Division of Corporations
Forming a Limited Liability Company (LLC)
Are you thinking of forming a LLC, but still need more information to help you make your decision? Use the following list of Corporation Frequently Asked Questions.
What is a Limited Liability Company (LLC)?
What are some of the benefits/advantages and disadvantages of forming an LLC?
What are the costs to form an LLC?
How do I go about naming my LLC?
What is the difference between a Member Manager and an External Manager?
What is a Registered Agent?
Why do I need a Federal Tax Identification Number (EIN)?
What is an operating agreement?
What are articles of organization?
What powers does an LLC have to carry out its business affairs?
Where can I find definitions for commonly associated LLC terms?
What records requirements are associated with an LLC?
Limited Liability Companies (LLCs)
One or more persons may form an LLC.
Benefits and advantages associated with an LLC
- The primary reason for forming a limited liability company is to limit the liability of the owners.
- Interests in LLCs, in addition, are protected from the claims of creditors of their members.
- Organizational changes related to the LLC can generally be made in the operating agreement alone (without amending the articles of organization).
- Managers and managing members are also protected from personal liability regarding claims pertaining to the exercise of their management authority except for more egregious conduct (criminal or reckless acts, deriving improper personal benefits, voting for unlawful distributions, etc.).
- Generally, an LLC with multiple members is treated for income tax purposes as a partnership (nontaxable entities that act as conduits for transferring income and loss directly to the individual partners) and a single-member LLC is “disregarded” as a separate entity for tax purpose, the same way it is disregarded for federal tax purposes. Thus, most LLCs are not subject to corporate income tax.
- LLCs are similar to S corporations for federal tax purposes and do not pay tax themselves, but pass their income through to their shareholders.
Selected benefits over a corporation:
- Flexibility: One of the benefits of an LLC over a corporation is the great latitude provided in the drafting of the operating agreement and the flexibility that is possible on such issues as members’ contribution obligations, member and management voting powers, profit and loss allocations, governance structure, members’ distribution rights, etc. Amendments may be made to the operating agreement as needed.
- A corporation requires that specific formalities be completed on a regular basis, including annual meetings of shareholders and directors each year, meeting minutes which are kept with the corporation’s records, etc. It is a good business practice to document major decisions regardless of the structure of your business; however these formalities are not required for LLCs.
- The interest a member owns in an LLC can be protected from creditors while the stock a person has in a corporation may be seized and sold by creditors.
- LLCs can make special allocations of profits and losses among members; S corporations cannot. S corporations have one class of ownership with profits and losses allocated according to the percentage ownership.
LLC Disadvantages
The main disadvantage of the LLC as compared with an S corporation has to do with the tax treatment for profits that are taken out of the business. If yours is a smaller company, you may want to consider the LLC carefully as the disadvantage primarily affects smaller companies.
Here’s the situation: With an S corporation, profits taken out of the business (other than salary) are not subject to social security and Medicare taxes (which together amount to 15.3% in 2004)*.
Consider this: In larger companies, where company owners take out salaries of $85,000 or more, plus profits, this situation would not have much of an impact; however, in smaller companies where the owners take out more modest salaries (and then take profits out of the business when available), all the profit taken out of the LLC would be subject to social security and Medicare taxes, where in the S corporation it would not. The result: For a small business where the owner paid themselves a $35,000 salary and took an additional $40,000 in profit out of the business, the extra taxes on the $40,000 would be over $6,000.
* The maximum amount subject to the social security portion for tax years beginning in 2004 has increased to $87,900. All net earnings of at least $400 are subject to the Medicare portion.
What are the costs to form an LLC?
$145 plus state filing fees. Filing fees for each state are as follows:
| Alabama | 155 |
| Alaska | 280 |
| Arizona | 265 |
| Arkansas | 80 |
| California | 85 |
| Colorado | 130 |
| Connecticut | 165 |
| Delaware | 120 |
| District of Columbia | 150 |
| Florida | 125 |
| Georgia | 230 |
| Hawaii | 105 |
| Idaho | 150 |
| Illinois | 600 |
| Indiana | 120 |
| Iowa | 80 |
| Kansas | 195 |
| Kentucky | 90 |
| Louisiana | 135 |
| Maine | 205 |
| Maryland | 221 |
| Massachusetts | 520 |
| Michigan | 100 |
| Minnesota | 185 |
| Mississippi | 80 |
| Missouri | 135 |
| Montana | 120 |
| Nebraska | 295 |
| Nevada | 230 |
| New Hampshire | 165 |
| New Jersey | 150 |
| New Mexico | 80 |
| New York | 260 |
| North Carolina | 255 |
| North Dakota | 165 |
| Ohio | 255 |
| Oklahoma | 155 |
| Oregon | 80 |
| Pennsylvania | 125 |
| Rhode Island | 180 |
| South Carolina | 140 |
| South Dakota | 155 |
| Tennessee | 350 |
| Texas | 325 |
| Utah | 167 |
| Vermont | 105 |
| Virginia | 236 |
| Washington | 225 |
| West Virginia | 165 |
| Wisconsin | 225 |
| Wyoming | 130 |
Naming Your LLC
The name of your LLC must comply with requirements of the Department of State.
