FAQs About Business Ownership
- If someone sues my business, can they collect from me?
Probably not, if you have treated your business separate from yourself. A limited liability company, limited partnership, and corporation provide the business owners with statutory protection against persons attempting to collect on an act by the business. General partnerships and sole proprietorships do not. Plaintiffs do have the ability to “pierce the corporate veil” by making the case that the entity was a sham. Be sure to have an operating agreement to counter this threat. Furthermore, in most small businesses, the owner is highly involved in the business. Any actions taken personally by the business owner (and not by the business) are subject to personal liability against the business owner. That is why it is important to be sure that all actions of the business (contracts in particular) are taken by the business (signed by the business owner as an officer of the company).
- How Much Does Business Ownership Cost?
Formation fees with the state of Florida are $70 for a corporation and $125 for an LLC. Annual fees for corporate ownership in Florida are $137.50 for an LLC and $150 for a corporation, due May 1 of each year. The State of Florida fee schedule for all entities is found here: http://www.sunbiz.org/filefee.html. The federal government does not charge a fee. Initial formation costs range from $500 to $2,000, depending on the level of negotiations and detail in the organizational documents.
- Do I Need to Pay Myself a Salary?
Opening another location takes a lot of resources. You must have the capital required to acquire a new location and hire more workers, as well as the time to invest in launching the new location. Instead, you pay 15.3% self-employment tax on all income of the business, just as you are required to pay as a sole proprietor. One of the benefits of a corporation is the ability to pay yourself a reasonable salary. All remaining profits above the reasonable salary amount can be distributed to you through distributions, which are not subject to employment taxes. During the initial phases of your corporation, it may be reasonable to not pay yourself a salary at all. See the IRS’s explanation of reasonable salary here: http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/S-Corporation-Compensation-and-Medical-Insurance-Issues.
- What Happens to My Ownership Interest When I Die?
Without an entity, the assets of the business would be distributed to your heirs according to your will, and, without a will, via intestacy (see the Florida Bar’s discussion of probate and intestacy here: http://www.floridabar.org/tfb/TFBConsum.nsf/48e76203493b82ad852567090070c9b9/92f75229484644c985256b2f006c5a7a). That means that all of the assets must be sold and the funds distributed to the heirs. With an entity, the membership interest or stock passes to your heirs, again according to your will or via intestacy. A well written operating agreement or bylaws discuss alternate means of transfer in the event of the death of the owner(s).
- How Do I File My Taxes for the Business?
For a corporation, you would file an 1120 or 1120s. For an LLC taxed as a partnership, you would file a Form 1065 and K-1s. For a single member LLC, you would file a 1040 and Schedule C or Schedule E. If your business has employees, it will need to file quarterly Form 941 and annual Form 940. Please seek advice from an accountant prior to filing your business taxes, as there are other forms necessary in certain situations.
- I am in a Business 50/50 with Another Person. Who Gets to Make the Decisions?
Without additional agreement prior, nobody. This is a reason to be sure you have appropriate legal counsel from the start of the relationship. Your operating agreement or stockholders agreement should spell out who makes certain decisions of the company, or a process by which those decisions are to be made. If you are in a deadlock situation, you may be able to have a judge determine the appropriate course, or file for judicial dissolution of the company.
- What Documents Am I Required to Keep?
The State of Florida requires certain records to be maintained by LLCs and Corporations, in a form capable of conversion into written form within a reasonable time.
- Minutes of all meetings of its shareholders and board of directors, a record of all actions taken by the shareholders or board of directors without a meeting, and a record of all actions taken by a committee of the board of directors in place of the board of directors on behalf of the corporation.
- Accurate accounting records.
- A record of its shareholders in a form that permits preparation of a list of the names and addresses of all shareholders in alphabetical order by class of shares showing the number and series of shares held by each.
- Its articles or restated articles of incorporation and all amendments to them currently in effect;
- Its bylaws or restated bylaws and all amendments to them currently in effect;
- Resolutions adopted by its board of directors creating one or more classes or series of shares and fixing their relative rights, preferences, and limitations, if shares issued pursuant to those resolutions are outstanding;
- The minutes of all shareholders’ meetings and records of all action taken by shareholders without a meeting for the past 3 years;
- Written communications to all shareholders generally or all shareholders of a class or series within the past 3 years, including the financial statements furnished for the past 3 years under s. 607.1620;
- A list of the names and business street addresses of its current directors and officers; and
- Its most recent annual report delivered to the Department of State under s. 607.1622.
- 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.
- What Happens if I Do Not Comply with the Records Requirement?
Persons looking to sue you personally would have an easier time doing so. Entities are only effective as liability protection vehicles to the extent that the Corporation is treated as a separate and distinct entity, apart from the individual. Your entity will likely not be pierced by the courts if it is established and operated to conduct a bona fide business venture and if the business operates as a distinct and separate entity from its individual owners. If you fail to comply with the statutes regarding entities, a court is more likely to see this entity as an alter ego of its owner(s) and pierce the corporate veil.