LLCs are attractive to many small to medium sized businesses because they provide the best mix of the tax benefits of a partnership or sole-proprietorship with the liability protection of incorporating. This is because unlike normal corporations, an LLC is a “pass-through” entity where all profits & loss are considered the owners and reported on person income tax returns.
Additionally, while running and maintaining an LLC is more difficult than a simple sole-proprietorship, it’s far less complex and costly than full-blown incorporation so it’s idea for small to medium sized businesses. To understand more of why you may want to file your business as an LLC, consider the main features:
LLC Means Limited Personal Liability
As if they were shareholders in a corporation, owners of LLCs enjoy personal liability protection for any debt or claims against the business. Simply put, this means that if your business owes money for utilities or to a creditor or landlord and it cannot pay the obligation, your personal assets are protected. Should a lawsuit arise, only the assets belonging to the LLC would be at risk, hence the “limited” nature of the liability protection provided.
Exceptions to the Protection LLCs Provide
The protection that LLCs provide business owners is not 100% complete. This is true of S CORPs and C CORPs as well. Exceptions do exist. Specifically, the owner of an LLC can be found personally liable if:
Because there are gaps in what LLC protection covers, a great way to improve your protection of your personal assets is to acquire business insurance designed to fill in the gaps of the coverage LLCs provide. This is essential for businesses where concerns like malpractice exist.
Additionally, if a court ignores your LLC protection, insurance will still cover you. However, it won’t protect you from unpaid debt. Therefore, once again, it’s important to keep your LLC as well funded as possible to ensure it is on top of its debt obligations.
Management Structure in an LLC
In a typical LLC, all owners participate equally in all aspect of the business. This structure is referred to as member management. On the other hand, manager management, is an LLC structure where one or more owners are non-managing and simply share in the profits. This happens in situations where perhaps a family business sees one partner retire, or where one partner is an investor.
The essential difference is that only those named as manager can vote in management decisions in a manager management LLC. Though this may be a convenient form of LLC, there are specific state and federal regulation concerning sales of securities to keep in mind.
LLC Tax Obligations
One of the most attractive features of an LLC is that it is not a separate tax entity from its owner. Meaning, unlike a corporation which pays taxes before the owner is paid and taxed again, taxing only happens one time. Instead, the profits and losses of an LLC pass directly on to the owner(s) who report and pay their tax obligations each quarter based upon their individual share of the LLCs P&Ls.
Even though an LLC has no tax obligations, LLCs that are co-owned have to file IRS FORM 1065 annually. This is the same form that partnerships must file and basically sets out each member’s share of the overall LLC profits (or if it is the case, losses). This form helps the IRS ensure LLC co-owners and partnerships correctly report income.
Creating an LLC
Forming an LLC requires two crucial steps:
Dissolving an LLC
One of the crucial tasks of your LLC Operating Agreement is to protect your business from the abrupt ending it would face if a member decides they want to end the LLC. Without an agreement stipulating agreed to provisions for how to dissolve an LLC in the event on or more parties wants out, they can just leave and force remaining members to fulfill debts, divide assets, and either make a new LLC or move on. An agreement typically includes buy-sell clauses designed to prevent just this that include specific details on what to do in the event a co-owner retires, passes on, or decides to move in a different direction.
Still Have Questions?
An LLC is a great way to provide personal asset protection for all kinds of small and medium sized businesses. By providing the tax structure of a sole proprietorship/partnership with the liability protection of a corporation at only a fraction of the work, it may just be the right step for your business.
If you are considering incorporating or becoming and LLC and would like some sound legal advice from someone who knows the law and the concerns of small and medium sized business owners in Florida, look no further than the Law Offices of Yoel Molina. With years of experiences helping businesses owners throughout the state achieve peace of mind by finding the right protection for their personal assets, Yoel has the understanding, insight, and legal expertise needed to do the same for you. So give our office a call, we’d be glad to discuss your legal business needs and concerns.
Despite the fact that business contracts can be very complex, the elements needed to make the enforceable and valid are in and of themselves fairly straight forward to understand. This might make you wonder about the pages of legalese you’ve seen in contracts from service providers and others in the past. The truth is this language won’t help you much when creating business contracts with third parties in order to build your business in a reliable and legally dependable way.
Instead, you want direct language that both parties clearly understand and that will be easy to assess in a dispute resolution situation like mediation, arbitration, or even formal legal proceedings (and can likely help you avoid these dangers). So accurate and detailed everyday language is actually a good thingif you hope to make your contracts enforceable and legally binding.
Must a Contract Be in Writing?
Most of the time, oral contracts are considered legally binding. However, there are a few exceptions in a few states, for example, if a contract is to last longer than a year it typically has to be in writing. The bottom line, however, is that you want something that is not only binding,but that is easy to enforce. Because of the often unclear nature of oral contracts, written contracts can provide incredible clarity and protection from dispute when compared to oral contracts and therefore itis highly recommended your business only use written contracts.
What Is Required?
In order to be binding and enforceable, all contracts need two things:
1. That the parties involved are in agreeance. That is, that there is a clear offer made by one party and that the other party clearly accepts that offer within the terms of the contract.
2.There is an exchange between the two parties of something of value like goods, services, or money for one of the other in return. Typically this is payment of cash for services or goods delivered.
