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Annual Minutes: The Importance of Corporate Formalities

While the failure to file the required Annual Report with the Division of Corporations will lead to administrative dissolution of the corporation, failure to keep at least Annual Minutes is a little less cut and dried. Annual Minutes are not required to be filed with the Division of Corporations. There is no penalty for failure to complete and maintain Annual Minutes.

Yet there is every reason to document corporate action in the form of minutes which should be maintained by the corporation. Creditors will always seek to attach individual liability for debts to shareholders.

If corporate formalities, such as completing your Organizational Minutes and keeping regular Minutes of Meetings, have not been followed then you have created a red flag. Though Florida Corporate law requires that there be some fraud in forming the corporation or actions by individual shareholders to defraud creditors through the corporation, if you do not follow corporate formalities, chances are allegations of fraud in running the corporation as your personal piggy bank won’t be far behind.

In addition, failure to properly document loans made to the corporation could result in the IRS re-characterizing loans as capital contributions greatly changing your tax liability for capital gains should you seek to later sell your company.

The great thing about Annual Minutes is you can address all actions taken for which you did not have separate meetings. Here is a checklist of certain items, though not exhaustive, that should make it to your Corporate Minute Book:

1. Election of Directors and appointment of officers
2. Review of corporate financial statements
3. Changes in salaries of officers
4. Changes in compensation of managerial level corporate employees
5. Amendment of Articles of Incorporation
6. Adoption of employee benefit plans
7. Purchase, sale, or lease of real property or equipment
8. Approval of corporate loans taken or made
9. Authorizing additional stock or approving the issuance of authorized stock
10. Indemnification of Directors, officers, employees or agents

Florida Limited Liability Companies: How Limited is Your Liability?

A limited liability company (“LLC”) is a form of business entity available under the Florida Limited Liability Company Act. An LLC is controlled either by a Manager or by a Managing Member pursuant to the LLC “operating agreement.” Members hold their investment in an LLC in the form of membership interests.

Similar to S-Corporations and general partnerships, an LLC is a “flow through” entity such that only its members are liable for income tax. The business entity itself, unlike with C-Corporations, is not liable for income tax on its profits. Yet though similar in structure to a general partnership, an LLC enjoys limited liability for its “members” similar to corporate shareholders.

Subject to restrictions in the operating agreement of an LLC, a membership interest, being intangible property, is assignable and transferable. As such, though an individual member may not be liable for company debts, a member’s interest may be taken to satisfy a judgment against him – that is unless there is a statute that says otherwise. Florida has such a statute that until recently was less than clear.

In Florida, a judgment creditor was faced with Section 608.433, Florida Statutes, which allowed a judgment creditor to obtain a “charging order” against a judgment debtor’s LLC membership interest. A charging order only allows a creditor to receive LLC distributions normally payable to the member against whom there is the judgment. Of course, the LLC could always decide against distributions leaving the creditor empty handed.

What Section 608.433, Florida Statutes, did not expressly provide was the charging order as the ONLY remedy for judgment creditors.

The Supreme Court – Olmstead

The Florida Supreme Court’s decision in Olmstead v. Federal Trade Commission, 44 So. 3d 76 (Fla. 2010), interpreted the statute and Florida law to mean that in a Florida single-member LLC, a charging order is NOT the creditor’s exclusive remedy. The court ordered the judgment debtor to surrender all of his right, title, and interest in his LLC to the creditor to satisfy the judgment.

The widespread uncertainty created by Olmstead immediately got the attention of concerned business attorneys and their clients. Did the reasoning in Olmstead only apply to single-member LLCs or could it, and in any case would it, be used against multiple-member LLCs? The ruling appeared to most as contrary to Section 608.433 and the Florida Legislature’s intent.

Legislative Amendment – The Olmstead Patch

The legislature took action quickly and amended Section 608.433, Florida Statutes, which amendment became effective May 31, 2011, and is known as the Olmstead Patch.

