A Limited Liability Company ("LLC") is a hybrid entity which for tax purposes, is considered "pass-through." This means that a LLC offers a less complicated tax structure like that of a partnership or sole proprietorship. However, from the asset protection perspective, the LLC has the liability protection afforded by a corporation. A LLC has "Members" instead of "Shareholders" and "Managers" instead of "Directors." The Members of a LLC own interest in the company and may provide the managerial functions necessary for the LLC to operate. Or, the Members may elect a separate individual Manager to perform the managerial functions. A LLC has a relatively low set up cost with the State of Florida and the annual filing fees are minimal as well.
Now that you know the LLC structure, should you have an LLC?
The right kind of business entity will depend on several elements that may be applied to your specific situation and objectives.
Let’s start with what an LLC can do for you:
1. A Member of a LLC is limited in personal liability for the business assets and operations. Basically, your liability is limited to your contribution to the LLC. For example, we often recommend a LLC for a client who owns a piece of rental property. The LLC creates a balloon around the rental property so that if the LLC is sued, the Member’s liability is limited to the value of the property itself, and all of the Member’s other assets are protected.
2. As we already pointed out, a LLC is a "pass through" entity for federal tax purposes. This means that Members report profits and losses for the entity on their individual tax returns. Members may also share in the tax deductions available to the LLC. However, depending on your income tax bracket, this tax structure may not be beneficial to you.
3. Another advantage of a LLC is the operational structure. There does not have to be a separation of power among those owning interest in the company and those running the company. In fact, the default assumption of Florida Revised Limited Liability Company Act is that all LLCs are managed by their Members unless otherwise indicated to be Manager managed. This provides an ideal structure for small business owners and even sole proprietors who can limit their liability while still running the Company.
4. In addition, a LLC provides a great vehicle to transfer wealth in estate planning. Real Property may be transferred into a LLC and then interests in the LLC may be gifted on an annual basis while still qualifying for the federal annual gift tax exclusion. In addition, the LLC provides the foundation of a Family Limited Partnership which is a useful tool for transferring family owned business interests to the next generation at a discounted value.
Now, what are the drawbacks of an LLC?
1. Although we do not have income tax in Florida, the paperwork required to maintain an LLC is a concern for some of our clients. There are IRS filing requirements for informational returns even though no tax is reported under the LLC entity. Additionally, the Florida Department of State requirements for annual filings are more cumbersome than simply operating without the LLC.
2. Also, if you are a professional, providing services that have licensing requirements or some sort or certification or registration requirement overseen by the State, like an attorney, a doctor or an accountant, to name just a few, then a simple LLC is not the proper entity to run your business. You must have a "Professional Association" designation, and this type of entity does not limit your liability for professional malpractice.
As with any estate planning vehicle, there is no "one size fits all" that will provide the best plan for everyone. Please give our office a call to schedule an appointment to discuss whether a LLC would suit your specific needs.