Let’s look at these two requirements in greater detail:
Requirement #1: Agreement Between Parties
The basic gist of the first requirement is that the clearer it is that all parties agree to all terms stated within the contract, the stronger it will be and easier to enforce. Reality is that things are not always so clearly black and white. Things get blurry. It’s not always so clear if everyone fully agreed to everything unless it’s explicitly stated that they do. Over time, much has been learned about issues where agreement isn’t so clear:
Offer & Acceptance
To understand why this can be unclear, think of an example where you buy lunch. You walk up to a food cart and the vendor tells you the special is chicken for $5.99 with a side of potatoes. This would be his offer. If you tell him, Sounds great, I’ll take it, you’ve accepted the offer. If instead you tell him, I think I want beef today, you’ve rejected the offer. However, if you say, I do like chicken, but I really want a salad instead of potatoes, you’ve not accepted the offer, but have made a counter offer. This is where things can be a little unclear.
When the discussion involves things more involved than what sandwich you are having for lunch, the stakes are higher and if there is a misunderstanding – someone has to pay for it. This is why making offer and acceptance clear is crucial to contracts.
At What Point Acceptance Occurs
The goal here is to determine as accurately as possible when acceptance does in fact occur as clear in the contract as possible. However, even when this is done, a party may want time to think about an offer. In the interim, the other party may reconsider and wish to change specific terms so that disputes can arise. To minimize the chances for this, certain rules should be followed concerning how long an offer should remain open, how you should revoke an offer, what sort of expiration date you may want to include, as well as how to handle counter offers.
How Long Does an Offer Remain Open?
The issue you run into is that without stating specifically in the contract how long the offer is valid, it is legally considered open for a reasonable amount of time. This is clearly open to interpretation and can be the source of a dispute that could simply be removed by including an expiration date within the contract itself. This leaves no room for doubt.
If you are on the other side of the contract and considering an offer without an expiration date stipulated, it’s in your best interest to accept it as soon as possible if you want to go through with it before they want to change the offer. Until you accept it, it can be revoked at any time.
Revoking an Offer
The party making the offer has the right to revoke it at any time before it's been accepted. The only exception to this is if they agree to leave it open for a specific amount of time. In this case, they must abide by these terms in order to avoid dispute. Since making a counteroffer does not constitute as acceptance, the party making the offer may still revoke the original offer if you respond with a counteroffer – they are not obliged to keep the original on the table.
Offer Expiration Dates
When a contract has an expiration date, or an option, this typically comes with a fee. A typical option is a 30-day option where the seller (an option is typically used in the exchange of goods for cash) agrees to not offer the product or goods to anyone else for 30-days while the buyer considers the offer. Regardless of whether or not a seller charges for the inclusion of an expiration or option in the contract, they are obliged to follow them.
Counteroffers are an integral part of the negotiation process and are simply an offer made by the one party against the other party’s offer. For example, a seller offers you chicken and potatoes for $5.99 and you counter offer by asking for chicken and salad for $5.99. Typically, if the party agrees to the counteroffer, acceptance happens at that point.
It’s important to note that inconsequential differences cannot be used to void a contract where a counteroffer was accepted. In our example of the lunch special, if the food vendor agreed to provide salad instead of potatoes and it turned out the salad wasn’t as big as the side of potatoes, they wouldn’t owe you the different in potatoes.
Exchanging Something of Value
The second major component of any contract besides the offer and acceptance is the actual exchange of value. That is, if you expect the terms of your contract to be legally valid, there must truly be a give and take – both parties must give something of value to the other.
Defining the Thing of Value, or Consideration to Be Exchanged
Legally speaking, whatever is to be exchanged of value between parties in a contract is called the consideration. In most cases, the consideration is a promise to render future services, or deliver goods or payment. For example, the promise to deliver a daily special with chicken and a salad in exchange for the promise to pay $5.99.
A Contract Vs. A Gift
If one party is simply doing something for the other or giving them something, they are under no legal obligation to follow through on their agreeance to do so. For example, if someone promises to bring a pie to your party as a favor but instead shows up with punch because the store was out of pie, you have no legal recourse to attempt to hold them to their original promise to bring pie.
On the other hand, if there had been an agreement where both parties agreed to provide pie for events for each other, a contract would exist, and legal recourse would be available.
Promises vs. Action
There are a few situations where the consideration is met by actions instead of actual promises to perform them. For example, if you asked the food vendor for salad and instead of saying anything, they just gave you the chicken with salad – this would constitute agreement and that a contract was made. Legally, you wouldn’t be able to say, I changed my mind, you should have double checked first, and be freed from the original verbal contract you had already entered into.
Still Have Questions?
While these issues are straightforward and natural consequences of making agreements between two parties, there is quite a lot of things to keep track of. That’s why it’s best to have your contract drafted or reviewed by an experienced and qualified business attorney.
If you have a business contract you’d like drafted or reviewed, we’re here to help. Yoel Molina is a qualified, experienced, and highly-knowledgeable business attorney serving small to medium sized businesses throughout Florida. If you just simply have questions, give our office a call and we’d be glad to discuss your legal business contract concerns and needs.
18/3/2016 0 Comments