Recently my friend Pepe Mendilueta, an expert in Basque cuisine, asked me to advise him on the best legal form to acquire a restaurant in Miami.
Without delay I set out to explain to Pepe what I have learned on the subject after more than 20 years of practice as a Florida business broker. Pay attention Pepe!
The most used formula for buying and selling businesses in Florida is the transfer of assets. This means that the seller transfers the assets but retains the liabilities. Thus, the buyer begins a “clean slate” stage as the new manager of the business.
To purchase the assets, the buyer will likely choose to create a C Corporation or an LLC. There are few cases in which you choose to buy the shares of the company that owns the business or put the assets under your personal name.
The differences and similarities that I know between both forms of constitution are the following:
With the C Corporation there is double tax. First they charge the company, then you pay personal taxes on the profits. It's like the IRS catches you twice! On the other hand, with the LLC you only pay taxes once, as an individual. That's a big advantage.
Regarding liability, with the C Corporation the shareholders do not respond with their personal assets to debts or lawsuits. With the LLC you are usually not personally liable either, unless you commit gross negligence. So in this sense they are very similar.
Another key difference is that the C Corporation has a more formal structure, with a board of directors and shareholders. The LLC is more flexible because the owners set the rules among themselves in an operating agreement.
Finally, in the C Corporation, investors buy shares of the company and are therefore called “shareholders”, while in the LLC the owners receive shares of the company and are called “partners” or “members”.
In the end, I ended up recommending to Pepe that due to the size of his business, it was practical for him to establish an LLC because this way he would have greater administrative flexibility, he would avoid double taxation and he would not be personally responsible for the company's debts and obligations. In any case, I did not forget to remind him that he should seek advice from a specialist lawyer who would have his back in relation to the delicate tax issue.
I hope with these tips that I have one day earned a good lunch at Pepe's long-awaited restaurant.
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Author: Alfredo González (Alfred@negociosenflorida.com)
Illustration: Bing Images