FLORIDA FORMS OF ORGANIZATION Alan H. Aronson, Esq. Akerman Senterfitt

Transcription

1 Last Updated: January 2010 FLORIDA FORMS OF ORGANIZATION Alan H. Aronson, Esq. Akerman Senterfitt Table of Contents 1. Nonprofit Corporations 2. For-Profit Corporations 3. Limited Liability Companies 4. Low Profit Limited Liability Companies 5. Joint Ventures 6. Partnerships and Limited Partnerships 7. Sole Proprietorships 8. New Forms of Hybrid Organizations The most common legal form of organization utilized by the social sector is the nonprofit corporation although for-profit corporations, limited liability companies (LLCs), joint ventures and various kinds of partnerships, including limited partnerships, are increasingly being used-- typically to accommodate plans to earn revenues or access capital markets. Each of these forms of organization has advantages and disadvantages and sometimes, with the help of experienced counsel, they are used in combination to maximize strengths and minimize weaknesses of a particular form. The following chart provides a high-level overview of various organizational forms that can be used in the social sector. More detailed descriptions of each form follow in the subsequent text. 1

2 Nonprofit 501(c)(3) Corporation For-Profit Corporation Formation Management and Control Liability Tax Factors Capital and Loans File articles or certificate Managed by Members, directors, Generally exempt from Can accept charitable of incorporation directors who officers and employees federal and state taxes donations and grants. (containing specific info appoint officers to are generally not liable if receive 501(c)(3) Eligible for program required by IRS) with run day-to-day for debts and obligations exemption. Liable for related investments state and pay filing fee. operations as of the corporation, tax on unrelated (PRIs) by File application on Form specified in bylaws. including for unlawful business income, and foundations. Can 1023 for tax-exempt Some nonprofit acts of others involved other taxes such as borrow money and status unless below corporations have in the affairs of the property and sales issue debt instruments gross receipts threshold. members (like corporation. They can (unless local and state but cannot raise Recruit directors, draft shareholders) who be held liable for exemptions apply). capital by issuing bylaws and hold elect directors. injuries due to their own Donors can deduct stock. organizational meeting. misconduct but some contributions Take steps to comply states provide limited with license, tax and immunity to such employment law/regs. persons and also to volunteers. File articles or certificate of incorporation with state and pay filing fee. Decide on board of directors, draft bylaws, hold organizational meeting and issue stock. Take steps to comply with license, tax and employment laws/regs. Managed by directors that are elected by shareholders. Directors appoint officers to run dayto-day operations as specified in bylaws. Shareholders are generally not liable for debts and obligations of the corporation, including for unlawful acts of others involved in the business. Unless indemnified by the corporation, directors, officers and employees can be held liable for injuries caused by their own acts or failures to act. A C Corporation is subject to corporate tax on net income. If net income is paid to shareholders as dividends, the individual shareholders are taxed. If a corporation elects to be a S corporation and meets several criteria, it can receive pass through taxation. Can raise capital by issuing stock (equity) and by borrowing money through loans or other debt instruments. Corporation may be able to accept PRIs from foundations in the form of loans or equity. B Corp (a forprofit corporation with a social mission that is licensed to use the trade name B Corporation ) See for-profit corporation See for-profit corporation. The B Corp license requires the corporation to incorporate specific socially beneficial performance standards into its governing documents and operating principles. See for-profit corporation. See for-profit corporation. See for-profit corporation. A B Corp should be in a better position to attract PRIs from foundations in the form of loans or equity. 2

3 LLC L3C (low-profit LLC) Partnership Sole Proprietor Formation File articles of organization or certificate of formation with state and pay filing fee. Negotiate and execute operating agreement. Take steps to comply with license, tax and employment law/regs. Similar to LLC but must be formed for a charitable or educational purpose. Only permitted in certain states (e.g., VT, IL, MI,UT,ME, WY) No filing requirements unless limited partnership (LP) or limited liability partnership (LLP), but partners should sign partnership agreement. Take steps to comply with name, license, tax and employment law/regs. No filing requirements. Has no legal existence apart from owner. Take steps to comply with d/b/a name, license, tax and employment law/regs. Management and Control Liability Tax Factors Capital and Loans Flexible structure Same as a corporation. Can raise capital like a partnership through contributions with management by member/owner. responsibilities Otherwise, same as specified in for-profit corporation. operating agreement (usually management committee or single manager). Usually not taxed as an entity because most LLCs choose pass through treatment whereby the member/owners report profits and losses on personal tax returns. Tax-exempt member/owners treat their share of income as exempt or subject to unrelated business taxable income, depending on the character of the income. See LLC Same as a corporation See LLC. Same as for-profit corporation except L3C enabling legislation is written to comply with PRI regs and is thus intended to attract equity or debt investments by foundations. Partners have equal, full control unless otherwise specified in partnership agreement. Owner has full control. Partners are personally liable for the debts and obligations of the partnership, including for unlawful acts of other partners and employees. Risk can be limited by creating an LP or LLP. Owner is liable for all debts and obligations, including for unlawful acts of employees. Generally not taxed as an entity. Partners report profits and losses on personal tax returns. Not taxed as an entity. Owner reports business profits and losses on personal tax return. Can raise capital through contributions by partners and by borrowing money through loans or other debt instruments. Owner provides funds for capital investment and owner can borrow money through loans or other debt instruments. 3