As a minimum, keep these points in mind as you select a company name:
- For an LLC, please select a designator for the last part of the name (use either “LLC” or “Limited Liability Company”) to identify your company as an LLC.
- The name you select may not contain language implying that your company is connected with a government agency or that it is chartered under United States law.
Important Liability Issue for LLCs: You should make a point of using the correct name of your company, including the “LLC” or “Limited Liability Company” designation at the end of the name, as you conduct your business. Once you form your LLC, keep in mind that omission of the designation in the use of the name shall render any person who knowingly participates in the omission, or knowingly acquiesces in the omission, liable for any indebtedness, damage, or liability caused by the omission.
Company Management
LLC Member Manager vs. External Manager
An LLC can be run by Members or External Managers.
What is a member?
A member is an owner of the company. An LLC can be run by a member (owner) or several members (owners) of the company. Thus, where a member or several members run the company, the people who own the company also run the company. Most Limited Liability Companies are member managed in this way.
What does it mean to have external managers?
If not managed by its members, you will choose to hire an outside person to run the company who does NOT own a part of the company. This would be termed an “External Manager.” You may have one external manager or several external managers.
What is a Registered Agent and is one needed?
Most States require that an individual, or service company, be responsible for receiving important legal and tax documents. This service is provided by an "agent" of the company who is "registered" within the State, thus the term "Registered Agent."
The registered agent for the company must have a valid street address within the State and be available during normal business hours to receive documents. The services performed by a registered agent may include:
- Receiving and forwarding legal documents;
- Receiving and forwarding franchise tax and annual report forms; and,
- Accepting and forwarding service of process.
A Registered Agent must be an adult, residing within the State and provide a physical address (PO Box is not acceptable).
Business Activity
Business Descriptions for IRS Tax Purposes
You must check select one of the descriptions one of the boxes that best describes the principal activity of your business. For example, if you will operate kiosks selling jewelry, select “retail”. If you are unsure what category your company falls under, please consult the category list provided on this page.
Why do I need a Federal Tax Identification Number (EIN)?
An Employer Identification Number (EIN), also known as a federal tax identification number, is a nine-digit number that the IRS assigns to business entities.
- This number is used to identify a business entity and to identify taxpayers that are required to file various business tax returns.
- A business will need to apply for a new EIN if the business is sold or is otherwise transferred.
Entity Classification
For Federal tax purposes, an LLC business entity must file as either a corporation, partnership or sole proprietorship. Federal tax laws will automatically classify and tax certain LLC business entities as corporations. These entities are:
- A business entity formed under a Federal or State statute or under a statute of a federally recognized Indian tribe if the statute describes or refers to the entity as incorporated or as a corporation, body corporate, or body politic.
- An Association under Regulations section 301.7701-3.
- A business entity formed under a Federal or State statute if the statute describes or refers to the entity as a joint stock association.
- A state chartered business entity conducting banking activities if any of its deposits are insured by the FDIC.
- A business entity wholly owned by a state of political subdivision thereof, or a business entity wholly owned by a foreign government or other entity described in Regulations section 1.892.2-T.
- A business entity taxable as a corporation under a provision of the code other than section 7701.(a)(3).
- Certain foreign entities (see Form 8832 instructions).
- An Insurance Company.
What is the effect of Not Electing and Entity Classification, the Default Rules?
If an LLC does not File Form 8832, it will be classified, for Federal tax purposes under the default rules. The default rules provide that if the LLC has at least two members and is not required to be classified as a corporation, it will automatically default as a partnership, and be required to file a partnership return. An LLC that has only a single member and is not required to be classified as a corporation will automatically default to the classification of disregarded entity. The disregarded entity files as a sole proprietorship and completes the appropriate schedules as part of the single owners Form 1040.
Note: The above is a summary of tax information from the IRS website and does not present complete information. Please consult an appropriate tax professional if you need clarification or contact the IRS directly for more detail.
Articles of Organization
(1) In order to form a limited liability company, articles of organization of a limited liability company must be executed and filed with the Department of State by one or more members or authorized representatives of the limited liability company. The articles of organization shall set forth the following and additional information as required:
(a) The name of the limited liability company.
(b) The mailing address and the street address of the principal office of the limited liability company.
(c) The name and street address of its initial registered agent for service of process in the state.
(2) The articles of organization are executed by at least one member or the authorized representative of a member.
Note: Articles of organization are filed quickly and efficiently using our online system. Since filings are completed with the Division of Corporations electronically, this cuts the processing time required to form your LLC.
Additional LLC Information
A limited liability company may be organized for any lawful purpose, and remains subject to statutes and regulations of the laws of the State of Florida for regulating and controlling its business.
Unless its articles of organization or operating agreement provide otherwise, each limited liability company organized and existing under Florida law shall have the same powers as an individual to do all things necessary to carry out its business and affairs, including, without limitation, the power to:
(1) Sue and be sued, and defend, in its name.
(2) Purchase, receive, lease, or otherwise acquire, own, hold, improve, use, and otherwise deal with real or personal property, or any legal or equitable interest in property, wherever located.
