How to Optimize Your LLC as you Renew by May 1 to Avoid the $400 Penalty
Florida entities must be “renewed” every year by filing an Annual Report which is due May 1 and subject to a $400 late penalty. Around September of every year, the State begins to “Administratively Dissolve” any unrenewed Corporations (Corp or Inc), Limited Liability Companies (LLC) and Limited Partnerships (LP or LLP). This can result in various unwanted legal consequences, including losing the right to the name.
Filing an Annual Report is actually the legal minimum to keep an entity “alive”. For better corporate health, we would recommend you consider at least the following five legal issues as you renew each of your business entities:
- Managing Members. The new Florida LLC statute went into effect this year for all LLCs. Among other important changes, the concept of “Managing Member” was eliminated and persons with that title will default to being “Managers” or “Members”, depending on the circumstances. This may be completely inconsistent with the way your LLC was designed to work (or works by default) because the “Managing Member” could end up having virtually total control of the LLC on one extreme or just as much say as any other Member on the other extreme. Accordingly, LLCs with Managing Members need to figure out how their LLC’s legal structure must be updated to put everything in order, preferably before going on the record by filing the next annual report disclosing who the Members or Managers are.
- Converting to LLC. If your entity is a Corporation (whether taxed as an S-Corporation or not), the owners are missing out on a higher level of asset protection they would otherwise have if the entity was an LLC. With the proper legal planning and implementation, an existing corporation can be converted into an LLC that is treated by the IRS as if it is still the same corporation (same tax ID number) and there is no need to transfer any assets.
- Single Owner LLC. If your entity is already an LLC but is owned entirely by one person, understand that in your case the regular LLC asset protection does not apply. However, without careful legal structuring, the mere addition of a second member can bring a host of potential problems. Who you choose as your new “partner” can also make a difference, and care must be taken not to disrupt the entity’s desired tax treatment. Balancing the legal and tax issues is key when adding a second member to achieve asset protection without unnecessary exposure.
- Partnership Agreement. If you do have partners but don’t have a co-ownership agreement (shareholder/operating agreement), don’t wait until you have a problem. These problems usually come up when one of the owners dies, gets sick, become lazy, gets divorced, is sued, loses interest, etc., etc. If you have executed co-ownership agreements for each of your entities, look at them again – carefully, and if they do not reflect what you think the deal should be (or if you don’t understand them), then get them updated.
- Ownership Title. Review how ownership in your business is actually documented. Is the corporate book in order? Are those documents consistent with what is being reported on the tax return? Have changes in ownership been documented? Have any of the “owners” put their interest in someone else’s name, without creating legal protections for the intended “owner” (and the other actual owners) should the owner of record voluntarily or involuntarily fail to honor the agreement? Should the ownership interest be titled in the name of the owners’ trusts or a holding company?
If it turns out you have not covered one or more of the above or you have any questions whatsoever, contact us to see how we can help you maximize your legal protection while reducing tax to the legal minimum and avoiding hassles and costly disputes down the road.