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AVOIDING PERSONAL LIABILITY IN AN LLC:
A debt, obligation, or liability of a limited liability company is solely a debt, obligation, or liability of the LLC. A member or manager is not personally liable, by way of contribution or otherwise, for a debt, obligation, or liability of the LLC solely by reason of being or acting as a member or manager. Potential routes to liability for members, include: (i) written obligation to make future contributions; (ii) 2 year clawback for improper distributions; (iii) responsible person liability for U.S. taxes and for Florida sales or use taxes; or (iv) tortious conduct individually committed by a member or manager.
WHAT TO AVOID:
The following is a brief list of the many factors that must be avoided in the State of Florida to prevent a creditor from piercing the entities corporate veil and pursuing collection from its shareholders or members:
1. Debt is intentionally and knowingly incurred when the entity is insolvent;
2. Annual shareholder, board of directors’ or membership meetings are not held and/or other corporate formalities are ignored;
3. Corporate records are not maintained;
4. Shareholders / members use corporate funds for personal reasons thereby endangering the entities financial stability;
5. Commingling of corporate activity and/or funds and those of the person or persons who control the entity; and
6. A failure to maintain separate offices, the company has little or no other business and is only a facade for the activities of the dominant shareholder / member who is in fact, the corporate “alter ego.”
BUSINESS LAW ARTICLES
PIERCING THE CORPORATE VEIL
When a corporation or limited liability company becomes insolvent the business owner often is worried that the creditors will try to "pierce the veil" of the entity and sue the individual owner for all the business’s debts. Florida courts have made it difficult for creditors to pierce the veil of a corporation or LLC to hold owners responsible for corporate obligations. Creditors who contract with a business entity can pierce the veil and sue the owners only if they show that (i) the corporation or LLC was established for an illegal purpose, or (ii) if the owners were using the corporation to evade what is really a personal obligation (e.g., using a corporation to incur debt to personal consumption). Most successful efforts to pierce a corporate veil occur when a "mom and pop" business owner intermingles personal and business finances, such as when they pay personal bills from a corporate account. The corporate veil is pierced in that case because the corporation is the legal alter-ego of the controlling owner. There is a famous Florida Supreme Court case on piercing the corporate veil called the Dania Jai-Alai case.
Entity Formation | Contracts | Transactions | Solutions
There is no one Florida legal structure that works best for all Sarasota and Manatee county businesses. The most favorable choice depends on a number of factors, including the number of owners, your tax situation, and whether or not you have employees. As a result, every new Florida business must determine its form of operation: Limited Liability Company, Corporation ("C" or "S"), Sole Proprietorship, or General or Limited Partnership. There are a variety of tax and non-tax considerations that impact this decision. We can assist you with the establishment of your new Sarasota and Manatee county business entity: Limited Liability Company (LLC), Florida Corporation, Florida Partnership and Florida Limited Partnership (FLP). Continue reading to learn more about the advantages of each type of entity.
Limited Liability Company (“LLC”): A Florida Limited Liability Company is formed by filing its Articles of Organization with the Florida Division of Corporations. When establishing a Florida LLC it is advisable to have at least two members and an operating agreement (see below). Can be either Member-managed or Manager-managed.Liability is limited to how much each member puts into the company (personal investment) except any business debt that is personally guaranteed (business loan or line of credit). Management may be exercised by one or more managers who need not be members or by one or more of the members. The types and number of members is unrestricted unless S-status is elected.
Single Member LLC: May elect to have the entity disregarded for tax purposes or to be taxed as a corporation.
Multi-Member LLC: May elect to be taxed either as a corporation ("C" or "S") or a partnership (income is taxed directly to the members). Provides asset protection to each member as a creditor may only obtain a charging lien against their ownership interest. An S-corporation election may reduce exposure for federal self-employment tax but also deprive it of certain tax benefits under IRC 754 (allows a partnership a step-up in the tax basis of its assets to their fair market value in the event of the death of a member or subsequent buyouts between members). An S-election may not be advisable when raising capital because of the limitations on the issuance of preferred equity.
Operating Agreement: Outlines each owner's (i) responsibilities, (ii) share of the profits, (iii) who may be a member of the entity, (iv) what happens if a member desires to leave, and (v) what happens when a member passes away.
Tax:The taxation of a Florida Limited Liability Company interest is determined by how the LLC elects to be taxed. A single-member LLC will be taxed as a disregarded entity and its sole member and considered to be self-employed and subject to tax on the net earnings of the LLC (the same as a sole proprietorship). A multi-member LLC that is taxed under the default classification of a partnership will also have its members classified to be self-employed and subject to tax on the net earnings of the LLC. In contrast, an LLC which elects to be taxed as a corporation (a C corporation or S corporation election) may have its member paid as an employee (subject to withholding) of the LLC.
C - Corporation: Subject to tax as a separate legal entity (double taxation). Dividends (distributions out of earnings and profits) are subject to tax at the shareholder level. Shareholders are not personally liable (unless they issue a guarantee) for corporate obligations. Managed and controlled by its officers and directors.
S – Corporation:A pass-through Florida legal entity with no corporate level tax. Shareholders report and pay tax on their pro rata share of income, losses, deductions, etc. Stock owners reduce his/her tax bill by paying themselves a reasonable salary (subject to payroll taxes) and a dividend (distributed free of employment tax). Shareholders are subject to tax on net recognized built-in gain during a 10-year recognition period after S corporation status takes effect. May only have one class of stock (Nonvoting stock is not deemed a second class of stock) and less than 100 shareholders. Special Shareholder Rules: (i) not more than 100 shareholders; and (ii) every shareholder must be an individual (other than a non-resident alien), an estate, an eligible trust, or certain tax-exempt organizations. A husband and wife and all lineal descendants and their spouses are treated as a single shareholder.
S-Status: Must be elected by all shareholders during the taxable on or before the 15th day of the third month thereof or any time during the preceding taxable year. The election may be revoked only with consent of shareholders owning more than half of the corporation’s stock on the day of the revocation. Shareholders are not personally liable for corporate liabilities. An S-election will reduce exposure for federal self-employment tax and state entity-level tax.
Tax Return: Files IRS Form 1120S and reports on the Schedule K-1 the amount of income, loss, deduction, etc. allocated to the shareholders.
General, Limited and Limited Liability Partnership:
Treated as a separate entity even though its income is taxable to the partners.Types: General Partnership, Limited Partnership, and Limited Liability Partnership. A partner is taxed annually on partnership income, regardless of whether any cash is distributed. This income increases the basis of a partner in his or her partnership interest.Each partner pays self- employment tax on his/her share of the profits.
General partners have unlimited joint and several liability for partnership obligations. A limited partner is liable only to the extent of his or her contributed capital and any agreement to contribute capital.Limited Partnership: Consists of one or more general partners who make management decisions and one or more limited partners who are passive investors. General Partnership: Each general partner is an agent of the partnership and therefore generally binds the partnership and the other partners.
Limited Liability Partnership: Partners are liable for the entities business debts and for their own negligence, but not the negligence of other partners. Commonly used by physicians, lawyers, and other professionals.
Sole Proprietorship: Not a separate Florida legal entity.No formation requirements are necessary.Income earned by the business (less expenses) is taxed directly to the owner. The owner is liable for all of its debts and receives no personal liability protection. The owner will have complete control over the business and its operation.
Marc J. Soss, Esquire
This website has been prepared for informational purposes only and does not constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask me to send you free written information about my qualifications and experience.