When starting a business in Florida, entrepreneurs must decide on the legal structure that best suits their needs. Two popular choices are the Limited Liability Company (LLC) and the Corporation (Corp). While both offer distinct advantages and provide limited liability and asset protection to their owners, understanding the differences is crucial in making an informed decision aligned with your business goals. In this post, we’ll break down some of the core differences between LLCs and Corporations in Florida, from formation to taxation and governance.
Formation and Structure
LLC: A Florida Limited Liability Company is formed by filing Articles of Organization with the Florida Department of State. LLCs offer a flexible management structure without the formalities corporations must observe. The owners of an LLC are called “members,” and the LLC can be managed by the members directly or by designated managers. Ownership interest in an LLC is called either “membership interest” or “units”–being the same thing.
Corp: Corporations are formed by filing Articles of Incorporation. They are required to operate with a more rigid structure, including a board of directors overseeing corporate affairs and officers managing the day-to-day activities. Shareholders are the owners of a corporation, and they have limited influence over everyday operations. Ownership interest in a corporation is called “stock” or “shares”–being the same thing as well.
Liability Protection
Both LLCs and Corporations provide their owners with some asset and limited liability protection. This means that personal assets of the members or shareholders are generally protected from the business’s debts and legal claims. In Florida, the seminal decision of Olmstead v. F.T.C., 44 So. 3d 76, 83 (Fla. 2010) (recognizing “the full scope of a judgment creditor’s rights with respect to a judgment debtor’s freely alienable membership interest in a single-member LLC”) abrogated the general rule and recognized that it is possible for a creditor to reach not the assets of a member-owner but that owner’s rights to distributions from a single member LLC. In a later post, we will examine this in detail and discuss how to plan for this reality under Florida law.
Taxation Differences
LLC: Florida LLCs are typically taxed as pass-through entities, meaning the business itself does not pay taxes on profits. Instead, the profits and losses “pass through” to the members, who then report them on their personal income tax returns. This avoids the double taxation scenario often associated with corporations. You should consult with your CPA for more information.
Corp: By default, Corporations are taxed as separate entities at a corporate income tax rate. After-tax profits distributed as dividends to shareholders are taxed again at the individual’s tax rate, hence the term “double taxation.” However, some corporations can elect to be taxed as an S corporation (S Corp) if they meet certain IRS criteria, thereby allowing profits and losses to pass through to shareholders’ personal taxes, similar to an LLC. You should consult with your CPA for more information.
Governance and Compliance
LLC: LLCs offer more relaxed governance structures but a higher filing and annual report fee. There are fewer formalities to observe; they do not require annual meetings, minutes of meetings, or a board of directors. However, it is still advisable to maintain an operating agreement that outlines the management structure and members’ rights.
Corp: Corporations have lower filing and annual report fees but they are bound by more stringent statutory requirements, such as conducting annual meetings, maintaining minutes, and issuing stock. These formalities provide a clear structure but require more rigorous record-keeping and adherence to statutory procedures.
Operational Flexibility and Formality
LLC: The LLC is lauded for its operational flexibility. Florida law permits LLCs to structure their management and financial interests in a way that best suits the members, making this entity very attractive for small businesses seeking simplicity.
Corp: Corporations, especially larger ones, may benefit from the formal structure and easy transferability of ownership through the sale of stock. This can facilitate raising capital and provide a clear hierarchy that may appeal to investors, making corporations a favorable choice for businesses seeking to scale or go public.
Conclusion
Choosing the right business entity is a foundational decision for entrepreneurs. In Florida, both LLCs and Corporations may provide robust liability protection and have their own unique benefits. The decision often hinges on the company’s size, management preferences, tax considerations, and future business goals. An LLC might be the right fit for those who value flexibility and simplicity, while a Corporation could be better suited for those planning expansive growth or seeking to issue stock. It’s wise to consult with a Florida business services attorney to examine the specifics of your situation and help guide you through the nuances of state law, ensuring your business is built on a solid legal foundation primed for success.