Business Structures in Florida


Corporations

A corporation is a separate and distinct legal entity. This means that a corporation can open a bank account, own property and do business all under its own name. The primary advantage of a corporation is that its owners, known as stockholders or shareholders, are not personally liable in most instances for the debts and liabilities of the corporation. For example, if a corporation is sued and forced into bankruptcy, the owners will not be required to pay the debt with their own money. If the assets of the corporation are not enough to cover the debts, the creditors cannot go after the stockholders, directors or officers of the corporation to recover any shortfall.

A corporation is managed by a board of directors, which is responsible for making major business decisions and overseeing the general affairs of the corporation. Like representatives in Congress, the stockholders of the corporation elect directors. The directors appoint officers, who run the day-to-day operations of the corporation.

Licensing Requirement

All corporations, LLC’s or partnerships that operate in construction in the State of Florida must be qualified prior to advertising or engaging in the practice of construction. Corporations cannot operate under a fictitious name only. Neither can a license issued as an individual be considered adequate qualification. The corporation must be qualified through the State and the license must read, John Smith, Roofing Solutions, LLC. Then an additional Qualified business entity license (QB) must accompany the license of the contractor.

Corporation Overview

The "C-Corporation" designation merely refers to a standard, general-for-profit, state-formed corporation. To be formed, an Incorporator must file Articles of Incorporation and pay the requisite state fees and prepaid taxes with the appropriate state agency (usually, the Secretary of State -- Corporations Division). Separate Legal and Tax Life.

A corporation, which is properly formed and operated as a corporation, assumes a separate legal and tax life distinct from its shareholders. A corporation pays taxes at its own corporate income tax rate and files its own corporate tax forms each year (IRS Form 1120).

Number of Persons Required

In Florida, one or more persons may form and operate a corporation or LLC.

Constitutional Protections for Corporations

Although a corporation is not a "citizen" under the privileges and immunities clause of the Fourteenth Amendment to the U.S. Constitution, a corporation may exercise some of the constitutional protections granted to natural persons.

Right to Due Process and Equal Protection

Corporations enjoy the right to equal protection and due process of law under the Fourteenth and Fifth Amendments to the U.S. Constitution.

Freedom of Speech

Absent some narrowly drawn restrictions serving compelling state interests, corporations have the right to express themselves on matters of public importance whether or not those issues "materially affect" corporate business.

Right to Counsel

While a corporation cannot be imprisoned, a criminal action can result in fines and other penalties that could harm shareholders, officers, and other persons. Thus, a corporate criminal defendant has a Sixth Amendment to a Right to Counsel. But note, because a corporation faces no risk of incarceration, it has no right to appointed counsel if it cannot afford to retain private counsel.

No Privilege Against Self-Incrimination

Corporations have no privilege against self-incrimination (e.g. to prevent disclosure of incriminating corporate records).

S-corporations

Although S-corporations do not pay federal taxes at the corporate level, they still must prepare separate tax returns. S-corporations file their returns on Form 1120S. A traditional corporation, known as a C-corporation, is taxed as a separate entity, leading to double taxation of profit. A S-corporation, on the other hand, is a corporation that elects to be treated as a pass-through entity (such as a sole proprietorship or partnership) for tax purposes. S-corporations are not subject to double taxation. Moreover, the accounting for a S-corporation is generally easier than for a C-corporation. There are, however, certain restrictions placed on S-corporations:

  • The S-corporation must not have more than 75 stockholders. (A married couple is treated as one stockholder).
  • Each stockholder must be an individual who is a citizen or resident of the United States, or an estate or qualifying trust of such person.
  • The corporation must have only one class of stock. (However, voting differences within a class of stock are permissible).
  • The corporation must use the calendar year as its fiscal year unless it can demonstrate to the IRS that another fiscal year satisfies a business purpose.
  • Not more than 25% of the corporation's income can come from passive activities, such as annuities, dividends, rents, royalties, etc.
  • Corporations wishing to become a S-corporation must file Form 2553 with the IRS, and each stockholder of the corporation must sign the form.

Liability

Stockholders are not liable for corporate debts. This is the most important aspect of a corporation. In a sole proprietorship and partnership, the owners are personally responsible for the debts of the business. If the assets of the sole proprietorship or partnership cannot satisfy the debt, creditors can go after each owner's personal bank account, house, etc. to make up the difference. On the other hand, if a corporation runs out of funds, its owners are usually off the hook.

Please note that under certain circumstances, an individual stockholder may be liable for corporate debts. This is sometimes referred to as "piercing the corporate veil." Some of these circumstances include:

  • If a stockholder personally guarantees a debt.
  • If personal funds are intermingled with corporate funds.
  • If a corporation fails to have director and shareholder meetings.
  • If the corporation has minimal capitalization or minimal insurance.
  • If the corporation fails to pay state taxes or otherwise violates state law.
  • If the corporation has been qualified by an individual with a Florida construction license the qualifier maintains some liability in certain situations.
  • If the actions of one of the principle officers has directly caused financial or physical harm.

Piercing The Corporate Veil

Officers, directors and controlling shareholders have a general fiduciary duty of loyalty and care that should govern all their corporate conduct. Unless they breach that duty by gross negligence or acts in bad faith, they usually will have no personal liability to third parties. Third parties have to show personal wrongful conduct on the part of a company official or director to hold them personally responsible, extra-corporate actions that would support application of the legal doctrine known as piercing the corporate veil.

If, the corporate form is used to perpetuate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts may decide not observe the separation of the corporate entity from its stockholders, and it may deem the corporation’s acts to be those of the persons or organizations actually controlling the corporation. For the record, this would be “bad”.

The Alter Ego Doctrine is intended to prevent individuals or other corporations from misusing the corporate laws by the device of a sham corporate entity formed for the purpose of committing fraud or other misdeeds. Alter-ego liability is an extreme remedy, sparingly used or invoked, and always the exception to the rule. However, when the remedy is employed by the court as a last resort to prevent injustice, it can be disastrous for the shareholders of a corporation which expected limited liability.

It is indeed possible to breach the wall of personal liability provided by incorporation, and for your asset safety you should know how such exceptions can occur. If you don't protect your assets, know that your competitors will. Certain acts of directors and officers may be grounds for a company creditor to ask a court to "pierce the corporate veil". For example, if the corporation cannot pay a creditor's proven debt or a court judgment claim, the individuals who own and manage the corporation can be held personally responsible for company obligations, even though they have given no previous personal guarantees.

Piercing the Corporate Veil can happen when:

  1. Corporate debt is knowingly incurred when the company is already insolvent;
  2. Required annual shareholders or board of directors meetings are not held, or other Corporate-Formalities are not observed;
  3. Corporate records, especially minutes of directors meetings, are not properly or adequately maintained;
  4. Shareholders remove unreasonable amounts of funds from the corporation, endangering its financial stability
  5. There is a pattern of consistent non-payment of dividends, or payment of excessive dividends;
  6. There is a general commingling of corporate activity and/or funds and those of the person or persons who control the corporation; and
  7. There is a failure to maintain separate offices, the company has little or no other business and is only a facade for the activities of the dominant shareholder who is in fact, the corporate "alter ego."

In order to maintain personal limited liability, it is essential these described actions be avoided. Courts in recent years have found ever-expanding reasons to hold directors, officials and shareholders personally liable for corporate responsibilities. Among other activities courts have found that may impose personal liability are improper corporate guarantees of loans or contracts benefiting an officer, timing of the sale of a controlling interest in the company for self-benefit, profiting from inside information, transactions with other businesses which may constitute conflicts of interest, unreasonable loans to company officials, and extension of unwarranted credit.