The three kinds of business entities you can use in Florida
Video Description
There are three kinds of entities that you can use for your business in Florida. Those are (1) the limited liability company or LLC, (2) the corporation denoted by Inc., and (3) the partnership with its various permutations like the limited partnership and limited liability limited partnership. You can choose which legal entity to use when you initially set up your business or for an existing business you can convert from one to another.
In this video Florida Bar Board Certified expert business lawyer David Steinfeld explains how each of these types of business entities operate in practical application and how to structure them up for your business needs.
In this video Florida Bar Board Certified expert business lawyer David Steinfeld explains how each of these types of business entities operate in practical application and how to structure them up for your business needs.
Video Transcript
Hello, I'm Dave Steinfeld a Florida Bar Board Certified business litigation attorney, which means I'm recognized as an expert in business litigation law. The video you're about to watch is from a talk I gave entitled “A primer on business litigation law”. This video introduces my background and a little bit about business litigation in Florida. The video is not intended to provide legal advice, but merely to give you background information on this area of the law. After you've watched the video, please take a look at other videos and articles on my website www.DavidSteinfeld.com. Thanks for watching
Who is David Steinfeld
Hello everyone, I'm Dave Steinfeld. I am a Florida Bar Board Certified business litigation attorney and what that means is that I'm recognized in Florida as an expert on business litigation law. Just to give you some of my background, I went to college at the University of Wisconsin on an Army ROTC scholarship in Madison, Wisconsin and then prior to going on active duty, I went to the University of Miami Law School. My interest in going to University of Miami was in their international law program having lived overseas in Japan as an exchange student through Rotary before that.
A lot of times people think that in the military if you're not a JAG officer if you're not practicing attorney in the military that you really don't have an opportunity to use your law degree but one interesting story that I like to tell you about that occurred when I was on active duty first as an intelligence officer in the Army was on board a ship in the East China Sea where I was posted as the intelligence officer in an Army operation. And as it turned out one of my instructors at the University of Miami had been one of the co-authors on the UN Law of the Sea and that came into great benefit on the ship when we turned out to be just a stones throw away from North Korea heading right toward their waters and I was able to grab the commodore of the destroyer group and the captain the ship and educate them very quickly on what I knew about the UN Law of the Sea and the fact that the North Koreans didn't really subscribe to it and we were able to turn around and get out of that area. After I completed my tour of duty as an intelligence officer I was fortunate enough to transfer into the Army JAG Corps where I practiced law as a criminal defense attorney for many ,many years. After I was in the courtroom I realized that I enjoy being in the courtroom and standing in front of a group just like yourselves or group of panel members or jury and arguing cases. When I got out of the service when I finished my tour of duty, I knew I wanted to settle around the West Palm Beach area so my wife and I picked this area north of West Palm Beach to settle and I've been working in this area ever since. I've been out of the Army now for about ten years or so an I have used that opportunity to become Board Certified as I mentioned earlier in business litigation law.
A lot of times people think that in the military if you're not a JAG officer if you're not practicing attorney in the military that you really don't have an opportunity to use your law degree but one interesting story that I like to tell you about that occurred when I was on active duty first as an intelligence officer in the Army was on board a ship in the East China Sea where I was posted as the intelligence officer in an Army operation. And as it turned out one of my instructors at the University of Miami had been one of the co-authors on the UN Law of the Sea and that came into great benefit on the ship when we turned out to be just a stones throw away from North Korea heading right toward their waters and I was able to grab the commodore of the destroyer group and the captain the ship and educate them very quickly on what I knew about the UN Law of the Sea and the fact that the North Koreans didn't really subscribe to it and we were able to turn around and get out of that area. After I completed my tour of duty as an intelligence officer I was fortunate enough to transfer into the Army JAG Corps where I practiced law as a criminal defense attorney for many ,many years. After I was in the courtroom I realized that I enjoy being in the courtroom and standing in front of a group just like yourselves or group of panel members or jury and arguing cases. When I got out of the service when I finished my tour of duty, I knew I wanted to settle around the West Palm Beach area so my wife and I picked this area north of West Palm Beach to settle and I've been working in this area ever since. I've been out of the Army now for about ten years or so an I have used that opportunity to become Board Certified as I mentioned earlier in business litigation law.
What does Board Certification mean
The process to become Board Certified as a business litigation attorney in Florida is that you have to prove yourself to the Bar by doing a certain number of jury trials and non-jury trials within a specific time period. You also have to be peer reviewed by lawyers and judges and you have to pass what's essentially a mid-career bar exam all about business litigation law. I've also been very fortunate enough to have been recognized by my peers and local judges and been awarded Martindale-Hubbell's highest recognition in peer review which is called AV preeminent.
Florida legal entities
What I want to do now is give you a basic overview of some of the legal entities that we have in Florida and tell you a little bit about how those work. We have basically three kinds of business entities under Florida law. One is the corporation, the second is a limited liability company, and the third are partnerships and there are various permutations of partnerships under Florida law. There are partnerships, limited partnerships, limited liability partnerships, limited liability limited partnerships. They're all somewhat different but they have been replaced to a great extent in practice by the limited liability company or the LLC. All three of these vehicles are statutorily authorized by the State of Florida. That means that there is a particular chapter of Florida law that controls these entities. For a Corporation, for example, Chapter 607 of the Florida Statutes is what controls all of the corporate law and that's based on the uniform model business act and to a large extent the interpretation of those laws come from New York law in corporations and Delaware. The LLC statute is found at Chapter 608 of Florida Statutes [Note: after this presentation Chapter 608 was repealed in favor of Chapter 605, Florida’s Amended LLC Act] and that's a relatively newer statute it's only been around for 12-15 years or so and it's really only come into play in the past decade. The partnership statutes are found at Chapter 620 of the Florida Statutes but as I mentioned earlier the limited liability company has in large part replaced the partnership as the dominant vehicle for small local businesses because it's so simple to use.
