Don’t Believe These 4 Myths About LLCs

Mar 1

A Limited Liability Company (LLC) is an advantageous business structure as it comes with several benefits for business owners. For starters, LLCs provide a veil of protection that keeps business assets separate from their owner’s assets in unfortunate situations such as litigation or incurring debt. Also, when set up correctly, LLCs have Operating Agreements that outline how the business should be managed. However, choosing to run your business as an LLC is not a one size fits all solution to solving all your problems. Here are some myths you may have heard about LLCs.

Myth #1: Setting up a business as a Limited Liability Company (LLC) will shield owners from all possible legal and financial woes.
The truth is that LLCs must run like other businesses, following state laws, and operate ethically. It is important not to commingle personal and business transactions, but to maintain the corporate fiction. For example, remember to sign business contracts as a member or manager of the business, not as an individual. Also, it is possible to pierce the corporate veil of a LLC in Florida if there is evidence of misconduct.

Myth #2: Member disputes rarely occur within an LLC.
Disputes between the members of an LLC are very common. Conflicts can occur when members change, financial disputes arise, or duties are breached. Disputes can be minimized with a thorough operating agreement. An operating agreement is typically drafted when the business is initially formed, and it dictates how the company will run. Operating Agreements clearly define if it is member managed or manager managed. It will define the powers of the members and managers, and it creates the plan that the company will follow to admit new members, disassociate members, how the company will be taxed, what the compensation plan is, and how the company will handle disputes such as a member engaging in unethical conduct. Operating Agreements are even important for single-member LLCs because the document can include a plan of succession. A Palm Beach business attorney can assist with customizing an operating agreement for your business or handle an LLC member dispute.

Myth #3: LLCs are a partnership.
LLCs and partnerships are two separate legal entities. For tax purposes, LLCs have traditionally elected to be treated the same as partnerships, and Operating Agreements are commonly drafted that way. However, Florida allows LLCs to elect S corporation status, which will be automatically terminated if that traditional LLC partnership language is included in the Company’s operating agreement. Instead, if a LLC wishes to elect a S corporation status, the operating agreement must reflect that the members’ distributions will be on a pro rata basis based on ownership, and not based on the capital account balances. Any language reflecting partnership tax provisions must not be included in an operating agreement where the LLC has elected S corporation status.

Myth #4: Setting up an LLC in Florida is a complicated process.
The process of forming an LLC is actually relatively easy and it begins with the Florida Division of Corporations. Business owners must choose a business name that is not currently in use and it must include LLC or L.L.C in the name. The Florida Division of Corporations will walk you through the Articles of Organization online, take your filing fee payment, and you can have your LLC created and filed in less than an hour. However, it will not provide you with an Operating Agreement. You could try using a general form found online, but it will not be tailored to your business. As seen above, a comprehensive Operating Agreement with the necessary content to ensure that your Company functions the way that is most beneficial to you from both a legal and tax perspective requires an experienced attorney and a CPA. Investing in these professionals in the beginning will save time, money, and headaches that business owners can ill afford as they should be concentrating on running their businesses.

If you are in the planning stages of forming an LLC or if you have formed an LLC and you are realizing that you need an Operating Agreement or need to fix one, contact the Simpson-Cannon Law Firm today.