Print This Post/Page


Corporate, LLC and Ltd. Existence. Corporations, limited liability companies (LLC’s) and limited partnerships (Ltd.’s)are legal entities created in accordance with state statute. Existence of these entities commences upon filing certain Articles with the Division of Corporations (or up to five days earlier or such later date as indicated in the Articles.) In Florida the initial filing fee to establish a corporation is $70 and to establish an LLC is $125. The initial filing fee of a limited partnership is $7 per $1,000 of capital contributions, but not more than $1,750 nor less than $52.50. Existence of all these entities may be perpetual.

Partnership existence. In contrast, partnerships exist by virtue of a partnership agreement (written or oral), regardless of whether anyone else is aware of the partnership’s existence. Existence may not be perpetual, but rather is "at will" unless a date of termination is established by the partnership agreement. A Florida partnership becomes an LLP by registering its existence with the state ($50 filing fee) and by paying a $25 annual fee along with an annual Statement of Qualification.

LLLP existence. Another addition to the alphabet soup of legal entities is the LLLP, a limited liability limited partnership. Unlike LLP’s, LLLP’s are already registered with the state. Thus, in order to become an LLLP, a limited partnership need only file a Statement of Qualification along with a $25 annual fee.

Limited partnerships are no longer favored by knowledgeable attorneys because LLP’s are cheaper to form and maintain, less complex and provide better asset protection (discussed below.)

LLC and LLP history. LLC’s have been part of the legal landscape since the 1980’s, but they were unpopular in Florida until 1998 when the legislature decided to treat LLC’s as partnerships for state income tax purposes, thus excluding LLC’s from the 5.5% state corporate income tax (unless the LLC elects to be treated as a C corporation). LLP’s and LLLP’s were not recognized in Florida until July 1, 1999. Florida is one of the first states to recognize LLP’s and LLLP’s.

Annual fees. Corporations must pay an annual fee of $150. LLC’s must pay an annual fee of $138.75. There is a whopping charge of $400 for paying the corporate or LLC annual fee late. Limited partnerships must pay an annual fee of $7 per $1,000 of contributed capital, but not more than $437.50 or less than $52.50. LLP’s pay only $25 per year.

Equity holders. Corporations are owned by stockholders. LLC’s have "members", rather than stockholders or partners. Being analogous to S corporations, LLC’s can exist with only a single member. In contrast, since LLP’s and LLLP’s are partnerships, they must have at least two partners to exist.

Rights to withdraw. The LLC Membership Agreement (formerly referred to as the Regulations or as the Operating Agreement) governs the interrelationship of the members and the LLC. It is similar to a stockholders agreement or a partnership agreement.  Unless the Membership Agreement allows it, a member may not withdraw from the LLC.  A similar rule applies for limited partners.

In contrast, general partners have a right to dissociate (i.e., withdraw) at any time and to have their partnership interests redeemed. However, if the dissociation violates the partnership agreement, then payment may be delayed until the purpose of the partnership has been accomplished or the termination date of the partnership has been reached, whichever comes first. If payment is delayed, the dissociating partner has a right to interest and security on the partnership obligation.

Dissenters rights. A significant difference between LLC’s and partnerships on the one hand and corporations on the other hand relates to dissenters rights. If a corporation sells substantially all of its assets, stockholders who failed to consent (i.e., dissenters) must be given the right to have their stock redeemed for fair value. In contrast, an LLC or partnership can sell substantially all of its assets without having to run the risk that it may have to redeem minority members or partners who failed to consent.

The entity "shield". Except for general partners of partnerships which do not qualify as LLP’s or LLLP’s, all of the entities under discussion provide significant levels of asset protection in the sense that their owners are generally not liable for entity level liabilities. (See, e.g., Fla. Stat. §608.4227 protecting members of an LLC.) However, the "shield" can be pierced in certain events, such as where a corporation is used to commit fraud or is used for an illegal purpose. Fla. Stat. §608.701 provides that LLC members can be found liable for company level debts applying the same rules as apply to corporations. An important distinction between corporations and LLC’s, on the one hand, and LLP’s and LLLP’s on the other hand, is that Fla. Stat. §620.8306(3) simply provides that the partners are not liable for partnership level debts incurred while the partnership was an LLP.

Assignee rights. As a general rule, the assignee of a stockholder has all of the rights of the assignor. However, if a partner transfers his partnership interest to another person, the transferee will be treated as a mere "assignee". The assignee will be entitled to whatever distributions the partnership may make, but will have no "political" rights and no rights to information. That is, the transferor continues to be a partner for all purposes other than receiving distributions. (Fla. Stat. §620.8503.)

In essence, the partnership rules apply with respect to an assignment of a membership interest in an LLC , except that the assigning member ceases to be a member upon assignment of all his membership interest. (Fla. Stat. §§608.432.)