What do I mean by that. An LLC as we call it is somewhat of a hybrid. It operates like a partnership but it looks like a corporation. It is recognized as a legal entity like a corporation. You can have members which you'd call shareholders in a company, it can own property, it can transact business similar to a partnership but it operates in practice and under the law more like a corporation. There are less burdensome responsibilities for the owners and operators of an LLC as compared to a corporation. You don't have to have so many of the regular meetings and shareholder agreements so the LLC to a great extent has replaced the corporation as the dominant player in the business market in Florida simply because most of our corporations are small closely held businesses maybe one person two or three people that for lack of a better term are in a partnership and have a small local business.
What do I mean by that. An LLC as we call it is somewhat of a hybrid. It operates like a partnership but it looks like a corporation. It is recognized as a legal entity like a corporation. You can have members which you'd call shareholders in a company, it can own property, it can transact business similar to a partnership but it operates in practice and under the law more like a corporation. There are less burdensome responsibilities for the owners and operators of an LLC as compared to a corporation. You don't have to have so many of the regular meetings and shareholder agreements so the LLC to a great extent has replaced the corporation as the dominant player in the business market in Florida simply because most of our corporations are small closely held businesses maybe one person two or three people that for lack of a better term are in a partnership and have a small local business.
Corporate management documents
One of the key issues that a lot of people step right over in creating a business entity in creating their company is the proper documentation. For a corporation you’d have a shareholders’ agreement, articles of incorporation, other documents. For an LLC we call that an operating agreement and for a partnership of course a partnership agreement. Why is it important to have this documentation when you're forming the entity because what happens down the road potentially and it avoids a lot of problems later. It goes with the saying an ounce of prevention. If you properly document your arrangement with your partners for lack of a better term in your business it makes it a lot easier should something happen to one of those partners later on or should the partners become at odds with one another you can figure out what to do.
The Florida business act which is Chapter 607 for corporations has been around for a long time. As I mentioned is modeled on the model business Corporations Act. It has a robust set of default provisions contained within it that if you don't have those types of provisions in your shareholders’ agreement or your articles of incorporation or other documents forming the corporation you can look to the statute as a fall back and a backstop and utilize what's in those statues. The LLC statutes being much newer have not come to that point yet they are in development and it will be several more years before those default provisions are contained within that and that makes it even more important if you have an LLC to have the proper documentation for the entity otherwise you may wind up in a situation where the statutes don't provide any coverage.
The Florida business act which is Chapter 607 for corporations has been around for a long time. As I mentioned is modeled on the model business Corporations Act. It has a robust set of default provisions contained within it that if you don't have those types of provisions in your shareholders’ agreement or your articles of incorporation or other documents forming the corporation you can look to the statute as a fall back and a backstop and utilize what's in those statues. The LLC statutes being much newer have not come to that point yet they are in development and it will be several more years before those default provisions are contained within that and that makes it even more important if you have an LLC to have the proper documentation for the entity otherwise you may wind up in a situation where the statutes don't provide any coverage.
The downside of not having an operating agreement
I'll give you an example of something that I witnessed recently. There were two people who formed a business just north of here a little store they signed the lease they opened the business and it was a retail store and they were going to sell things. Not uncommon in Florida not uncommon anywhere. At some certain point these two partners couldn't get along anymore. One of the partners came to visit me and said the other partner took everything out of the bank account took the materials out of the store and left and said I'm taking everything and I'm going to do what I want. The person who came to see me said what do I do. So instinctively I said we need to take a look at your operating agreement for the LLC. Well they didn't have one. They decided it would be a lot cheaper to simply go online and form the company and sort of do it yourself. The risk there is that when you do it yourself and you don't have the expertise that someone like I do has in forming these entities and mapping these things out, you wind up missing broad swaths of very, very important information.
Now those two people have signed a lease in their own names they've got a problem between them with what you do now with all the money that's been taken out of the bank account all the merchandise what about the suppliers who are now saying they want to be paid what about the customers who have placed orders that are not going to be filled and then you've got a landlord saying someone owes me rent. The problem for those people becomes they're potentially on the hook personally because they didn't structure their business at all. They didn't as we say paper their business. They decided it would be a lot cheaper to not invest the time and money to sit down with a qualified attorney and do that.
That's not to say that everyone needs to spend thousands of dollars right up front when you form a business, many businesses can't afford to do that but in the beginning stage of the business when you plan out a business marketing plan when you decide where you're going to locate your business and what type of business you're going to do it becomes important to think through these issues and sit down just as you would sit down with a CPA to do your books to sit down with a qualified business attorney and understand what is out there and the potential pitfalls to properly structure your business.
Now those two people have signed a lease in their own names they've got a problem between them with what you do now with all the money that's been taken out of the bank account all the merchandise what about the suppliers who are now saying they want to be paid what about the customers who have placed orders that are not going to be filled and then you've got a landlord saying someone owes me rent. The problem for those people becomes they're potentially on the hook personally because they didn't structure their business at all. They didn't as we say paper their business. They decided it would be a lot cheaper to not invest the time and money to sit down with a qualified attorney and do that.
That's not to say that everyone needs to spend thousands of dollars right up front when you form a business, many businesses can't afford to do that but in the beginning stage of the business when you plan out a business marketing plan when you decide where you're going to locate your business and what type of business you're going to do it becomes important to think through these issues and sit down just as you would sit down with a CPA to do your books to sit down with a qualified business attorney and understand what is out there and the potential pitfalls to properly structure your business.