(3) Sell, convey, mortgage, grant a security interest in, lease, exchange, and otherwise encumber or dispose of all or any part of its property.
(4) Purchase, receive, subscribe for, or otherwise acquire, own, hold, vote, use, sell, mortgage, lend, grant a security interest in, or otherwise dispose of and deal in and with, shares or other interests in or obligations of any other entity.
(5) Make contracts or guarantees, or incur liabilities; borrow money; issue its notes, bonds, or other obligations, which may be convertible into or include the option to purchase other securities of the limited liability company; or make contracts of guaranty and suretyship which are necessary or convenient to the conduct, promotion, or attainment of the business of a corporation the majority of the outstanding stock of which is owned, directly or indirectly, by the contracting limited liability company; a corporation which owns, directly or indirectly, a majority of the outstanding membership interests of the contracting limited liability company; or a corporation the majority of the outstanding stock of which is owned, directly or indirectly, by a corporation which owns, directly or indirectly, the majority of the outstanding membership interests of the contracting limited liability company, which contracts of guaranty and suretyship shall be deemed to be necessary or convenient to the conduct, promotion, or attainment of the business of the contracting limited liability company; or make other contracts of guaranty and suretyship which are necessary or convenient to the conduct, promotion, or attainment of the business of the contracting limited liability company.
(6) Lend money, invest or reinvest its funds, and receive and hold real or personal property as security for repayment.
(7) Conduct its business, locate offices, and exercise the powers granted by this chapter within or without this state.
(8) Select managers or managing members and appoint officers, directors, employees, and agents of the limited liability company, define their duties, fix their compensation, and lend them money and credit.
(9) Make donations for the public welfare or for charitable, scientific, or educational purposes.
(10) Pay pensions and establish pension plans, pension trusts, profit-sharing plans, bonus plans, option plans, and benefit or incentive plans for any or all of its current or former managers, members, officers, agents, and employees.
(11) Be a promoter, incorporator, shareholder, partner, member, associate, or manager of any corporation, partnership, joint venture, trust, or other entity.
(12) Make payments or donations or do any other act not inconsistent with law that furthers the business of the limited liability company.
Additional Definitions
Limited Liability Companies
Authorized Representative - One or more persons acting to form a limited liability company by executing and filing the articles of organization, as authorized by a member of such limited liability company. The authorized representative may, but is not required to be, a member of the limited liability company that is being formed.
Capital Account - The agreed value of the initial contributions, increased by the agreed value of subsequent contributions to capital, if any, and reduced by distributions of capital, unless otherwise provided in the articles of organization or the operating agreement.
Contribution - Any cash, property, or services rendered or a promissory note or other obligation to contribute cash or property or to perform services, which a person contributes to the limited liability company as a member.
Distribution - A direct or indirect transfer of money or other property or incurrence of indebtedness by a limited liability company to or for the benefit of its members in respect of their economic interests.
Foreign limited liability company - A limited liability company formed under the laws of any state other than Florida or under the laws of any foreign country or other foreign jurisdiction.
Majority-in-interest of the members means, unless otherwise provided in the articles of organization or operating agreement, members owning more than 50 percent of the then-current percentage or other interest in the profits of the limited liability company.
Manager - A person who is appointed or elected to manage a manager-managed company and, unless otherwise provided in the articles of organization or operating agreement, a manager may be, but need not be, a member of the limited liability company.
Manager-managed company means a limited liability company that is designated to be managed by one or more managers.
Managing member means a member appointed or elected as a managing member of a member-managed company.
Management agreement - If the LLC will be managed by a subset of its members or by someone who is not a member, there should be a management agreement in place which spells out the rights and duties of both the members and managers.
Member - Any person who has been admitted to a limited liability company as a member and has an economic interest in a limited liability company which may, but need not, be represented by a capital account or, in the case of a foreign limited liability company, has been admitted to a limited liability company as a member in accordance with the laws of the state or foreign country or other foreign jurisdiction under which the foreign limited liability company is organized.
Membership interest, member's interest, or interest means a member's share of the profits and the losses of the limited liability company, the right to receive distributions of the limited liability company's assets, voting rights, management rights, or any other rights under this chapter or the articles of organization or operating agreement.
Records Requirements; Right to Information
Each limited liability company is responsible for keeping the following records at its principal office:
- A current list of the full names and last known business, residence, or mailing addresses of all members, managers, and managing members.
- A copy of the articles of organization, all certificates of conversion, and any other documents filed with the Department of State concerning the limited liability company, together with executed copies of any powers of attorney pursuant to which any articles of organization or certificates were executed.
- Copies of the limited liability company's federal, state, and local income tax returns and reports, if any, for the 3 most recent years.
- Copies of any then-effective operating agreement and any financial statements of the limited liability company for the 3 most recent years.
Unless contained in the articles of organization or the operating agreement, a writing setting out:
- The amount of cash and a description and statement of the agreed value of any other property or services contributed by each member and which each member has agreed to contribute.
- The times at which or events on the happening of which any additional contributions agreed to be made by each member are to be made.
- Any events upon the happening of which the limited liability company is to be dissolved and its affairs wound up.
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