by: Glenn M. Cooper, Esq.

While this article will focus primarily on legal aspects of structuring a business in Florida, it is first important to discuss some practical concerns.

First and foremost, it is essential to have a comprehensive business plan drawn up to outline the goals and objectives for the Florida business and how those goals and objectives will be attained. This includes a clear budget and financial projections. The business plan is integral to your successful dealings with business contacts in Florida including banks, lenders, investors, consultants, accountants and attorneys.

For the French businessperson or company interested in structuring a business entity in Florida, there are various public and private agencies available to provide valuable information and contacts. These organizations include UBIRANCE (www.ubifrance.fr) which assists French companies in investing and developing globally, the French Consulate in Miami (www.consulfrance-miami.org), the French American Chamber of Commerce (FACC) of Miami/Fort Lauderdale (www.faccmiami.com). UBIFRANCE and the FACC can provide valuable insight into the Florida business environment with knowledge and experience based on excellent research, previous experience of French companies in Florida and the excellent network of contacts that the PEE and FACC possess. Enterprise Florida (www.eflorida.com) is the official agency of the State of Florida for promoting business, trade and investment into Florida. The Beacon Council (www.beaconcouncil.com) is the official economic development agency for Miami-Dade County, while the Broward Alliance (www.browardalliance.org) and the Business Development Board of Palm Beach (www.bdb.org) are the official economic development agencies for Broward and Palm Beach Counties respectively.

All of these organizations can provide excellent insight, information, contacts, incentives and services to French businesspersons or companies interested in structuring and establishing a business in Florida. It is certainly worthwhile to take advantage of these agencies, most of which do not charge for their services. These agencies will be discussed in further detail in the workshop, Governmental Incentives and Services Available for International Commerce and Investments.

Representative & Branch Offices

From both the legal and tax perspective, a Florida representative or branch office of a French company would not be considered an independent entity in Florida unless a separate legal entity such as a Florida corporation or limited liability company is properly established. Rather, the representative or branch office would be treated as part of the same French company that has launched the Florida branch. To form a branch office of a foreign corporation in Florida, the foreign corporation must file an application to transact business in Florida. The costs and time involved to form a branch may be less than the costs and time involved in forming a Florida corporation or limited liability company. However, there can be serious legal and tax consequences to the French company based on the Florida Representative or Branch Office. That is because all activity of the Florida Representative or Branch Office could be directly attributed to the French company. Thus, the French company could be directly taxed for its activities through the Florida Representative or Branch Office. Furthermore, the French company could be directly liable for all activities associated with the Florida Representative or Branch Office. The potentially serious adverse consequences are a major impetus for choosing to properly structure an independent legal entity in Florida such as a corporation or limited liability company.

Common Forms of Business Organizations in Florida

Sole Proprietorship

The sole proprietorship is the simplest form of business organization. A sole proprietorship will have a single owner (sole proprietor) who will maintain exclusive control over and responsibility for the business. Both the assets and liabilities of the sole proprietorship and the assets and liabilities of the sole proprietor are one in the same from a legal perspective. While the sole proprietorship is relatively easy to initiate and manage (with little government reporting involved) it is the least sophisticated form of business structure and is normally not well suited to foreign investment. Only the sole proprietor may act on behalf of the business and the sole proprietor is subject to unlimited personal liability for all obligations of the business. Thus, the sole proprietor can lose all of his or her personal assets in the event of a business failure of the sole proprietorship. Equity capital in the sole proprietorship is limited to the resources of the sole proprietor thus not permitting outside investment. The only financing options available are the sole proprietor’s personal assets and debt financing by sole proprietor. As a sole proprietorship is not considered a separate entity for tax purposes, income, gain, loss, deductions and credits of a sole proprietorship are attributable directly to the sole proprietor for tax purposes.

Partnership

A partnership (or general partnership) is an association of two or more persons to carry on as co-owners. Partnership property is owned by the partnership as an entity, not by the partners as co-owners. A partner generally has no interest that can be transferred, either voluntarily or involuntarily, in specific partnership property. The only transferable interest a partner has in the partnership is that partner’s share of the profits and losses, and the partner’s right to receive distributions. Each partner has equal rights in managing and conducting partnership business. A very important component of a partnership is the partnership agreement, whereby the relations among the partners and between the partners vis-à-vis the partnership are governed (though a partnership may be based on an oral agreement). Generally, each partner is jointly and severally liable for all partnership obligations. This means that each partner can be liable for obligations or debts of the partnership well beyond that partner’s investment in the partnership. An exception to this joint and several liability does exist for a person admitted as a partner into an existing partnership. That person would not be personally liable for any partnership obligation that was incurred before that person was admitted as a partner. While the partnership offers greater financing options than the sole proprietorship, including personal assets of partners, debt financing, sale of right to future profits, and bringing in new partners, the partnership does have disadvantages including joint and several liability that each partner must take on for the partnership and the potential for dissolution of a partnership upon the death, withdrawal or dissociation of a partner, as well as the notion that partnership interests are not easily transferable, among other disadvantages. A Florida partnership is not subject to federal income tax. Rather, each partner must report his or her distributive share of partnership gain, loss, deductions, and credits. Furthermore, each partner is liable for any income tax due on his or her share.

