Picking the appropriate structure for your business in Florida is essential, as it can save you the trouble of having to reclassify your business in the future. Many business owners narrow down their choice to a Florida LLC versus an S corp. Both of these entities have many similarities but a few key differences, and understanding these differences can help you make a final decision. Hiring a Fort Lauderdale business formation attorney is also helpful when making your decision, as your attorney can go over your business plan and give you specific advice on the type of entity that will work best for your needs.
What do Florida LLCs and S Corps have in common?
Both LLCs and S corps have limited liability for the business owners in regards to business debts. Both of them must be filed with the State of Florida. Both of them are pass through entities, meaning that the profit or loss of the business is passed through to the owners’ personal tax returns. This type of taxation is also used for sole proprietorships as well as partnerships. Pass through entities face only one level of taxation, and that is one main reason why the S corps and LLCs are popular business structures.
How are Florida LLCs and S Corps different?
LLCs in general have fewer obligations for operation compared to an S Corp. They have fewer forms required for registration, but they must file annual reports. LLCs are aslso not the perfect entity for every type of business. They have a limited life; for example when the owner(s) declare bankruptcy, become disabled, or pass away, the LLC is usually dissolved. LLCs are not expected to last more than 30 years in most states including Florida. Another issue is that LLCs cannot issue stock, while S corporations can.
S corporations offer some unique benefits
S corporations are a separate entity from the shareholders which allows the business to have a separate life from the shareholders. This means that if shareholders die or withdraw from the company, the business can continue without being dissolved. There are clearer lines between the shareholders and the company with this structure. However, S corporations are required to have annual shareholder and director meetings, regularly updated by-laws, and a host of other obligations that are not required for LLCs. Unlike LLCs, S corps can issue stock, which may be very important for a particular business.
To learn more about the differences between LLCs and S corps in Florida or to ask questions about which particular business entity will work best for you, contact Mark Schecter, a leading Fort Lauderdale business formation attorney for advice at (954) 779-7009.
A question often arises regarding the nature and scope of the duty owed by a majority stockholder or stockholders to a minority stockholder in a closely held corporation. In Biltmore Motor Corp. v. Roque, 291 So. 2d 114 (Fla. 3d DCA1974), the Third District Court of Appeal addressed this issue in the context of manipulation of stock issue by two majority shareholders against one minority shareholder where the majority shareholders made a decision to sell a new stock issue at a price materially less than its market value thus diluting the minority shareholder’s stock.
The minority shareholder brought suit against the majority shareholders to revoke and rescind the recapitalization of the corporation. The two defendants authorized the new stock issue, acting as the Board of Directors; the reason that they advanced for the change in capital structure was the repayment of certain loans that had serious impaired the capital of the corporation, jeopardizing its credit standing and ability to profitably conduct business.
The evidence presented showed that plaintiff had been involved with the company for 11 years, as an employee, vice-president and director. The defendants terminated his employment, and then made efforts to purchase plaintiff’s stock at an amount that was considerably less than the market value of the stock as testified to by an expert witness who estimated the value to be $6,900 per share. Although the defendants offered plaintiff his right to purchase his prorate share of stock, the court found this to be an empty gesture as the defendants knew that plaintiff would not invest any more money in the company having been ousted from the corporate family. In addition, the evidence showed that defendants began withdrawing sums of money for repayment of loans and in payment of undistributed earnings, and also raised their own salaries which was $17,500 in excess of the composite salary paid to all three stockholders prior to the termination of the minority stockholder.
Ultimately, the trial court found that there was no legitimate corporate purpose for the recapitalization of the company; that the only purpose was to dilute the plaintiff’s interest; that by recapitalizing, the defendants breached their fiduciary duty as majority stockholders; and accordingly, the trial court ordered the revocation and rescission of the recapitalization.
The trial court’s decision was affirmed on appeal. The Third District Court of Appeal noted that the defendants entered into a scheme directed against the minority shareholder, and the evidence in the record supported the trial court’s conclusion that no legitimate business purpose was shown for the actions of the majority stockholders.