The LIMITED LIABILITY COMPANY.
If you are starting your own business or if you are considering changing your business structure, a common first step is compare two of the most well-known business entities recognized under Florida Law.
The Limited Liability Company v. The S Corporation
While a Limited Liability Company (“LLC”) and the S Corporation (“S-Corp”) share many qualities, they also have distinct differences as discussed below.
The similarities between the LLC and the S-Corp
- Limited liability protection. Generally, both structures provide limited liability for the owners – thus, they typically are not personally responsible for business debts and liabilities.
- Separate entities. Both are separate legal entities created by a state filing.
- Pass-through taxation. Both are typically pass-through tax entities. While S- Corps must file a business tax return, LLCs only file business tax returns if the LLC has more than one owner. With pass-through taxation, no income taxes are paid at the business level. Business profit or loss is passed-through to owners’ personal tax returns. Any necessary tax is reported and paid at the individual level.
- Ongoing state requirements. Both are subject to state-mandated formalities, such as filing annual reports and paying the necessary fees.
Differences in Ownership and Formalities
Ownership. The IRS restricts S-Corp ownership, but it does not restrict the ownership of the LLC. Such IRS restrictions include the following:
- LLCs can have an unlimited number of members.
- S-Corps can have no more than 100 shareholders (owners).
- Non-U.S. citizens/residents can be members of LLCs.
- S-Corps MAY NOT have non-U.S. citizens/residents as shareholders.
- S-Corps cannot be owned by C corporations, other S corporations, LLCs, partnerships or many trusts.
- LLCs can be owned by C corporations, other S corporations, LLCs, partnerships and trusts.
- LLCs are allowed to have subsidiaries without restriction.
Ongoing formalities. S-Corps face more extensive internal formalities. Whereas, LLCs are recommended, but not required, to follow internal formalities.
- S-Corps must: Adopt bylaws, issue stock, hold initial and annual director and shareholder meetings, and keep meeting minutes with corporate records.
- LLCs may (bit are not required to do so): Adopt an operating agreement, issue membership shares, holding and document annual member meetings (and manager meetings, if the LLC is manager-managed), and document all major company decisions.
Differences in Management
- Owners of an LLC can choose to have members (owners) or managers manage the LLC. When members manage an LLC, the LLC is much like a partnership. If run by managers, the LLC more closely resembles a corporation; members will not be involved in the daily business decisions.
- S-Corps have directors and officers. The board of directors oversees corporate affairs and handles major decisions but not daily operations. Instead, directors elect officers who manage daily business affairs
Other Differences also include:
- Existence. An S-Corp’s existence is perpetual, Florida requires LLCs to provide means for dissolution in the formation documents. Certain events, such as death or withdrawal of a member, can cause the LLC to dissolve. Closing your LLS is as dissolving and winding up the business.
- Note: Florida’s current LLC Act will be repealed on January 1, 2015.
- Transferability of ownership. S-Corp stock is freely transferable, as long as IRS ownership restrictions are met. LLC membership interest (ownership) typically is not freely transferable, approval from other members is often required.
- Self-employment taxes. S-Corps may have preferable self-employment taxes compared to the LLC because the owner can be treated as an employee and paid a reasonable salary. FICA taxes are withheld and paid on that amount. Corporate earnings after payment of the salary may be able to be treated as unearned income that is not subject to self-employment taxes. For more information and whether this might apply to your particular situation, you should consult with your CPA. If you do not have one, I am happy to provide you with a few options.
It is NEVER Too Late to Convert your Florida S-Corp into a Florida LLC
In Florida, you can statutorily convert your business from a corporation to an LLC by filing the appropriate forms with the Department of State. This procedure automatically transfers your corporation’s assets and liabilities to the new LLC. Unlike other methods of conversion, only one business entity is involved, and you do not need to separately form an LLC before the conversion can occur. By the same token, there is also no need to dissolve your corporation; on the contrary, under Florida’s conversion statute, the one business entity involved in the conversion, which is originally a corporation, is simply considered by default to continue its existence in the form of an LLC. Key elements of the conversion procedure are laid out in sections 607.1112, 607.1113, 607.1114, and 608.439of the Florida Statutes (Fla. Stat.).
In order to properly convert your Florida corporation to a Florida LLC, we will need to do the following:
- Prepare a plan of conversion that includes, preparing and executing articles of organization for the new LLC, and have the board of directors recommend the plan to the shareholders.
- Hold a shareholder meeting and get the corporation shareholders to approve the plan of conversion, record and execute the meeting minutes and keep with the corporate books; and
- File a certificate of conversion and articles of organization with the Department of State.
The total minimum filing fee for this process should be $160 plus approximately $30 for certified copies.
Florida’s conversion statute states not only that all of your corporation’s property, as well as liabilities and obligations, are automatically transferred to the new LLC, but also that the rights of creditors and liens against the corporation continue unimpaired against the new LLC, and all legal claims and actions against the corporation continue against the LLC “as if the conversion did not occur.” For more information, check Fla. Stat. 607.1114.
Once the New LLC is formed, there is still additional work that needs to be done timely and properly if don’t want to lose the benefits of limited liability:
- Draft an LLC’s operating agreement
- Notify customers, clients, suppliers, and others with whom your business has relationships of its new status as an LLC. One other key step in the conversion process is to make sure that no business contracts or agreements, such as bank documents, leases, licenses, and insurance, will be nullified by your business’s entity change. If they are subject to this restriction, we will attempt to negotiate the terms prior to converting the business.
- hold required LLC meetings (such as member or manager meetings)
- keep proper minutes of LLC meetings
- keep LLC finances separate from personal finances by opening operational accountings
- use the official LLC name on your business documents; and
- Timely file the required annual report with the State of Florida.
A key point to keep in mind is that converting a C corporation to an LLC taxed as a partnership often results in a large tax bill. This is largely because the IRS considers this kind of conversion to be a liquidation of the corporation for which the corporation will owe tax, on top of which the corporation’s stockholders will also be taxed personally on the corporate assets assumed to be distributed to them; in other words, there is double taxation.
Converting a corporation to an LLC that will continue to be taxed as a corporation generally does not have the same degree of adverse tax consequences as when converting to an LLC taxed as a partnership and may even be largely tax-free. However, as this type of conversion will not change the basic elements of how your business will be taxed going forward, you should investigate closely how it would benefit the business, other than by providing a more flexible management structure. Also, in order for your LLC to continue to be taxed as a corporation, you must file a special election form with the IRS.
Converting from an S corporation to an LLC is fundamentally different from converting from a C corporation, because an S corporation has only one level of taxation; as a rule, an S corporation itself does not pay tax, only its shareholders do. Therefore, the tax consequences for this type of conversion are often more limited than conversions from a C corporation.
Attorney, Sommer C. Horton, wrote the content of this Article. If you have questions or wish to discuss your business incorporation, planning and litigation needs – please contact Ms. Horton at (561) 299-0018.