Limited Partnership (LP)

While the sole proprietorship and partnership are not required to make an official filing with the state of Florida in order to begin operation, a certificate of limited partnership must be filed with the Florida Department of State in order to commence a limited partnership. Unlike the general partnership which is limited to general partners only, a limited partnership is made up of one or more general partners and one or more limited partners. Management of the limited partnership is centralized in the general partner(s). While the general partner is subject to unlimited liability for the debts and obligations of the limited partnership, the limited partner is only liable up to the amount of his or her investment in the LP. However should a limited partner take part in the control or management of the LP, that limited partner can be jointly and severally liable for obligations and debts of the LP similar to a general partner. Thus it is normally the general partners of a LP that are responsible for managing the LP business. While a general partnership is generally dissolved upon the death or withdrawal of any partner, a LP does not automatically dissolve on the death or withdrawal of a limited partner or upon the assignment of the limited partner’s interest in the LP. On the other hand if a general partner dies or withdraws from a LP, the LP automatically dissolves unless there remains at least one other general partner and the LP’s governing documents (i.e. limited partnership agreement) permit the LP to continue. Limited partnerships, like general partnerships, are not subject to federal income tax. Rather, each partner must report his or her distributive share of partnership gain, loss, deductions, and credits. Furthermore, each partner is liable for any income tax due on his or her share.

An extension of the LP is the Limited Liability Partnership (LLP), which differs from the LP in that, a partner of an LLP is not held liable for debts or obligations of the LLP arising from errors, omissions, negligence, malpractice, or wrongful acts committed by another partner or by an employee, agent, or representative of the LLP. Partners of an LLP are liable for debts and obligations arising out of their own negligence or misconduct or the negligence or misconduct of employees under their direct supervision. Both general and limited partnerships may register as limited liability partnerships by filing a statement of registration with the Florida Department of State.

Corporation

A corporation is legal entity that exists separate and apart from its owners or shareholders. A corporation, unlike a sole proprietorship or partnership, can continue in existence indefinitely despite the death or withdrawal of a shareholder. A Florida corporation is formed by filing articles of incorporation with the Department of State of Florida and paying the filing fee. One of the most notable differences between the corporation and the partnership is that partners who manage a partnership (whether a general or limited) risk becoming jointly and severally liable for obligations and debts of the partnership whereas the corporate form generally provides limited liability across the spectrum from managers to passive investors of the corporation. Shareholders of a corporation generally are not liable for claims against the corporation beyond the amount of the shareholder’s individual investment. However, practically speaking a small or newly formed corporation may be required to have the shareholder(s) individually co-sign credit instruments thereby making the co-signing shareholder(s) personally liable with regards to that corporate transaction. Additionally, limited liability may not apply to a corporation that does not follow and maintain corporate formalities including holding regular shareholder and director meetings, taking minutes of said meetings and filing an annual report with the Florida Department of State. Such failure to maintain corporate formalities could result in an ultra vires or piercing of the corporate veil attack whereby a third-party creditor can directly pursue directors, officers, or shareholders of the corporation.

Subscriptions for stock in a Florida corporation must be in writing. Stock of a Florida corporation may be issued in exchange for any tangible or intangible property and past or future services to the corporation. While a partnership interest is not freely transferable, shareholders of a corporation generally may freely transfer their interest (stock) in a corporation unless limited by the articles, bylaws, or a shareholder agreement.

In addition to the articles of incorporation, corporate bylaws must be adopted by the Florida corporation. The bylaws are the rules and regulations that a corporation adopts to govern its affairs. A corporation is required to have annual meetings (unless formally waived by shareholders) and may also have special meetings from time to time. Resolutions from corporate meetings are memorialized in minutes of the meeting which (once properly recorded and authenticated by the appropriate officer or representative of the corporation) become binding on the directors, officers or shareholders of the corporation. A Florida corporation is generally managed by a board of directors (except for small private corporations which may be managed directly by shareholders and officers upon written agreement of the shareholders). The shareholders of the Florida corporation elect the directors. Officers of a Florida corporation are generally appointed by the board of directors and appointed officers serve until removed by the board of directors (with or without cause).

