Advantages and Disadvantages of Limited Liability Companies for Small Businesses

What Entity is best for your new Business?

When deciding which entity type is suitable for your small business, it is important to examine both your business’ and personal specific needs.

Typically, there are significant benefits to operating your small business as a corporate entity, rather than a general partnership or sole proprietorship, as it relates to the division of ownership, liability and tax exposure.

Advantages of Florida Limited Liability Companies

In Florida, the newest corporate entity option, Limited Liability Companies (LLC), has rapidly gained popularity among small businesses.

An LLC is a hybrid legal form of a company that provides the benefit of pass-through taxation (like a partnership or sole proprietorship) with limited liability (like a corporation) to its owners or members. In the United States, LLCs are governed by state statutes.

Florida law provides several advantages to small businesses for selecting an LLC entity type:

Taxation

Quite possibly the most common reason small business owners select LLCs is to benefit from the “pass-through” taxation wherein the owner’s portion of the company’s profits (or losses, for that matter) is reported on their personal tax returns rather than the business’.

This avoids the double taxation incurred by traditional corporations, where profits are taxed first as income generated by the corporation and then again by the individual owners when distributions are made.

It should also be noted that while LLCs are regarded as either partnerships or sole proprietorships for federal taxation purposes, the LLC may also elect to be taxed as an S- or C-corporation, if beneficial to do so.

Liability

Like corporations, an LLC protects owner(s) from its debts or other liabilities incurred by the company itself (although, not the members!).

Absent explicitly guaranteeing business debt using personal assets, an owner’s liability is limited to the amount invested into the company and does not extend to assets separate from the LLC.

Flexibility

Florida allows for significant flexibility in the general structure of Limited Liability Companies. Meaning, there are no restrictions on the number of members permitted or the management structure of LLCs that may otherwise pose limitations for traditional corporations.

Florida LLCs, including single-member companies, may also be owned by foreigners or other corporate entities. The laws also allow for varying distribution of profits, unlike partnerships, for example, which are always split equally.

Informality

Another significant benefit to small business owners is the simplicity and lack of formality associated with the administration of an LLC. Unlike a corporation, LLCs do not require the maintenance of minutes or resolution and typically involves less complicated paperwork.

Subsidiaries

Additionally, although this benefit may not be used by the typical small business owner, Florida LLCs are permitted to have unlimited subsidiaries.

Disadvantages of LLCs in Florida

While the advantages listed above may suggest that a Limited Liability Company is the best option for small businesses formation in Florida, the following disadvantages must be considered prior to making a selection:

Expense

LLCs are typically more expensive to form and maintain than sole proprietorships and general partnerships due to initial and ongoing fees and costs.

Depending on the circumstances, such costs may be prohibitive to the start-up of a small business.

Increased Taxes

While pass-through taxation is typically viewed as a positive aspect of LLC ownership, under certain circumstances an owner’s self-employment taxes may be higher than the corporate rate and will also include federal payments such as Medicare and Social Security.

Transfer

Ownership of LLCs is difficult to transfer or pass on unless the LLC’s operating agreement specifically permits and outlines the manner in which ownership can be transferred.

This may prove problematic to small business owners who intend to pass their interests in their businesses to family members etc.

Limited Case Law Precedent

Since LLCs are the newest member of the corporate structure family, there is limited case law available to aid as guidance to owners.

Conclusion

Although it is not surprising that LLCs have become very popular among small business owners, it is imperative to examine all advantages and disadvantages prior to making a selection.

Opting for the incorrect business entity type can be a costly mistake for small businesses.

Every small business owner’s circumstances are different. If you would like to speak to an attorney regarding your options, contact us here.

 

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