Companies or corporations are recognized legal fictions which allow persons to carry out business endeavors without the risk (or to limit the risk) of personal liability. There are many ways to structure a business. The two most popular business entities i Florida are the limited liability company or “LLC” and the Subchapter S corporation. Under an LLC., the owners or more appropriately, its members, have limited liability only to the extent of the assets of the company. The same is true with a Subchapter S corporation, however, the owners in this type of entity are called the shareholders. Both the LLC and Subchapter S corporation have the advantage of being taxed like a partnership, which means that the taxes are passed through to the individual owners as opposed to first paying corporate income tax on the net profits and then tax on the dividends to the owners (double taxation). Subchapter S corporations have to make an election to be treated as an Subchpater S corporation with the IRS to avoid corporate level tax.
LLC.’s are created by filing articles of organization with the Florida Department of State, Division of Corporations. How the business is to be run, including, who makes the day to day decisions, what items need to be put to a vote, how do members sell their interests, etc.., is set out in what is called an operating agreement. While there is no requirement for a formal operating agreement, this document is very important as it is a roadmap as to how to run the business and what are the rights of its members. Without it, Florida Statutes dictate how the business ir run, and what are the rights and responsibilities of the members.
Subchapter S corporations are similar in that they are created by filing articles of incorporation with the Florida Department of State, Division of Corporations. Although it is not required, shareholders under a Subchapter S corporation may enter into what is called a Shareholders’ Agreement, which spells out the rights and responsibilities of the shareholders. Again, while it is not required to form the corporation, the Shareholders’ Agreement takes out much of the uncertainty in case the shareholders begin to fight over management, the direction of the business or when one or more of the shareholders simply wants to be bought out of the business. Without a written agreement in place, the shareholders must try to work out their differences when they are already not getting along, or must rely on the Courts to decide their relative positions.
Thus, when starting a business, numerous factors need to be considered, such as as the type of business structure to be formed, how the business will be managed and operated on a day to day basis, etc. Our firm can help guide you through the process of selecting the right entity which fits your needs, as well as structure your company to help minimize internal conflict through a well thought out shareholder or operating agreement.