One of the most popular corporate structures for startups is the limited liability company (LLC) model. One of the big advantages with this route is that LLCs have plenty of tax FLexibility because the IRS considers them to be distinct and separate entities. This entails that the IRS will not be taxing the LLC directly, and it can be up to the members of the LLC to determine how they should be taxed. Among the options available to them include the Single Member LLC structure, and the Partners in an LLC structure.
In a Single Member LLC structure, the firm is taxed as if it was a sole proprietorship. This means that the profits and losses of the business itself are not taxed directly but are paid through the single member’s own personal federal tax returns. This isn’t always a good thing. Sometimes the taxes are higher than if the business was at a corporate level. Individual members will have to pay for federal items such as Medicare and Social Security. Because of the implications of being in an LLC, we highly recommend to get in touch with a knowledgeable financial adviser at Kissimmee, FL, who can help with designing a proper financial plan.
With the Partners in an LLC structure, all the members of the firm elect to be treated like a traditional partnership to spread out the tax payable, amongst each other.
Why LLCs are the way to go
The biggest advantage with LLCs is how they come attached with the label, “Limited Liability”. This means that the owner’s personal liability is limited. If the business is in debt, owed to other businesses; claims, lawsuits and liens are limited to the assets of the business itself. They are not extended toward the personal assets of the business owners under most circumstances.
A few pitfalls to avoid when setting up an LLC in Kissimmee, FL
Mixing up the accounts
During the early stages of your business, there isn’t a lot of money flowing in or out. So, it is rather tempting to not open up an account and operate out of your own personal bank accounts. Here’s the problem with LLCs though – when you mix up the business money with your personal money, it could prove to be disadvantageous during costly litigations. Attorneys argue that the LLC structure of your business is invalid because the funds are being routed from your personal accounts.
Blindly trusting your partner
This has got to be the biggest pitfall you should keep in mind before starting up a partnership. It is a common sight in courts to see that a person from LLCs are awaiting pending litigations because there was a breach of trust between members of the firm who were supposed to be the best of friends or even family members. These disputes can stretch your funds thin and stretch for years. This is a problem that can be remedied if you have appropriately drafted agreements for all such situations. You can never be too careful with the future.
You should be careful, however, because this limitation of liability does not extend to instances of negligence and illegal acts committed by the owners of the LLC. If an attorney can prove that the owners have been guilty of fraud, the entity pursing the lawsuit might end up getting the right to the owners’ personal assets. Then there are the bad practices which most budding entrepreneurs are guilty of on a regular basis, such as muddling up their business and personal bank accounts. If the attorney is able to dig up this fallacy, they would end up invalidating the right of your business to claim the LLC structure, thereby making your personal assets free for the taking.
Starting an LLC in Kissimmee, FL requires complete conformity with state laws, which gives the benefit of limited liability protection to the owners. One of the advantages with LLCs is how they provide the ‘flow through’ tax treatment so they do not have the double level of tax found in most corporate enterprises. Only the owners incur taxes, making it advantageous to small and medium-sized enterprises.
While the rules for setting up an LLC can vary significantly, state by state, those specific to the formation of an LLC in Florida can be read here, on the official Florida website. You might need a lawyer to read the fine prints so you don’t make any mistakes and end up incurring fines. Getting legal counsel is particularly advisable when you have multiple owners and investors from outside.
Naming your LLC
The first step toward starting an LLC in Kissimmee, FL is to name the organization. You have to choose an available business name. There are several issues when it comes to picking an appropriate name for your LLC. These include:
- The name should end with terms such as, “LLC”, “Limited Liability Company” or some other permitted abbreviation which indicates that the firm is an LLC.
- The name should be such that it is distinguishable from existing domestic LLCs filed with the Secretary of State.
- You should conduct a search on the internet to see if your preferred name is being used by other companies.
- When searching for a domain, it is preferable to have the term ‘.com’ associated with your business instead of ‘.org’ or ‘.net’ and similar variants.
- The name should not contain terms which could be prohibited in Kissimmee, FL. These include ‘bank’ and ‘trustee’ among others.
- The name should not include the terms ‘corporation’, ‘inc’, ‘incorporated’ or any words similar to them. It is important to remove all doubt and confusion when it comes to LLC and a corporation.
- You must ensure that your business name is not in direct conflict with an established trademark of another company.
