Reviewed by: Daniel Wagner

Organizing your personal and business assets to protect them from creditors is key to maintaining and growing wealth. Whereas a legal claim can bankrupt a small business, LLCs, corporations, and other holding companies need to minimize exposure of assets and reduce risky operations. While certain business entities offer limited liability (shielding personal assets from being seized due to business debts), tax implications must also be considered.

At Gottlieb Wagner, our South Florida corporate formation lawyers are eager to set up your business for success by helping you determine which business entity is right for you.

The Impact of Choosing a Business Structure

Choosing the best business structure will be based on your professional goals and the degree to which you want your personal assets protected. The type of business entity you choose will have an impact on day-to-day operations and how much you pay in taxes. Of course, what business entity or corporation you qualify for will depend on your company’s makeup.

Partnerships

Generally, partnerships are a sound choice for multiple owners or for professional groups, such as attorneys or physicians. A partnership is a single business with duties split between the partners. Profits and losses may be split equally or based on each general partner’s individual contributions. There are two kinds of partnerships: limited partnerships (LPs) and limited liability partnerships (LLPs). In LPs, one general partner has unlimited liability, and the rest have limited liability. In contrast, an LLP protects each partner with limited liability but does require public disclosure of financial documents.

Limited Liability Companies (LLCs)

Medium- to higher-risk businesses should consider forming an LLC if they want to avoid paying corporate taxes. An LLC allows each member’s (owner’s) personal assets to be safeguarded, but it does require members to make self-employment contributions to Medicare and Social Security. Unlike some states, if a member leaves an LLC in Florida, the partnership does not need to be dissolved; rather, the Articles of Organization will need to be amended or restated.

Corporations

Corporations offer the most asset protection to their owners but come with higher start-up costs and taxes. Unlike partnerships and LLCs, corporations pay income tax on their profits. C-corporations, or C-corps, are taxed twice, first when the company makes a profit and again when the dividend is paid to shareholders. If your company will need to “go public,” then a C-corp may be the best option.

An S-corp, on the other hand, avoids the double taxation of C-corps. Profits and some losses can avoid corporate tax rates, instead passing through to each owner’s personal income. However, to qualify as an S-corp, a business must meet certain criteria, which is why it is necessary to work with our corporation formation attorneys.

Piercing the Corporate Veil

In some situations, liability protection in an LLC or corporation may not apply. When this occurs, a creditor may be able to seize the personal assets of a company owner, officer, or shareholder. Known as “piercing the corporate veil,” Florida courts have historically set aside limited liability protection in the following circumstances:

“Alter Ego” Doctrine

If the corporation or LLC lacks a separate identity from an individual or corporate shareholder, then the corporate veil may be pierced. In this case, individual shareholders may be found personally liable for the company’s debts. The courts may look for certain red flags, including if the business is not honoring formalities such as conducting annual meetings, investing sufficient capital to cover potential liabilities, or misrepresenting their business goals.

In Dania Jai-Alai Palace, Inc. vs. Sykes, the Florida Supreme Court developed a three-pronged test to satisfy the “alter ego” doctrine, which includes:

• The shareholder dominated or controlled the corporation
• The corporation was created for a fraudulent purpose
• The fraudulent purpose harmed the plaintiff and resulted in damages

Single-Member LLCs

Generally, multi-member LLCs are protected from creditors seizing the company’s assets to satisfy one of the member’s personal debts. To do so, a creditor would need to obtain a “charging order,” which would permit a member’s distributions to be paid directly to the creditor. However, the Florida Supreme Court ruled in Omstead v. FTC that a “charging order” was unnecessary in a single-member LLC. This decision had a significant impact on single-member LLCs, potentially forcing the LLC to dissolve due to large debts.

Discuss Your Business Goals with Our South Florida Business Formation Attorneys

Each corporation or business entity provides different benefits. Of course, no business structure is perfect, but choosing the right formation will ensure that the drawbacks do not impede your operations. At Gottlieb Wagner, our corporation formation lawyers will assess your ability to raise capital, your personal assets, tax implications, and your professional endeavors to help you select the right business structure. Now is the best time to get started.

To schedule your consultation with one of our South Florida business formation lawyers, contact us online or by phone at (305) 919-7788.