Florida Limited Liability Companies
Provided as an educational service by John Raymond Dunham, III, Esq..
The 1998 Legislature made changes to the Florida tax treatment of Limited Liability Companies (“LLCs”). Effective July 1, 1998, and applicable to tax years ending on or after that date, LLCs qualified to do business in Florida will be treated for state purposes in the same manner as they are treated for federal purposes. This means that if the LLC is not taxed at the entity level for federal purposes, i.e., tax as a partnership or sole proprietorship, it will not be subject to Florida’s corporate income tax. Additionally, Florida now recognizes single-member LLCs.
The Florida Department of Revenue (“DOR”) is expected to take the position that the single-member LLCs will be treated for Florida corporate income tax purposes in the same manner as they are treated for federal purposes. As stated in a draft DOR tax information bulletin, “single-member LLCs which have elected to be disregarded for separate filing requirements under the federal ‘check the box’ or similar provisions will be allowed the same treatment for Florida corporate income tax purposes.” A single-member LLC which is disregarded for separate filing requirements would likely report its income on Schedule C (Profit or Loss From Business), Schedule D (Capital Gains and Losses) or Schedule E (Supplemental Income and Loss) of the individual/member’s Form 1040. The same tax advantages which partnerships have over S and C corporations apply to the single-member LLCs. However, the single-member LLC has none of the allocation complexities inherent in partnership taxation.
Most single-owner businesses and professional practices are operated as sole proprietorships, S corporations or C corporations. The sole proprietorship is a complete pass-through for federal and Florida corporate income tax purposes. The S Corporation is a less than perfect pass-through entity for federal income purposes. However, many one-owner businesses and professional practices have operated as S corporations because of limited liability protections afforded by the entity and thereby, sacrifice the tax benefits available in operating as a sole proprietorship. With the availability of single-member LLCs which avoids both federal and state income tax and which also provides the liability protections of a corporation, the LLC will most likely become the entity of choice for many one-owner businesses and professional practices.
In addition to the use of the single-member LLC by individuals operating small businesses and professional practices, the entity is also viable in the corporate context. Some of the benefits corporate owners of single-member LLCs include: 1) transactions between corporate owner and LLC (vs. corporate parent and subsidiary) may be disregarded for federal tax purposes; 2) an LLC is ignored for purposes of consolidated filing rules; 3) transfers of assets to a single-member LLC by a corporate acquirer of assets acquired in a corporate reorganization, is disregarded for federal tax purposes and avoids continuity of interest issues; and 4) facilitation of tax-free exchanges of property in entity solution. The ability to disregard a single-member LLC for tax purposes indicates that nonrecognition treatment may be available where the interest in the single-member LLC holding real estate is exchanged either for other like-kind real estate or an interest in another single-member LLC holding like-kind real estate.
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This publication is designed to provide accurate and authoritative information in regard to the subject matter covered and report on issues and developments in the law. It is not intended as legal advice, and should not be relied upon without consulting an attorney.