LIMITED LIABILITY COMPANIES ("LLC'S") & SUBCHAPTER "S" CORPORATIONS - WHAT'S THE BEST STRUCTURE FOR A SMALL BUSINESS?

Researched by Chris Qualmann

Sole Proprietorship - “C" Corporation - “Sub-S” Corporation - General Partnership - Limited Liability Company (“LLC”) - what’s BEST for a Small Business? 

[Typical Response: “My step-brother (and/or the 3rd cousin of a coworker of my fitness instructor …  the ex-husband of my neighbor's 4th grade teacher …  an assistant to a bookkeeper of my great-aunt) told me (insert one)_________ is best!”]

EVERYONE'S got an opinion, so what’s the REAL story? Here’s what my research suggests:

Generally, many professionals agree that the two (2) best choices for small businesses to consider are an “LLC” or an "S" corporation, largely because both allow “pass-through” taxation for the owners.  (See: “Asset Protection Strategies / Business Owners Toolkit”, www.bizfilings.com, May 24, 2012).  Some differences between LLCs and S corporations include the following:  

1. Memberships v. Stock Issuance: LLCs cannot issue stock, but rather, they offer "memberships." S corporations, on the other hand, can issue stock and are owned by the shareholders.
2. Management: A Florida S corporation is managed by its directors and officers, while LLCs are managed directly by the members unless they hire managers.
3. Restrictions: A Florida S corporation has some restrictions which are not applied to LLCs. For example, A Florida S corporation is limited to 75 shareholders, while the number of members in a Florida LLC is not subject to any restriction.
4. Life Span: A Florida S corporation has an unlimited life span, while LLCs have a limited life span (in most cases around 30 years).

What are the Advantages of a Limited Liability Company?

Some advantages of a Limited Liability Company are:

1. Tax Advantages: Florida LLCs (like "S" corporations) have "pass-through" tax status, which avoids the double-taxation issues of "C" corporations. A "C" corporation must pay taxes on its income and individuals must pay taxes on the dividends they receive from the corporation. This can lead to double taxation on dividends that are paid out of corporate profits to the owners. Members of LLCs report the LLC's profits and losses directly on their tax returns, therefore they are only taxed once.
2. Limitation of Liability: Similar to Florida State corporations, LLCs shield personal assets from business debt. LLC members typically will not be liable for the debts and obligations of the LLC because, in most cases, the LLC is viewed as a separate entity in the eyes of the law.
3. Fewer Formalities: The Florida State Department of Corporations requires many formalities for Florida Corporations that it does not impose upon Florida LLCs. While corporations are required to follow many legally mandated formalities, LLCs have a more informal structure which makes them easier to maintain.
4. Subsidiaries Allowed. LLCs are allowed to have subsidiaries without restriction, whereas being a Florida S corporation places limits upon having subsidiaries.
5. Management Similar to a Florida Partnership: The management structure of a Florida LLC is much like that of a partnership. This allows the managing members to decide how the LLC will be run and to enter into an agreement formalizing this decision. Members can also appoint "managers" to run the LLC. 

What is the ownership structure of a Florida LLC?

1. "Members", not "Shareholders":  Owners of a Florida LLC are called "members". A member's interest in a Florida LLC is represented by "interest certificates" rather than "shares of stock".
2. Management by Members:  A Florida LLC is managed by its members, with each having control commensurate to their percentage of ownership, unless the members hire managers to operate the business.

Is there a difference in taxation of an LLC?

Limited liability company taxation is similar to that of partnerships or sole proprietorships, in that they have "pass-through" status. With limited liability company taxation the LLC itself pays no tax, but instead the owners of the LLC pay taxes on their share of the profits profits (or deducts their share of business losses) on their personal tax return.

In contrast to limited liability company taxation, C corporations are separately taxable entities. Therefore, the corporation must pay taxes on its income and individuals must pay taxes on the dividends they receive from the corporation. This can lead to double taxation on dividends that are paid out of corporate profits to the owners.

Limited liability company taxation is one of the most appealing reasons to form an LLC.

What are the restrictions of forming a Florida LLC?

The restrictions placed on LLCs are not placed by the Florida Division of Corporations, but by the federal government. These restrictions include:

1. Limited Life Span: LLCs typically have limited life spans. LLCs must list a dissolution date in the Articles of Organization. In addition, certain events such as the death or withdrawal of a member can cause the LLC to dissolve. In contrast, Florida State corporations have perpetual existence.
2. Difficult to Raise Outside Capital: LLCs do not have stock, therefore they don't get the benefit of stock ownership and sales. This makes it difficult for LLCs to raise capital from outside sources. In contrast, Florida State corporations can issue stock.
3. Minimal Liquidity: The interest in a Florida LLC is not freely transferable. Generally, other LLC members must approve of transfers of interest. Therefore, the LLC interest holders have minimal liquidity. This is an additional reason that it is difficult for LLCs to raise capital from outside sources.

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THE BOTTOM LINE: “Subchapter S Corporations” and “Limited Liability Companies” BOTH provide benefits to small business owners … including not only limitation of owner / operator / director liability, but also the ability to utilize “pass through” taxation.  Consult with a qualified Tax and/or Legal Professional for the specific business entity that best serves your needs.