Compared to corporations, LLCs are simple to set up and run. An LLC designation offers many distinct advantages and there’s a reason why it is a popular option. The paperwork is less complicated, and you are not required to maintain minutes or record resolutions.
Micro businesses, although a vibrant and profitable segment of any economy, often get confused and categorized in the same pile as small businesses. Today because of COVID-19, more and more people are becoming self-employed, and so the ubiquity of micro-businesses is increasing.
What Differentiates a Micro Business From a Small Business?
Micro businesses are companies with annual sales and assets valued at less than $250K annually and with less than five employees, and often home-based. That is primarily what differentiates them from a small business, they are also often home-based businesses. Businesses such as catering, babysitting, photography, computer repair, housekeeping, wedding planning, and accounting. Even home-based businesses can face liability (from both products and services), so it is important for micro-business owners to make sure they are protected legally.
Micro Business vs. Small Business
Small businesses on the other hand are identified as for-profit enterprises that are independently owned and operated but do not dominate their local market or industry. They employ 500 people or fewer and have assets that total less than $1M annually. Small businesses tend to have fewer issues securing capital loans, and recruitment as an independent enterprise is met with less resistance as they are seen as more established and reliable. As companies grow, an in-house small business team may require something more robust than a standard bookkeeping system to ensure adherence to payroll taxes, corporate taxes, and government fiscal policies. An internal payroll system, or outsourcing to an independent company that specializes in payroll accounting, can help alleviate the problems that come with increases in size and logistics.
How is LLC taxation different from corporation taxes?
Revenue earned is a “pass-through” to the owner(s) and billed at that person’s personal tax rate, whereas corporations pay a corporate tax rate.
Why is it important to separate your micro-business’ bank account from your personal one?
Commingling finances strips away the legal protection of your business assets, and may also be tax fraud to be expensing non-business items. A separate business bank account makes things a lot easier if you have to respond to an IRS audit. Auditors always look closely at small businesses with unmatched large expenses. A business bank account that is separate from your personal finances makes it easier to prove which purchases are for you and which purchases are for the business.
Pros and Cons of Setting up a FLorida LLC vs a Delaware Corporation:
If you are looking to form a business and trying to determine which state has the most to offer, there is a good chance that both Florida and Delaware have come up in your research. Both states have a good track record of attracting and supporting businesses through supportive regulations, resources, and incentives. Here, we’ll focus on the formation of a limited liability company (LLC) and the benefits that each state can offer.
Delaware enjoys a well-established reputation as a prime location for business incorporation. Many corporations have chosen Delaware to incorporate in thanks to their corporate-friendly laws and Court of Chancery, among other aspects. For this reason, Delaware corporations and LLCs tend to be more attractive to investors that favor this experienced and savvy environment for business.
Apart from a corporate tradition, there is not much to separate Delaware from other popular LLC formation locations. In fact, it tends to be a more expensive choice when compared to other states. If your company does not already have a physical presence in the state, you will be required to register and maintain an additional registered agent. Delaware also requires corporations to pay franchise tax, which can outweigh the similar taxes and fees of other states. Additionally, Delaware is not the most favorable location for small businesses, as most of the focus and benefits are geared toward large corporations with numerous shareholders. Small businesses are unable to benefit from the corporate-friendly laws to the same degree.
While none of these states levy a state income tax, Florida corporations (including LLCs) publicly list the owners of the business online, whereas ownership in a Nevada or Delaware corporation can be kept private.
Florida does not impose a franchise tax. This results in relatively low annual fees in Florida, as the only corporate fee the state requires is a corporate status fee of $150.
With an LLC in Florida, your company’s profits and losses will pass directly onto your members. LLCs fall into a default classification by the IRS and are therefore taxed much liked a partnership would be. For this reason, LLCs avoid the double taxation that corporations are subject to. Taking advantage of this benefit could result in significant tax savings for your company.
Organization & Flexible Management
Not only are LLCs simple to form in the state of Florida, but they also provide greater flexibility in management style compared to that of a corporation. With an LLC, members are allowed to define and implore the management structure as they see fit. Additionally, they can decide how profits are to be distributed among members, unlike corporations that are beholden to shareholders. Similarly, LLCs have fewer restrictions on ownership. Membership for LLCs can be unlimited and consist of non-citizens and entities.
Here are the basic steps you’ll need to take to start a limited liability company (LLC) in the state of Florida.
- Choose a name for your LLC – When setting up an LLC, you’ll need to choose a name for your business which complies with your state’s rules for LLC names. Your LLC’s name must be recognizably different from the names of other business entities already on file with your state’s Division of Corporations. Names may be checked for availability by searching the Department of State: Division of Corporations’ business name database.
- Appoint a registered agent – Every state requires that an LLC must have an agent for service of process in the state. A registered agent (also sometimes called a statutory agent) may be either an individual resident or business entity that is authorized to do business in the state. The registered agent must have a physical street address in said state.
- File Articles of Organization – An LLC operating agreement is a legal document that outlines the ownership structure and member roles of your new LLC. Although most states do not officially require you to have an Operating Agreement in order to form an LLC, it’s still a good idea to have one. The main sections of an operating agreement include organization, management and voting, capital contributions, distributions, membership changes, and dissolution.
- Prepare an LLC operating agreement – An LLC operating agreement is not required in Florida but is highly advisable. This is an internal document that establishes how your LLC will be run. It sets out the rights and responsibilities of the members and managers, including how the LLC will be managed. It can also help preserve your limited liability by showing that your LLC is truly a separate business entity.
- File annual reports – All Florida LLCs must file an Annual Report yearly to maintain “active” status. The first report is due in the year following formation. The report must be filed online between January 1st and May 1st.
Whether you are just starting an LLC or looking to improve your micro business’ operating agreement, call us at 561-207-2018 for a free consultation. We have serviced a variety of business clients including those in e-commerce, equestrian, retail, hospitality, food and beverage, entertainment, and professional sports.
This article is for informational purposes only and not to be construed as legal or tax advice. Consult your tax professional, attorney, or reach out to us for thorough legal counsel regarding the right business entity for your business.