By default, the Internal Revenue Service (IRS) treats corporations as subchapter c-corporations which means the corporations are taxed at the corporate level and the shareholders are taxed on distributions (this is known as “double-taxation”) This double taxations can be avoided by the corporation making an subchapter s-corporation election whereby the tax is passed-through to the shareholders (and thus there is not federal tax at the corporate level). However, the subchapter s-corporation election is generally not available to corporations with non-resident alien (foreign) shareholders.

Generally each share of a corporation is entitled to one vote at any meeting unless otherwise provided in the articles of incorporation or by written agreement of the shareholders. This is especially important in cases of deadlock where a majority vote cannot be achieved. In such cases where deadlock can be foreseen, a shareholder agreement is advisable at the outset. The articles of incorporation may provide for more or less than one vote per share for any one of more classes of shares (with different voting rights). In place of annual and special meetings, a Florida corporation may allow for shareholder action via written consent signed and dated by the shareholder voting his or her shares.

Limited Liability Company (LLC)

A limited liability company (LLC) is a hybrid between a partnership and a corporation. The LLC (like the corporation) protects its shareholders (“members”) from liability to third parties for the debts, obligations or liabilities of the company. Similar to a partnership, the LLC is managed directly by it’s members, unless the members agree to provide for a centralized management. In other words, LLCs are not required to be managed by a board of directors or equivalent body, although a centralized management is an organizational option. Therefore, the management and ownership structure is simpler than a corporation. However, unlike limited partners in a limited partnership, members of an LLC do not lose their limited liability by becoming actively involved in the company’s management. The LLC equivalent to corporate the corporate bylaws and shareholder agreement are the regulations and operating agreement.

LLCs may be classified as either partnerships, corporations or disregarded entities (in the case of single member LLCs) for federal income tax purposes. Under the entity classification regulations, a domestic LLC is automatically qualified as a partnership for tax purposes (unless it is a single member LLC in which case it is a disregarded entity), but the LLC may elect to be classified as a corporation. The taxation of an LLC versus a corporation is an interesting factor for a foreign shareholder. Whereas, a foreign-owned corporation is subject to double taxation, since the corporation is taxed at the corporate level and the shareholders are then taxed when they received distributions from the corporation, the LLC may offer pass through tax treatment to foreign members, as long as the LLC has more than one member. This means that there will be no federal taxation at the LLC level, but rather, the taxes will be passed through to the individual member. Note that a single-member LLC is treated as a disregarded entity and therefore, the Internal Revenue Service will view the LLC and the member as one in the same for tax purposes, which can lead to adverse tax consequences to the member.

While the LLC may offer interesting options and flexibility for the foreign-business person or investor, there are several disadvantages to the LLC. One is that the LLC is a relatively new entity and therefore, there is not a great deal of legal precedent for the treatment of an LLC although the popularity of the LLC has been increasing of late. On the other hand, the corporation has a great deal of legal precedent to guide the corporation. Furthermore, an LLC may not be favorable for companies that plan to take in outside investors, companies that plan to issue private or public offerings, and companies that plan mergers or acquisitions of the company in the future, as third parties may be more reluctant to deal with an LLC than with a corporation. Finally, foreign legal and tax counsel may not be as familiar with the LLC and therefore, the costs and complexity could be increased through the utilization of an LLC. On the other hand, competent international legal and tax counsel can guide the foreign businessperson or investor through the legal and tax formalities of the LLC.

Local Law Advantages in Establishing a Florida Business Entity

There is no minimum capitalization that a Florida corporation must have, unlike a French S.A.

There is shareholder anonymity in a Florida corporation, which means that shareholders are not required to, and normally do not, identify themselves in public records.

The shareholders need not be present in the United States or Florida in order to establish or maintain a corporation. In fact, the officers and directors of the corporation need not be present in Florida to establish a Florida corporation. Rather, the Florida corporation can be established by an incorporator who can be an attorney for that corporation in Florida.

Florida corporations offer limited liability to their shareholders, which means that shareholder liability is generally limited to the amount of investment made by the shareholder.

Government processing of corporate applications and filing is quick and efficient.

Establishment and maintenance of a Florida corporation does not require a civil law notary. Rather, the Florida attorney can handle the incorporation and ongoing legal obligations of the corporation that would require a civil law notary in France.

Florida corporations allow for easy transferability of shares.

Florida corporations and limited liability companies allow for interesting tax treatment depending on the ownership structure and tax planning.

Availability and assistance of public/private organizations mentioned on page one.

If the foreign business or investor plans to send executives, managers or others to the Florida company, it may be in the interest of the business to establish either a corporation or a limited liability company, as such entities are regarded as separate entities for immigration legal purposes and therefore, are more easily recognized by the United States Immigration & Naturalization Service (INS).

It is vital for the foreign-business person or investor to consult with competent legal and tax counsel on the legal and tax issues related to the establishment of a U.S. business entity.