company and hold a real estate asset in the name of your limited liability company. If you negligently install a gas barbecue grill and the grill explodes injuring or killing one of your tenants, you will likely be a defendant in a lawsuit. To minimize your exposure to these types of lawsuits, manage your assets in a professional and reasonable manner by reducing or eliminating those situations that place you at risk. For example, instead of personally building a multi-level deck and stairs, hire a licensed contractor to perform this task on your behalf.
COSTS OF FORMING A FLORIDA LLC
Compared to other states, the filing and maintenance fees for Florida LLCs are relatively inexpensive. The filing fee for a new Florida LLC is $100.00 and the Registered Agent fee is $25.00. Maintenance of the limited liability company requires filing an Annual Report (& Supplemental Fee) of $138.75 each year. By contrast, the initial filing fees for a limited liability company in Illinois and Massachusetts are $675 and $512 respectively.
OBTAINING AN EMPLOYER IDENTIFICATION NUMBER
Once your Florida company has been formed, you must obtain a Federal Employer Identification Number. The EIN application can be submitted to the Internal Revenue Service (IRS) via toll-free telephone, fax, regular mail or the internet.
The Internet EIN application is the preferred method for customers to apply for and obtain an EIN. Once the application is completed, the information is validated during the online session, and an EIN is issued immediately. The online application process is available for all entities whose principal business, office or agency, or legal residence (in the case of an individual), is located in the United States or U.S. Territories. The principal officer, general partner, grantor, owner, trustor etc. must have a valid Taxpayer Identification Number (Social Security Number, Employer Identification Number, or Individual Taxpayer Identification Number) in order to use the online application.
OBTAINING AN INDIVIDUAL TAXPAYER IDENTIFICATION NUMBER
A foreign individual who is not authorized to work in the United States is ineligible to obtain a Social Security Number. Instead, the foreign individual can apply for an Individual Taxpayer Identification Number (ITIN).
What is an ITIN?
An ITIN is a tax processing number issued by the Internal Revenue Service. It is a nine-digit number that always begins with the number 9 and has a 7 or 8 in the fourth digit, example 9XX-7X-XXXX. IRS issues ITINs to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain a Social Security Number (SSN) from the Social Security Administration (SSA).
ITINs are issued regardless of immigration status because both resident and nonresident aliens may have U.S. tax return and payment responsibilities under the Internal Revenue Code. Individuals must have a filing requirement and file a valid federal income tax return to receive an ITIN, unless they meet an exception.
What is an ITIN used for?
ITINs are for federal tax reporting only, and are not intended to serve any other purpose. An ITIN does not authorize work in the U.S. or provide eligibility for Social Security benefits or the Earned Income Tax Credit. ITINs are not valid identification outside the tax system.
IRS issues ITINs to help individuals comply with the U.S. tax laws, and to provide a means to efficiently process and account for tax returns and payments for those not eligible for Social Security Numbers.
Who needs an ITIN?
IRS issues ITINs to foreign nationals and others who have federal tax reporting or filing requirements and do not qualify for SSNs. A non-resident alien individual not eligible for a SSN, who is required to file a U.S. tax return only to claim a refund of tax under the provisions of a U.S. tax treaty, needs an ITIN.
Examples of individuals who need ITINs include:
1. Non-resident alien filing a U.S. tax return and not eligible for a SSN
2. U.S. resident alien (based on days present in the United States) filing a U.S. tax return and not eligible for a SSN
3. Dependent or spouse of a U.S. citizen/resident alien
4. Dependent or spouse of a non-resident alien visa holder
How do I know if I need an ITIN?
If you do not have a SSN and are not eligible to obtain a SSN, but you have a requirement to furnish a federal tax identification number or file a federal income tax return, you must apply for an ITIN.
CONCLUSION
The Florida limited liability company is a versatile choice for both real estate investment and business entities.
