Among the many options that an owner has in terms of setting up a business in St. Cloud FL are LLC, S-Corporations and C-Corporations. Each of these has their own advantages and disadvantages in terms of ownership, taxation and limitation of personal liability.
Establishing your business as a limited liability company (LLCs) is a guaranteed way to minimize legal risks and protect your own personal assets. It has become the de-facto pathway for every successful entrepreneur who wants to expand their business as they go along. LLCs are one of the few business structures which are capable of protecting an owner from their own mistakes and the malicious intents of others around them. This could be their own business partner or a hostile rival.
If you need help forming your LLC in St. Cloud, FL, please call us at 407-344-1012, or email us at [email protected].
For the majority of the cases, starting an LLC is a formidable task for many first-time business owners, simply because of the far reaching legal repercussions which will dictate the financial wellbeing of their company in the future.
Yet another reason why establishing an LLC is so intimidating is because the average business owner doesn’t know enough about protective entities, and the advantage that an LLC business structure provides.
It is important to note however that restructuring your exiting business as an LLC doesn’t have to be as daunting as many make it out to be. The paperwork and legal jargon is not something you should fear, but instead make an effort to gain an understanding on how LLCs can prove to be advantageous to your company and yourself.
It has been shown that most business owners prefer the protection offered to them by limited liability companies (LLCs) instead of sole proprietorship, or even becoming a corporate entity. This is because a limited liability company is considered to be a separate and distinct legal entity.
The LLC will have to obtain its own tax identification number and open a bank account to hire employees and do business. The biggest advantage of LLCs is that the members have what is known as ‘limited liability’ and are not under debts or liabilities of their business. This means that should their business come under heat by rivals, debt collectors and the state, the owners will not be held personally liable.
It wasn’t until 1977 that the LLC structure was introduced in the United States. This makes LLCs a recent phenomenon when compared to other legal entities. It wasn’t until about a decade ago that business owners began taking an interest in the benefits reaped by LLC structures.
Prior to the LLC structure, members seeking limited liability protection only had the option to become a corporation. The two legal entities however offer very a different set advantages and disadvantages.
So what is the difference between an LLC and a corporation?
Incorporation is an evolution from being a sole proprietorship (or partnership) to becoming a company which has been recognized by the state as a separate legal entity. There are certain benefits, such as tax exemptions, distancing yourself from being personal liability and gaining credibility with clients. But not all incorporates are created equally.
The benefits reaped under an LLC
- Flexibility in management: Corporations have to abide by a particular management structure which has directors being responsible for major business decisions while officers are in charge of the day to day operation of the business. LLCs don’t typically need a formal management structure, something which can play to their advantage if they want to exert more control over their business.
- Pass-through taxation: The IRS does not take taxes on a business level, but instead, the income and loss is reported on member’s own personal tax return. These have to be paid by the members.
- Very little information is needed to found an LLC in St. Cloud, FL. This is in stark contrast to corporations which are buried under a mountain of legal paperwork.
- S corporations allow business owners to use their business losses as deductions on their personal tax returns.
- S corps provide savings on self-employment and Medicare taxes. This is in contrast to C corps which are completely separate tax entities.
- LLCs and C corporations do not have any restrictions on the number of owners they can have at any one moment. S corporations however have a number of restrictions. These include a cap of 100 owners who must also reside in their area of business.
- Venture capitalists and similar firms prefer C corps as the preferred business structure. This is because owners can offer different stock options, which give different levels of dividends. Investors are naturally drawn toward the prospect of higher dividends which corporations promise in general.
The mistakes entrepreneurs generally make with their business
- Choosing the wrong business structure. An example would be a freelancer who mistakenly establishes themself as a C Corporation and finds themself paying a significant portion of their income because of the double taxation under state laws to the IRS.
- 3 partners form an S Corp for their real estate business and realize very soon that they must now share their income in proportion to their ownership even though they agreed that the allocation of their profits would be 20%-30%-70%. If they wanted such flexibility they should have formed an LLC instead, which allows more control over dividing the profits.
- Incorporating the business, irrespective of whether it’s an LLC, S-corporation or C-corporation is not the same as getting a business license. Most businesses are required to get a license from the local, state or federal level. It is generally inexpensive to obtain a business license than having to pay costly fines for operating without a license.
- Failure to comply with LLC requirements. This is a common mistake business owners make when they form when they fail to take into account the rules required of an LLC entity. If a rival business hires a plaintiff to show that you have not been maintaining your LLC as it should, they could disqualify you from reaping the benefits of an LLC structure, making your personal asses free for the taking.
