Advantages and Disadvantages of Forming a Florida LLC
A limited liability company can be used for many different purposes. Each type use will have advantages and disadvantages. Below are some of the common uses I have seen with my clients and their respective advantages and disadvantages.
Forming a Florida LLC for Real estate ventures:
Benefit: The LLC is a limited liability entity that provides pass-thru treatment with special allocations of profit and loss if desired; there is no tax on distribution of appreciated property and no self-employment tax issues for rental property; and it can be organized with centralized management by managers, a managing member, or multiple managing members.
Detriment: Olmstead v. Federal Trade Commission, 44 So.3d 76 (Fla. 2010), has made it clear that a judgment creditor of a debtor owning a membership interest in a single-member Florida LLC may use the remedy of levy and sale under execution pursuant to F.S. 56.061. The 2011 amendment to the Florida Statutes and the Act have made it clear that Olmstead applies only to a single-member LLC, and that a charging order remains the sole and exclusive remedy of a creditor of a member of a multiple-member LLC.
Forming a Florida LLC for Professional and small businesses:
Benefit: There is simplicity of documentation and administration.
Detriment: Pass-thru taxation may create additional self-employment and Medicare tax costs unless an election to be taxed as a corporation (IRS Form 8832), subchapter S election (IRS Form 2553), or QSUB election (IRS Form 8669) is made, if applicable.
Benefit: A corporate election (IRS Form 8832) can be made. If a subchapter S election (IRS Form 2553) is made, the LLC will be taxed as an S corporation, and self-employment and Medicare taxes are eliminated as issues.
Detriment: There may be additional administrative and tax accounting costs.
Forming a LLC for Businesses with a need for and the ability to use multiple forms of equity ownership and tax pass-thru status:
Benefit: A corporate-type organization with “common” and “preferred” equity interests can be created, as well as nonvoting or participation interests, for maximizing investor return.
Note. Reorganization into a C corporation for an IPO can be accomplished by a conversion of the LLC to a corporation or creation of a new corporation (“NewCo”) with exchange offering, ending with an LLC owned as a wholly owned subsidiary of “NewCo.”
Detriment: Self-employment and Medicare tax issues remain while an LLC, and some complexity of downstream reorganization may occur.
Forming a LLC Equity participation for lenders:
Benefit: An LLC can provide profit participation benefits, including disproportionate allocations of profits and/or losses, to a secured or unsecured lender, with or without membership and management oversight rights. Compare F.S. 687.03(4).
Detriment: May incur additional or unexpected lender’s liability as a manager, managing member, or member voting on a material transaction in which there is a conflict of interest.
Forming a LLC With respect to mergers and acquisitions:
Benefit: An LLC can facilitate business and tax planning with tax pass-thru and special allocation attributes in an LLC/LLC merger or acquisition or in a C corporation acquisition by an LLC.
Detriment: An LLC may not be applicable in all situations and can complicate tax planning in an LLC/corporation merger or acquisition.
Forming a LLC Estate planning opportunities:
Benefit: An LLC can be utilized to help reduce the value of the assets held by an individual due to the application of discounts for lack of control and lack of marketability and pass additional wealth to future generations. LLCs can also be used to structure intra-family sales and to take advantage of discounted gifting opportunities. LLCs can also be utilized as investment vehicles, which allow the parent to maintain effective control of the LLC while providing an opportunity for children to learn about the investment strategy utilized by the parent.
Detriment: LLCs add additional complexity to a family’s estate plan, which requires additional filing fees and may require additional tax returns, increasing the expenses associated therewith. Distributions from and contributions to LLCs also need to be in proportion to the ownership of the LLC, or the ownership interests need to be adjusted accordingly.
There are some benefits to merging with an LLC, especially for multimember LLCs, including:
- There is a similar degree of asset protection for the owners of a multiple-member LLC as for a partner of a limited partnership, because F.S. 605.0503 clarifies that the holding in Olmstead will not be extended to multiple-member LLCs (in light of Olmstead, the level of protection afforded to the member in a single-member LLC is less than that afforded to a partner of a limited partnership), and greater asset protection for the owners than that available to a stockholder of a corporation.
- There are both simple and complex ownership structures with tax pass-thru status options.
- There is the ease of ownership and operation of a corporation, and less of the complexity of the general and limited partner relationship, and there may not be the restrictions of participation that are usually placed on limited partners.
- A partnership or corporate ownership model can be created, and if self-employment tax is an issue, an LLC can be used with a corporate election to serve as a management company.
The following are some common detriments of an LLC:
- F.S. Chapter 605 is a new statute, and there are no Florida cases to help with LLC planning and issue interpretation. However, it should be noted that several of the provisions are the same or similar to those that had existed in Florida, so some of the cases that applied F.S. 608 should still be applicable. Also, many of the provisions are identical to those in the Uniform Statute promulgated by the Uniform Commissioner and as a result the cases decided in other states will help to provide a body of cases.
- As more fully discussed in § 8.40, a charging order is not the sole remedy of a judgment creditor of the sole member of a single-member LLC.
- There may be self-employment issues. Because of self-employment tax issues, an LLC may not be the entity of choice for middle market or larger business organizations, other than investment or real-estate-oriented businesses.
- The creation of a family limited liability entity offers special benefits for high net worth clients’ assets or businesses. Asset protection and estate tax planning opportunities are presented by setting up this entity with an LLC as the general partner (if the LLC is not used as the actual planning entity) and contributing the marketable securities (including mutual fund interests) and/or other assets to the partnership or company. This is a benefit for the vast majority of clients, because ownership interests have a discounted value from market value (including marketable securities), just as the ownership interests of closed-end mutual funds generally trade at a discount from the value of the underlying securities due to discounts for lack of control and lack of marketability;
- gifts of ownership interests can be made at a discounted value from the value of the assets, so the value of the gift for gift tax purposes is decreased;
- it allows gifts of LLC interests during lifetime which transfer the assets to the donee but allow the donor to retain some degree of control over how the gifted assets are managed and utilized;
- it provides a mechanism whereby the management of the assets can be directed by the clients and also provides the management that will apply if the current manager becomes unwilling or unable to serve;
- at death, the value of the ownership interests owned by the decedent is discounted in most cases from the value of the assets; thus, the value of the asset in the estate for estate tax purposes is decreased (the discounts may not be allowed if corporate formalities are not followed, and as a result the LLC is seen as a sham vehicle or an extension of the decedent, not as an independent entity);
- multiple classes of ownership interests with priority returns and redemption features to enhance estate tax planning opportunities can be created;
- an income-tax-efficient model with the manager(s) having the discretionary right to distribute or reinvest earnings and profits can be executed;
- it allows a family to place an asset into an LLC, where the asset will not be fragmented into various pieces after death, such as a ranch that may be maintained after death in the LLC and would otherwise have been partitioned and partially sold by some of the children who inherited the ranch on death; and
- it provides a mechanism by which younger generations can be involved with and learn the investment strategy of the family.