Rights of partner’s creditor. A partnership arises solely by virtue of an agreement between two or more persons. If a creditor of a partner could seize and sell a partner’s partnership interest, then the other partners could suddenly find themselves in a contractual arrangement with a person with whom they did not contract. To avoid that result, Fla. Stat. §620.8504 limits the remedies of a judgment creditor of a partner. The judgment creditor can get a charging order directing the partnership to make distributions to the creditor instead of the partner-debtor, but generally cannot force the partnership to make distributions.

In the case of a general partnership, Fla. Stat. §620.8504 also gives the judgment creditor a lien on the debtor’s partnership interest and allows the debtor’s partnership interest to be sold via a foreclosure of the lien. The buyer at any such sale would be a mere assignee, however.   The foreclosure remedy is not available with respect to an interest in a limited partnership. 

A question arises as to whom the partnership should send the K-1 attributable to the partnership interest held by a partner whose interest is subject to a charging order. Many advisors take the position that the K-1 should be sent to the judgment creditor. This tends to put pressure on the creditor to settle because the creditor could find itself having to report so-called "phantom income" (i.e., income reported by the partnership, but not distributed to the partners.)

Rights of member’s creditor. Fla. Stat. §608.433(4) provides the charging order remedy for a judgment creditor of a member of an LLC. Such statute does not provide the remedy of seizing and selling the membership interest.

A question arises as to whether a judgment creditor of a member could seize and sell the membership interest or even the LLC assets if the member is the only member of the LLC. Since the reasoning behind limiting the creditor to a charging order relies upon the nature of a partnership or LLC as a private agreement by or among two or more persons, some analysts (including me) conclude that a single member LLC can be penetrated to pay the debts of its owner.

Since the remedies available to the judgment creditor of a partner or member are often perceived to be inadequate, many professionals advise their clients to use a partnership or LLC vehicle to hold assets otherwise reachable by creditors.

Taxation. Corporations are generally subject to double taxation in the sense that they pay taxes on their income and stockholders pay income taxes on the dividends received. Such corporations are called C corporations to distinguish them from S corporations (discussed below.) The new tax rules, however, generally tax dividends as long-term capital gains subject to a maximum 15% rate.

S corporations are generally not subject to income taxation. Instead, their income is taxed to the stockholders. To keep matters simple, an S corporation may only have a single class of stock. Voting rights can differ without being considered a second class of stock. However, a special rule subjects an S corporation to income taxes with respect to its "built in gain" recognized during the ten year period after it elects S status. "Built in gain" is gain inherent in the corporation’s assets at the time the S election is effective. The S election is made via filing form 2553. The effective date of the election is the first day of the next taxable year (almost always a calendar year in the case of S corporations), although the election can be retroactive to the first day of the current taxable year if filed with 75 days of such date (or within 75 days of the corporation’s existence.)

Partnerships are also "pass-through" entities for income tax purposes. There are several significant differences between partnerships and S corporations for income tax purposes. Perhaps the most important is that income passed through by an S corporation is not subject to employment taxes (e.g., FICA and medicare), while income passed through by a partnership can be subject to such taxes. This benefit is not available, however, if the corporation fails to pay reasonable compensation, albeit at the low end of reasonable. Accordingly, many small service businesses elect to be taxed as S corporations to minimize employment taxes.

Another significant difference relates to flexibility. The tax rules relating to S corporations are quite rigid compared to partnerships. Partnerships can allocate items of income and loss among the partners, while stockholders of an S corporation must each report a pro rata share of the corporate income and losses.

"Check the Box". LLP’s, LLLP’s and LLC’s with more than one member are taxed as partnerships for both federal and state income tax purposes. However, such entities can elect to be treated as corporations - and if the partners or members all have equal economic rights, then the entity could also elect to be treated as an S corporation. The election to be taxed as a corporation is made via form 8832. Thus there are now entities which are taxed as S corporations, but which are LLP’s or LLC’s for state law (e.g., asset protection) purposes.

Disregarded entities. Unless the election to be taxed as a corporation is made, single member LLC’s are taxed for federal income tax purposes as if they did not exist. That is, the LLC is a disregarded entity and its single member is treated as owning the LLC’s assets, income, etc. In contrast, single member LLC’s do have separate existence for state law purposes. For example, rentals of commercial real estate owned by a single member LLC and leased to its member are subject to sales tax.

A situation which often occurs in an estate planning context is that grantor trusts (which are ignored for federal income tax purposes) with the same grantor are the only members of an LLC or the only partners of a partnership. In such instances the separate existence of the members or partners is ignored. Thus there will only be one member or partner, which means the LLC or partnership will not have a separate existence for federal income tax purposes. The result is that the grantor is treated as owning the trust, LLC and partnership assets, income, etc., greatly simplifying the income tax reporting for such entities. Again, such entities will have separate existence for purposes of state law.

Wholly-owned subsidiaries of S corporations can make QSUB elections. The effect of the election is that the subsidiary is treated as a division of its parent for income tax purposes.

(c)2007 Steven M. Chamberlain.  All rights reserved.  Republication with attribution is permitted.