Florida is one of the best states in the United States of America to start an LLC in. LLCs in Florida aren’t required to pay state income tax and have no limitations on membership or management structure. So also, LLCs in Florida enjoy personal liability protection, flexibility in operational and taxation structure, and wide eligibility.
Florida is a tax-friendly state that does not impose an income tax on individuals and has a 6 percent sales tax. Corporations that do business in Florida are subject to a 5.5 percent income tax. However, LLCs, sole proprietorships, and S corporations are exempt from paying state income tax. Also, business insurance isn’t required by Florida state law except for workers’ compensation.
The Pros and Cons of Having an LLC in Florida
The pros of a Limited Liability Company (LLC) in Florida often outweigh any perceived cons but irrespective of how attractive and easy to set up a business legal entity or structure is, there are always pros and cons of owning such business status.
Hence the need to weigh your options before choosing a business structure or legal entity for your business. In this article, we will be looking at the pros and cons of owning a Limited Liability Company in Florida.
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LLCs Are Subject to Fewer Regulations Than Traditional Corporations
Limited Liability Company (LLC) in Florida are subject to fewer regulations than traditional corporations, and thus may allow members to create a more flexible management structure than is possible with other corporate forms.
As long as the LLC remains within the confines of state law, the operating agreement is responsible for the flexibility members have in deciding how their LLC will be governed. State statutes typically provide automatic or “default” rules for how an LLC will be governed unless the operating agreement provides otherwise, as permitted by statute in the state where the LLC was organized.
An LLC is Treated By Default As A Pass-Through Business Entity
For U.S. federal income tax purposes, an LLC is treated by default as a pass-through entity. If there is only one member in the company, the LLC is treated as a “disregarded entity” for tax purposes (unless another tax status is elected), and an individual owner would report the LLC’s income or loss on Schedule C of his or her tax return.
Thus, income from the LLC is taxed at individual tax rates. The default tax status for LLCs with multiple members is as a partnership, which is required to report income and loss on IRS Form 1065.
Under partnership tax treatment, each member of the LLC, as is the case for all partners of a partnership, annually receives a Form K – 1 reporting the member’s distributive share of the LLC’s income or loss that is then reported on the member’s individual income tax return.
On the other hand, income from corporations is taxed twice: once at the corporate entity level and again when distributed to shareholders. Thus, more tax savings often result if a business is formed as an LLC rather than a corporation.
Choice of Tax Regime
Another advantage of having an LLC in Florida is that the company can elect to be taxed as a sole proprietor, partnership, S corporation, or C corporation (as long as they would otherwise qualify for such tax treatment).
A limited liability company with multiple members that elect to be taxed as a partnership may specially allocate the members’ distributive share of income, gain, loss, deduction, or credit via the company operating agreement on a basis other than the ownership percentage of each member so long as the rules contained in Treasury Regulation (26 CFR) 1.704 – 1 are met. S corporations may not specially allocate profits, losses, and other tax items under US tax law.
Enjoys Limited Liability
Having a Limited Liability Company (an LLC) in Florida limits your potential liability as a business owner. For example, if a customer gets hurt using a product produced by your company or gets hurt when they are on any property owned by your company, an LLC can prevent a would-be plaintiff from going after your assets.
Some of the liabilities LLC owners can be shielded against include Unpaid business debts (Unless you personally guarantee them), Vendor disputes (If they try to bill more than you owe), and of course Damages (especially if someone is hurt by your business or on a property you own).
Please note that LLCs liability protection is similar to S – Corps and C – Corps and in contrast to sole proprietorship owners who have unlimited personal liability for the debts and actions of their business. Under a sole proprietorship, if your business borrows or loses money, you are personally liable for those debts. In an LLC, you are only liable if you provide additional personal guarantees.
Enjoys Flexible Membership
Another advantage of having a Limited Liability Company in Florida is the fact that this form of business structure allows for flexible membership. This means that members of an LLC may include individuals, partnerships, trusts, estates, organizations, or other business entities, and most states do not limit the type or number of members.
For some business ventures, such as real estate investment, each property can be owned by a separate LLC, thereby shielding the owners and their other properties from cross-liability. LLCs in some states can be set up with just one natural person involved.
Treated as Entities Separate from Their Members
Limited Liability Companies (LLCs) in Florida and of course in most states in the United States are treated as entities separate from their members. However, in some jurisdictions such as Connecticut, case law has determined that owners were not required to plead facts sufficient to pierce the corporate veil and LLC members can be personally liable for the operation of the LLC).
Florida Do Not Dictate Detailed Governance and Protective Provisions for The Members of a Limited Liability Company
Although there is no statutory requirement for an operating agreement in most jurisdictions, members of a multiple-member LLC who operate without one may encounter problems.
Unlike state laws regarding stock corporations, most states do not dictate detailed governance and protective provisions for the members of a limited liability company. In the absence of such statutory provisions, members of an LLC must establish governance and protective provisions pursuant to an operating agreement or similar governing document.
Difficulty in Raising Financial Capital
It may be more difficult to raise financial capital for an LLC as investors may be more comfortable investing funds in a better-understood corporate form with a view toward an eventual IPO. One possible solution may be to form a new corporation and merge into it, dissolving the LLC and converting it into a corporation.
Attracts Higher Renewal Fees
Another disadvantage of having a Limited Liability Company (LLC) in Florida is that the renewal fees may also be higher. In Florida, every domestic and foreign LLC transacting business in Florida must file an annual report with the Department of Financial Institutions.
Florida charges a $400 penalty if you miss the May 1st filing deadline. In addition, failure to file your annual report by the third week of September will cause your LLC to be dissolved. The fee is zero for non-stock corporations in some states.
Please note that just like in most states in the US., LLCs may face fines and even automatic dissolution when they miss one or more state filings. When this happens, LLC owners risk the loss of limited liability protection. A quality registered agent service can help prevent this outcome by notifying you of upcoming filing deadlines and by submitting reports on your behalf.
Unfavorable Tax Jurisdiction Outside the United States
Limited Liability Companies are confronted with unfavorable tax jurisdiction outside the United States of America.
Taxing jurisdictions outside the US are likely to treat a US LLC as a corporation, regardless of its treatment for US tax purposes—for example, a US LLC doing business outside the US or as a resident of a foreign jurisdiction. This is very likely where the country (such as Canada) does not recognize LLCs as an authorized form of business entity in that country.