| To: | File |
| From: | Your Name |
| Date: | 20 th May 2018 |
| Re: | Formation of Business entity |
INTRODUCTION
I have been contacted by four investors who want to invest in the State of Florida. The investors have asked me to research on the laws under Florida State to determine which type of business entity does the law of Florida prefer. Also, they asked me to advise them on the tax issues and determine which business entity is best for them to start.
Delegate your assignment to our experts and they will do the rest.
FACTS
See facts in the separate memo
ISSUES
Which kind of business entity can be created under a state of Florida law?
Which kind of entity I propose to be formed by the investors, currently and in the future under Florida State law?
Basing on the new entity that is selected who will be taxed?
How do you think the new tax law (TCJA) will affect the entity you selected and the owners?
LAW
Under Florida Statutes (FS) section XXXVI Ch.605-623, There are four forms of company entity that can be formed in the State of Florida. However, limited liability company is the business that is most preferred in that state. Most business in Florida State are limited liability company (Online Sunshine, 2018). Florida states have revised its limited liability company laws in order to attract local and foreign investors to invest in the state.
Limited Liability Company
In the state of Florida, limited liability company (LLC) is quite easy to form compared to other business entities, LLC business entity is different from the individuals who own the business (Online Sunshine, 2018). Therefore, LLC offers the investors some personal liability fortification against the business activities of limited liability company. The manager or a member usually run the daily operations of the business. LLC can also appoint corporate individuals who will help in the management of the daily operations of the business (RIA Checkpoint, nd).
Formation
A limited liability company is somewhere in between a partnership and a corporation. The rules that govern the operation of corporates is found in the Florida Statues, whereas the operating rules for partnership are usually found in the partnership agreement. Generally, a limited liability is formed one or two investors who fill the articles of organization with Florida Secretary of State. As part of the establishment, there are other business records which should be generated and reserved as part of the company's certified records (like minutes, an operating agreement and possibly membership certificates) (Online Sunshine, 2018). It will be a big mistake for the members who want to form limited liability company together operate a business without abiding written agreement.
TAXATION
Upon formation
A new Limited Liability Company can be formed and assets are transferred to in a transaction that is tax-free. The losses and profits that arise from the operations of LLC can be taxed in various ways and one way that can be used to taxes to identify the tax status for the company’s entity and reporting the status of the properties to the IRS. For instance, if the LLC has one owner, it can be ignored as a taxable entity for tax purposes and the losses and profit is reported on the individual income tax of the person owning the company (Online Sunshine, 2018). However, the LLC can choose to be taxed as cooperation or C corporation. If the LCC has at least two members the company can choose the option of being taxed as a C corporation, corporation or partnership. Depending on the choice of tax their several forms that can be used to file returns. The flexibility of having several forms to file tax enable the company to elect the tax status of the entity and the company’s protection against the liabilities that the company faces has made LLC a popular option in Florida (26 U.S. Code § 481, nd).
During operations-as to income or loss
Whether or not a limited liability company should file or pay Florida income taxes depends on the tax status that the investors or the company owners have selected for federal income tax purposes. If the LLC tax status is not selected or partnership is not defined then the company has no income responsibility (an LLC taxed as a partnership with corporate kind partners should file a tax return each year). If the LLC chooses to be categorized as a corporation or C corporation then it has the obligation of filing taxes to Florida states.
For its financial activities LLC should store separately its record and books. Depending on the tax category that LLC chose to be categorized, the state of Florida may impose an income tax on the losses and profits that LLC incur when doing business in the State of Florida. An LLC acquires an Employer Identification Number for use with its business' tax returns and bank accounts (Internal Revenue Bulletin, 2007). The remittance and collection of sales and use taxes, in addition to ad valorem (property) taxes, are usually similar to any type of business entity, including an LLC.
The tax form that LLC file
The main tax forms of limited liability company include Form 1040, Form 1065 and Form 1120. It is important for the shareholders to note that the filing of tax return has a deadline and when the tax is not paid on time there will be a penalty that will be laid upon to the defectors. In America, each person, business, and the company is supposed to file a tax return by April 15 (Internal Revenue Manual, nd).
Upon liquidation of the owner’s
A Limited Liability Company may be ended and its affairs wound up. Before deciding to essentially end the operations of business the stakeholders the repercussion of tax income since the company may be undertaking a wrong step to close the company (Online Sunshine, 2018).
Upon liquidation of the entity
Upon liquidation of the LLC that was grouped as partnership a distributer member usually does not acknowledge gain except if the fair market value (FMV) and the cash of marketable securities disseminated surpass the outside basis in his or her LLC interest (It is important to note that this column discourses the whole liquidation of an LLC as opposed to liquidation payments made to a member who was retiring or a deceased member's heir in interest.) Similarly, no loss or gain is acknowledged by the LLC on a liquidation distribution.
New Tax Law (Tcja)
The foundation of the tax cuts and jobs act (TCJA) is a brand-new rate for regular C corporations. The C corporation has entirely separate taxpaying entities compared to that of the investors or owners. Under the TCJA, the entire C corporations are subjected to one flat tax rate which is 21 percent. The new tax rate replaces the tax rate that ranged from 15% to 35% that the C corporation used to pay before the law was amended. The provision that is most beneficial to the owners is the fact that the company would be able to pay tax at a flat rate. The provisions that are most unfavorable to the entity and the owners is that the interest rate is very high and it may make investors shay away from investing in the country (Online Sunshine, 2018).
CONCLUSION
Based on the information provided in this paper I can recommend to the investors to form a Limited Liability company. Limited Liability Company is the best option since it accords the investors the liberty to choose the taxing method their want. Moreover, this option gives the investors security of their properties since the company’s properties are different from the owner's property.
References
26 U.S. Code § 481 - Adjustments required by changes in method of accounting | LII / Legal
Information Institute. (n.d.). Retrieved from https://www.law.cornell.edu/uscode/text/26/481
Internal Revenue Bulletin - November 26, 2007 - Rev. Proc. 2007-67. (n.d.). Retrieved from http://www.irs.gov/irb/2007-48_IRB/ar10.html
Internal Revenue Manual - 4.11.6 Changes in Accounting Methods. (n.d.). Retrieved from http://www.irs.gov/irm/part4/irm_04-011-006.html
Online Sunshine. (2018). The 2017 Florida Statutes.
http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0600-0699/0605/Sections/0605.0112.html
RIA Checkpoint. § 481(a), Citing the Internal Revenue Code