Although it might seem like a walk in the park to most readers, picking a good name can be an ordeal and obtaining a relevant domain name for your business will probably incur some capital investment if it is already owned by a third party company.
Filing the LLC Articles of Organization
To officially form your LLC, you must file an ‘Articles of Organization’ report with the Secretary of State in Florida. There are few things you should know before proceeding with this task:
The Articles of Organization are generally short and easy to fill. The filing fees will have to paid.
You should designate someone you trust to be a registered agent for the LLC. This person is authorized to collect legal documents related to your business; they include complaints and even subpoenas. You could choose a third party company to handle this as a service instead or nominate one of your LLC members.
You will need to include a statement about the purpose of the LLC indicating that you are not engaging in any illegal activity.
Preparing the LLC Operating Agreement
The LLC Operating Agreement highlights the financial management, rights and responsibilities of your members. Some of the key issues that should be addressed in the LLC Operating Agreement include:
- The person who will actually be managing the LLC. It could be a single manager, a group of managers or every LLC member
- Rectifying the losses – in legal terms – of the managers who are running the business. The amount of capital contributions to the LLC, when they were made and how much more is left to be made
- Highlight any penalties and remedies to the members if the promised capital contributions are not made in full
- Who gets the voting rights for important events such as capital contributions and the sale of the business
- How the profits and losses are to be distributed among the owners
- Whether the members of your LLC have an inclination toward liquidation of the LLC
- How formal meetings between the members are to be conducted
- A proper procedure highlighting the dissolution of the business should the need arise
Given the myriad of complexities involved in designing the LLC Operating Agreement, it is advisable to get legal counsel from your financial planner, financial advisor and insurance agency in Kissimmee, FL.
The issue of raising money from investors
Whether your LLC firm wants to raise money from outside investors, family members or VC firms, you will have to take into account the following tips.
Investors, especially VC firms, prefer to invest in corporations, not LLCs. So you are at a bit of disadvantage here, when it comes to accumulating capital, especially from this source..
If you are issuing stake units to investors, you will end up invoking the application of both federal and state securities laws. This definitely requires the aid of good legal counsel to help with the filing requirements. It also ensures minimal errors and potential legal conundrums.
You should fully disclose to potential investors the risk of their investments. They should understand the implications of the business and that it could fail, which means their investment may likely end up as a loss.
Legal rights of the investors such as rights to profits, tax benefits and right to vote during important events should be clearly outlined in the LLC’s Articles of Organization.
Retrieving the Employer Identification Number
You should obtain the Employer Identification Number (EIN) from the IRS because it is mandatory for all LLC firms if they plan on hiring employees into their businesses. The alternative way to spell out the EIN is “Federal Tax Identification Number”.
It used to be a burdensome task in the past when businesses were required to file an IRS Form SS-4 to retrieve an EIN – a process which could take up weeks and even months. This has changed with introduction of online media, and you can now obtain the EIN directly from the IRS website. This service is free of cost and gives you an EIN immediately. Other ways to obtain the EIN include via telephone and by U.S mail.
If you want to open a business account in your LLC’s name, then you will be required to retrieve an EIN. This means that one of your first priorities is the retrieval of an EIN from the IRS. Visit www.myfloridalicense.com, select “License” and choose the option for new business license applicants.
Obtaining a FLorida State License
Not all businesses are the same. Some require licenses, certifications and the explicit permission of the state. Depending on the nature of your LLC, you might be required to obtain a license on a local, state or federal level. For instance, if you offer manicure services, you should obtain a license from the states Board of Cosmetology. To check additional requirements for your business, you can visit the official site of Florida, at https://www.myFLoridalicense.com/intentions2.asp.
Failure to obtain a business license can result in heavy fines from the state government.
Setting up a bank account
In order to properly amass the funds sufficient to run the business, you will need to ensure that the LLC account is separate from your personal accounts. This means that the bank account should be in the name of the LLC and not the individual members or managers. The bank will require Articles of Organization, EIN and the possibility resolutions of the LLC to open the account. You will also be required to designate the person with the signing authority on checks and whether you need two signatures on larger checks which exceed a certain amount.
The LLC membership ledger
The LLC Membership Ledger is the same as that of a stock ledger in a corporation. This will show the names and addresses of the LLC owners, the class of units they hold, number of units owned and the date when these units were acquired. The membership ledger should record whenever a transfer of parties takes place between parties.