This commonly happens because most people are unable to keep their personal bank account separate from their business account, an elementary error which could prove devastating in the future, if taken to court.
- Failure to keep the state up to date whenever any key changes are made to your business. This requires filing an “Articles of Amendment” form with the state of Florida.
- The LLC structure does not protect owners from fraudulent and unlawful acts. If it has been proven that you’re breaking the law, you will be held personally accountable.
- Some owners believe that their startup is far too small to start as an LLC in St. Cloud, FL. Today’s society is highly litigious, which means that it is all the more important to yourself from your business as a separate identity. Sole proprietorship puts all your personal assets at risk. LLCs are also vital if you want to scale up your business in the future.
- Many owners blindly trust their partners without thinking of the implications down the line. It is common to see partners involved in bitter litigation because there was a breach of trust between friends and family members. These disputes can take up years to resolve, and may end up stretching your budget thin.
So why do investors have a general disdain toward LLCs?
Angel investors are generally successful businesspersons who are investing out of their own coffers. They are motivated by the promise of exponential profit in the future but they do tend to be a little lax with LLCs. As such, they are naturally inclined to fund a startup which gives them the maximum business opportunity down the line. In contrast, venture capitalists are a conglomeration of several businesses which want to maximize their revenues, something which is only possible with C-corps.
One of the primary problems with LLCs is because of taxes. LLCs are not directly taxed by the IRS because of being a pass-through company. VCs like to distance themselves from so many complexities.
C corps are the only legal entity which offers preferred stocks. LLCs only offer common stock. The difference being that preferred stock pays higher dividends and prioritizes stockholders to get paid first in a liquidity event. This is what VCs generally have in mind when they decide to risk investing in your company.
Filing the Articles of Organization
Before you officially form your LLC, you must file an “Articles of Organization” report with the Secretary of State in Florida. The file is generally short and easy to prepare, involving only a small filing fee to be paid.
It is a good idea to designate someone you trust to be registered agent for your company. This ‘agent’ will be authorized to collect legal documents related to your business which include complaints and subpoenas.
You will have to include a statement about the purpose of your business, clarifying that you’re not participating in an unlawful activity.
Key issues addressed in the Operating Agreement
The operating agreement will address common issues such as the financial management, rights and responsibilities of members. The key issues addressed in the Operating Agreement include:
- The person who will be managing the LLC.
- Offsetting the losses of managers in-charge of operating the business.
- The amount of capital contributions to the business, when they were made and how much is left to be contributed.
- Any penalties incurred by members if they failed to contribute their promised capitals in time.
- The voting rights for important events such as the sale of the business.
- The division of profits and losses among owners.
- The standard procedure for conducting formal meetings between members.
- The eventual dissolution of the business should the need arise.
To understand these complex legal requirements, we advise consultation your financial planner in St. Cloud, FL who will help you to make more a more informed decision.
The Employer Identification Number
Before your LLC in St. Cloud, FL is planning to hire employees, it is mandatory to obtain the Employer Identification Number (EIN) from the IRS. The EIN is also known as the “Federal Tax Identification Number”.
This was a difficult task to perform in the past because businesses were required to file an IRS Form SS-4 before they could retrieve their EIN. The process could take up to several weeks and even months. But the advent of an online portal has streamlined this process and you can now obtain it freely.
Additionally if you want to open up a business account in LLC’s name, you will have to obtain the EIN. Visit the www.myfloridalicense.com, and select “License” and choose the option for new business license applicants.
The need for a separate bank account
To properly accumulate funds for day to day operations of your business, you will need to ensure that the LLC account is separate from your personal accounts. The bank account should be created in the name of the LLC and not of the members. Opening the bank account will require the Articles of Organization, EIN and the possibility resolutions of the LLC as prerequisites.
In addition you will have to designate someone with the signing authority on checks. You will also have the option of choosing two signatures on larger checks that exceed a specified amount.
You don’t have to be alone
In light of the above article, it is clear that incorporating your business from a sole proprietorship to an LLCs is a major decision which can impact your personal financial situation for decades after. You should ideally involve a professional financial adviser from outside to help ease you into the new business dynamics of the LLC.
The journey of an entrepreneur is a perilous one, paved with thorns and shouldn’t be treaded without help. Not everything has to be a DIY exercise which you read up on the internet, you will require legal counsel, financial advice and a talk with your insurance agency on the right recourse to take.
Your insurance agent in St. Cloud, FL will ideally know the best recourse on making successful claims.
If you need help forming your LLC in St. Cloud, FL, please call us at 407-344-1012, or email us at [email protected].