The amendment expressly provides that a charging order is the exclusive remedy available to creditors seeking to enforce judgments using the interests of LLC members. This exclusive remedy applies in both single-member and multiple-member LLC contexts. However, and only in the case of single-member LLCs, if a creditor shows that charging order distributions will not satisfy the judgment in a reasonable time, a court may permit the foreclosure of the membership interest.

The amended statute does NOT address treating a multiple-member LLC as a single-member LLC where additional members are added with only nominal interests. This will no doubt be an area of future commercial litigation.

Benefits of Doing Business as a Limited Liability Company

LLCs are useful because they are flexible as to how membership interests can be held (by other business entities or trusts) without losing their flow through income tax treatment as would otherwise occur in the case of an S-Corporation.

LLCs are also useful for asset protection and with the Olmstead Patch, even more so. Compare the treatment of a membership interest in an LLC with the fact that shareholders’ stock certificates in corporations can be taken by a judgment creditor.

Where a charging order is obtained, the creditor must wait for profits to be distributed or distributions to be made upon closing a business run as an LLC. The LLC can meanwhile loan money to the debtor-member or pay a salary to him which, if head of household, is further given exempt treatment.

Meanwhile, a 1997 Revenue Ruling may create a tax liability for the creditor where distributions are not made, the creditor has a charging order, and profits are allocated to the debtor-member. The income tax liability on that member’s allocated income may need to be paid by the judgment creditor.

The Florida Department of State on its website reports there were almost 550,000 LLCs and 743,000 corporations in Florida by the end of 2010. LLCs are being increasingly utilized with over 138,000 Florida LLCs formed in 2010 to the approximate 104,000 Florida corporations formed.

As such, the LLC has become an increasingly important business structure in Florida.

Seven Reasons to Run Your Florida Business Out Of a Corporation

Florida is one of the leading states when it comes to new business formation according to the State of Florida, Division of Corporations. There are a lot of variables and advantages to consider in incorporating your business. But Florida Corporations enjoy a lot of advantages compared to other forms of doing business.

Corporations in the State of Florida not only enjoy having no state corporate income tax, but here are an additional 7 reasons why running your Florida business out of a corporation is the wise choice:

1. Limited Liability

If this isn’t reason enough, then what is? With limited liability, shareholders or company principals are protected from personal liability in almost all cases. For instance, if a corporation in Florida is indebted, creditors won’t be able to collect from shareholders. If you sign a personal guaranty, then you are liable for that agreement only.

2. Tax Advantage

You’ll be able to deduct expenses from your reportable income for Federal income tax purposes. Deductions will include salaries and retirement and health plan contributions. There also is no self employment tax which you may have to pay as a sole proprietor or sole member Limited Liability Company. And again, there is no Florida state corporate income tax.

3. Perpetual Existence

Corporations in Florida enjoy a continuous existence regardless of any changes in ownership.

4. Professional Appearance

Running your Florida business as a corporation gives you a more professional appearance, which is important in your marketing efforts, and helps when trying to obtain bank loans.

5. Employee Benefits

You’re better structured to accommodate employees with attractive benefits that will greatly assist your business in hiring the best candidates.

6. Lower Fees

In Florida, corporations enjoy low filing fees by as much as 25% compared to other states.

7. Undertake All Lawful Activities

The State of Florida allows corporations to conduct any type of business activities that are lawful. In view of this, all legitimate businesses should incorporate.

These are just seven of the reasons why operating your Florida business as a corporation is the ideal way to go. The State of Florida, Division of Corporations, provides a pro-business atmosphere to attract and help investors and entrepreneurs.

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The information contained in this website is provided for informational purposes only, and should not be construed as legal advice on any subject matter
and you should consult with an attorney before using any information from or any Legal Forms provided on this website. Read the entire Disclaimer.

Nickolas C. Ekonomides is licensed in Florida with main office Clearwater.