Do you have a half-formed business entity? 

Far too many small business owners are in this position and here are the reasons why:

#1.  They set it up themselves.  Perhaps they were told by a friend or some other business owner: “It’s simple. All you do is go on Sunbiz.org and fill out their form.  Then you go to the IRS website and fill out their form to get your tax number.”

This is a huge urban myth that puts small business owners in a precarious position if that’s all they do.

Setting up a corporation in Florida takes between 7 to 10 steps depending on the individual circumstances.  Filing the Articles on Sunbiz.org and obtaining an EIN on the IRS website are only 2 of those steps.

Setting up an LLC in Florida takes between 5-10 steps, but there’s an important analysis/planning stage for LLC’s that comes before the first document is ever filed.  This is because LLC’s are complex creatures.  They are not “plug-and-play” like corporations.

Filing on Sunbiz.org and on the IRS website are the 2 well-known steps to setting up a new business, but if that’s all that gets done, the new business isn’t fully formed.

#2. Their accountant sets it up for them.  You’d think that this would be a safe way to go.  An accountant is a professional, after all, and presumably knows what they’re doing.  This is true when it comes to taxes.  But corporations and LLC’s are created in the law, not in tax.

Accountants don’t usually know the legal requirements for forming a corporation in Florida or for forming an LLC in Florida.  Most only know the IRS requirements and the tax documents to file.  Which means they form a business entity by doing only 2 or 3 of the steps that need to be done.

In all fairness to them, they are restricted from doing some of those steps by rules that govern CPA’s and the rules that prohibit the unauthorized practice of law by non-attorneys.  This means they are not allowed to prepare the legal documents that are needed to form a corporation or LLC.

In addition, accountants just look at it from a tax perspective and not a legal perspective.  You have to analyze both when you select a type of entity.  Many accountants see an LLC as the best choice because it has many tax options. However, an LLC is often not the best option for small businesses because of the legal pitfalls.  Not knowing these pitfalls, accountants suggest an LLC more than they should.

Do you suspect that your corporation or LLC wasn’t set up correctly?

Many times, small business owners don’t realize their business isn’t fully formed until one of these events:

#1 – You apply for a loan and the bank asks for all the formation documents and you realize you don’t have them.

#2 – You apply for a government designation as a small business and they ask for all your formation documents, which you don’t have.

#3 – You have a conflict with a business partner and your lawyer asks for your formation documents, without which the company could be in jeopardy.

#4 – You get sued and your lawyer asks for your formation documents, without which you may be threatened with personal liability.

These are the most common ways small business owners discover that their business was not fully formed.  But these are not the only situations in which it matters.  It’s always important to have a fully formed company, so it’s not advisable to wait until one of these four things happen before you do something about it.

What do you need to do if you discover your company is not fully formed?

Once a small business owner realizes that they have a half-formed business, most of them want to fix the situation right away.  But how?

There are two categories of formation documents: those that get filed with the government and those that don’t.  The documents that get filed with the government include ones we’ve already mentioned: Articles that get filed with the state of Florida, IRS Form SS4 to get an EIN, and if your business will be taxed as an S corporation, IRS Form 2553.  That’s all that gets “filed” anywhere.

For the documents that don’t get filed with the government, they often get overlooked.   Some of these documents are required by statute while some are advisable but not required. It depends on the type of entity you have, the number of owners, and your particular circumstances.

We’ve seen situations where business owners have found samples of documents online and have used them as their own.  This has many obvious pitfalls.  Different states have different requirements, so some documents may not fit with Florida laws.  Documents for corporations are different than documents for LLC’s, so it won’t count if you get the wrong kind.  Copying someone else’s documents means you have to live by someone else’s rules that are set out in those documents, and that may not be good for you or your business.  And finally, you may find a poorly written sample that doesn’t meet any of the requirements that it should, and you would never know until it’s too late.

The best course of action is to discuss your needs with a Florida small business attorney. They are trained to know what documents you will need for your particular business and circumstances. They know the requirements for forming a corporation in Florida and the requirements for forming an LLC in Florida.

At The Legal Department, we routinely conduct audits of corporations and LLC’s to determine what is already in place and what is missing. Then we fill in the gaps.  When we’re finished, the company is fully set up with all the documents it needs to function as it should.  It doesn’t have to be a big project, but it needs to be done and done right for the business entity to provide protection and peace of mind for its owners.

Setting up a corporation in Florida or setting up an LLC in Florida means following the technical requirements in the law.  Be sure to find a professional advisor who knows these requirements to help you.