There is a wide range of options regarding the organization and structure of businesses, the needs of a small, one or two-person operation are likely to be substantially different from those of a much larger business. One of the biggest issues small business owners face is determining which legal entity is right for their business. Many small businesses start out as sole proprietorships, however, once they start growing, it could be better to change or convert the business to a limited liability company (LLC).
When you operate your business as a sole proprietorship, the law does not recognize any difference between you and your business. If the business is sued, your personal assets could be in jeopardy of a legal judgment. It’s important to learn how to protect yourself from the risks faced by your business. Converting a business from a sole proprietorship to a limited liability company (LLC) can be an effective way for a business owner to protect both the business and themselves.
Let’s start by going through the basics of each…
- The owner of the business and the business itself are a single entity.
- The owner does not pay corporate tax, but instead pays personal income tax on any profit; often making for a simpler tax return.
- Profits belong solely to the owner, as do legal judgments in the unfortunate event of a lawsuit.
Limited Liability Company (LLC)
- Your business is a distinct entity, keeping business assets separate from your personal assets.
- Business owners’ personal assets are protected in the event of lawsuit or debt.
- The LLC provides tax advantages that a sole proprietorship does not.
- In the state of Florida, LLCs are pass-through entities, so similar to sole proprietorships, profits and losses are reported on a business owner’s individual federal tax return, eliminating the need to file corporate taxes.
- Unlike a sole proprietorship, the LLC may have more than one owner; allowing you to capitalize your business by adding partners or selling a percentage interest in the LLC.
There is no single solution that works for every type of business. If after considering all the variables, converting your sole proprietorship to an LLC seems to be advantageous, the steps are fairly straightforward.
In Florida, the name of an LLC must include the words “Limited Liability Company” or “Limited Company” or the abbreviations (LLC, LC, Ltd., Co.). The company name must be distinctly different than other names already on file with the Florida Division of Corporations. You can check for name availability online.
Every Florida LLC must have a registered agent, which is an individual or business authorized to do business in the state that is appointed to accept legal documents on behalf of the LLC if a lawsuit is filed against it. A physical street address in Florida for the registered agent is also required.
Articles of Organization
You must file Articles of Organization with the Florida Division of Corporations. These articles will include:
- The LLC’s registered agent’s name, address, and signature
- The name(s) and address(es) of the LLC manager(s)
- The effective date of the LLC if it differs from the filing date
The Articles of Organization can be filed online or by mail.
Although not mandatory for Florida LLCs, operating agreements are highly recommended to establish parameters for the operation and ownership of the business. An operating agreement is essential for single-owner LLCs to set the LLC apart from a sole proprietorship, thereby protecting the limited liability status of the LLC.
Tax and License Requirements
LLCs with more than one member must obtain an IRS Employer Identification Number (EIN). Single-member LLCs only have to obtain an EIN if you decide to have the LLC taxed as a corporation rather than a sole proprietorship. Depending on the LLC’s business type and location, local and/or state business licenses may be required.
To retain active status, a Florida LLC must file an annual report with the Florida Division of Corporations every year between January 1 and May 1. The annual report can be filed online.
About Oakstone Law, PL
Oakstone Law PL was founded by Bob Kleinknecht. A member of the Florida Family Trust Company Subcommittee, the Estate Tax & Trust Planning (ETTP) Committee and the Real Property, Probate & Trust Law (RPPTL) Section of the Florida Bar, Kleinknecht has 15 years’ experience.
Prior to founding Oakstone law, he spent more than eight years serving as a personal, in-house estate, tax and charitable planning attorney for a Forbes 400 family in New York and Florida. Before that, he was an estate planning and estate settlement attorney with prominent firms in Boston and Washington, D.C. after beginning his career with a boutique firm in Naples, Florida.
Licensed in Florida and Massachusetts, Kleinknecht has developed a practice model that eliminates billing by the hour and offers a streamlined, customized client process supported by technology, security and a personal approach.