Effective January 1, 2015, all LLCs operating in Florida are governed under new rules detailed in the Florida Revised Limited Liability Act (“the new statute”). Ignoring these changes will not only put your LLC at risk of violating the law but will also limit your ability to effectively manage your Florida LLC.
What Are Some of the Significant Changes?
Member-managed versus manager-managed
The new statute completely abolishes the managing member concept. LLCs are now either manager-managed or are membermanaged collectively by all members of the LLC. For multimember or multi-manager LLCs, it is important to identify the LLC’s “authorized representative” with authority to bind an LLC. You can now file a statement of authority, which gives that notice; or alternatively, file a statement of denial, which identifies who cannot bind an LLC.
Additional Non-Waivable Provisions in Operating Agreements
The new statute highlights 17 nonwaivable provisions in operating agreements (previously six). Some of the more significant revisions include:
No “free pass” (indemnification) for bad faith, willful or intentional misconduct or knowing violation of law.
1. Preventing an LLC from suing or being sued in its own name.
2. Unreasonably restricting a member from suing the LLC.
3. Changing Florida law as the governing law.
LLC Tax Implications
If the LLC taxed as a partnership is engaged in a trade or business activity (as opposed to an investment activity such as interest, dividends or rentals), the income is generally subject to selfemployment taxes as high as 15.3 percent, on top of income taxes already being paid.
Under proposed tax regulations, however, an LLC member can be classified as a limited partner (not subject to self-employment tax) as long as the member does not meet any of the following conditions:
1. Has personal liability for debts or claims against the partnership by reason of being a partner;
2. Has authority to contract on behalf of the partnership; or
3. Participates in the partnership’s trade or business for more than 500 hours during the year.
Under the new changes, a member who meets the tests for hours and liabilities can still be subject to self-employment taxes if the proper statement of authority (or denial) has not been filed.
LLC Membership – Adding LLC members
Traditionally, LLCs are formed when members contribute assets. Under the new statute, there can also be members who do not contribute funds or assets to their LLCs.
How can new members be added to an existing LLC?
1. Follow the terms of the operating agreement;
2. Mergers, interest exchanges or conversion of LLCs from other types of business entities;
3. Consent of the current members; or
4. A complicated process involving inactive LLCs.
IMPORTANT: If an LLC wants to enforce promises to make capital contributions, put those promises in writing.
Bringing on new members creates a variety of tax consequences. If a member contributes an asset to join the LLC and that asset’s value is greater than its tax basis, then specific rules must be applied to determine how income should be allocated on the sale or depreciation of that asset. Alternatively, if a member joins the LLC with no capital contributions, his or her tax consequences can be treated one of two ways: (1.) A new member is subject to tax on the receipt of his or her interest if the interest would entitle him or her to receive distributions on liquidation from day one. (2.) Or, a new member can receive a profit’s interest (tax free), which entitles him or her to future profits but no immediate distributions on current value.
LLC Membership – Subtracting LLC members
When members disassociate, they do not necessary have a buy-out right from the LLC. There are also tax implications on the disposition of an LLC interest. Abandonment of an LLC interest can create an ordinary or capital loss, depending on whether the partnership is liable for any debts. Membership interests can also be sold to a third party (or the other partners) or redeemed by the LLC (with varying tax consequences). Sales of membership interests can also create opportunities for additional depreciation deductions for a buyer.
Compensation and Distributions
Without an agreement, members are not necessarily entitled to compensation. On a related vein, be careful with distributions. LLCs must be solvent to do so. Usually, just money can be distributed. Once entitled to receive a distribution, the entitled party becomes a creditor. Distributions can even go to disassociated members. If distributions are made improperly, LLC members and managers can be personally liable for improper distributions if they consent to them, subject to a statutory “safe harbor.”
What Should I Do Now?
Well-considered operating agreements are extremely important. They should address issues like membership, management, distributions, income allocations, adding members,
disassociation, deadlock resolutions and much more. Have your lawyer and CPA review your operating agreement or help you create one if you currently do not have one.