4 1. Nonprofit Corporations a. Overview The Florida Not For Profit Corporation Act governs the formation, operation and dissolution of nonprofit corporations in the State of Florida. A nonprofit corporation in Florida is managed by its board of directors and operated by its officers and employees. Instead of shareholders, a nonprofit corporation may, but is not required to, have members. Nonprofit corporations, of course, are specifically organized to not earn profits. No part of the income or surplus of a Florida nonprofit corporation may be distributed to its members, directors or officers; however, reasonable compensation may be paid for services rendered. A nonprofit corporation has an existence of its own, independent of the terms of office or employment of members, directors or officers. It can sue or be sued in its own name and can own real estate or other assets in its own name. b. Advantages of Incorporation: pros and cons of nonprofit vs for-profit The principal advantage of incorporation is that it protects the shareholders or members from personal liability for the obligations and liabilities of the corporation, including unlawful actions of officers, directors and staff acting on its behalf. In addition, incorporation establishes continuity; corporations (both nonprofit and for-profit) are subject to a body of statutes that provide very specific guidance as to their formation and operation; and incorporation brings stature to the organization and implies stability. Where profit is not a goal and the enterprise can be funded without the need for access to capital markets, the nonprofit corporation is the preferred vehicle for pursuing social objectives. Although nonprofit corporations are not prohibited from engaging in commercial activities, the directors of a nonprofit are duty-bound to devote primary attention to the promotion of the social mission of the corporation rather than the production of net income. On the other hand, if access to capital markets is needed, a for-profit corporation (or limited liability company, discussed below) is likely to be the preferred option because nonprofit corporations cannot issue capital stock. The directors of a for- profit corporation, however, owe strict duties to the shareholders to maximize profits and value. Therefore, unless the directors and managers can tie the social mission of their for-profit corporation directly to its business purpose, they can be sued for breach of their duties to shareholders and for misuse of corporate assets if they focus too much on the social mission and forego profits. This problem can be avoided if all shareholders agree to pursue a social mission or devote a percentage of revenues to charitable causes, but such 4

5 agreements may be temporary because a change in control or a drop in earnings can lead to amendment or abrogation of shareholder agreements. c. Formation A nonprofit corporation attains its separate legal status through the filing and approval by the Department of State of the State of Florida of its articles of incorporation. This document is in essence a contract between the state and the nonprofit corporation in which the State of Florida grants individual legal status to the corporation in exchange for the corporation s commitment to follow its rules. The Florida Not For Profit Corporation Act requires that the articles of incorporation of a nonprofit corporation must include the name and street address of the initial principal office and, if different, the mailing address, of the corporation; the purpose(s) for which the corporation is being organized; a statement of the manner in which the directors are to be elected or appointed (or the articles may specify that the method of election is contained in the corporation's bylaws); any provisions, not inconsistent with the Florida Not For Profit Corporation Act, which limit in any manner the corporate powers or the corporation authorized under the Act; the street address of the corporation's initial registered office and the name of its initial registered agent at that address, together with a written acceptance of appointment as a registered agent; and the name and address of each incorporator. In addition, the articles may set forth the names and addresses of the initial directors; any provision, not inconsistent with law, regarding the regulation of the corporation's internal affairs; the manner of termination of membership in the corporation; the rights upon termination of membership; the transferability of membership; the distribution of assets upon dissolution or final liquidation; any designation of one or more classes of members; the names of any persons or the designation of any groups of persons who are to be the initial members; a provision to the effect that the corporation will be subordinate to and subject to the authority of any head or national association; and any provision that is required or may be set forth in the bylaws of the corporation. The Articles of Incorporation must be in writing, in English, and executed by the incorporator. The Articles may, but need not contain the corporate seal, an attestation by the secretary or assistant secretary, or an acknowledgement, verification or proof. The Articles of Incorporation must be delivered to the Florida Department of State in Tallahassee, Florida. The website is The current filing fee is $ A link to a form of Articles of Incorporation may be found at 5

6 d. Management and Control Once the nonprofit corporation has been established, the initial board of directors should meet (in person/by consent) to ratify the acts in connection with the initial formation of the corporation and adopt bylaws which set forth the rules and procedures governing the decision-making process of the board of directors and the general operation and management of the corporation consistent with the applicable statutes of the State of Florida and the articles of incorporation. If the initial directors are not named in the articles of incorporation, the incorporators shall hold an organizational meeting at the call of a majority of the incorporators to elect directors and complete the organization of the corporation. Typically, the bylaws of a nonprofit corporation contain provisions governing member, director and officer qualifications, powers, and duties; voting; filling of vacancies; meetings; property holding and transfer; indemnification of directors and officers; committees; bank accounts; fiscal year audits and financial reports; conflicts of interest; and amendment and dissolution procedures. The power to alter, amend, or repeal the bylaws or adopt new bylaws is vested in the board of directors unless otherwise provided in the articles of incorporation or the bylaws. e. Liability of Members, Directors and Officers A member of a Florida nonprofit corporation is not personally liable for any act, debt, liability or obligation of the corporation. A member may become liable for dues, assessments, or fees, as provided by law. Directors and officers who are a party to any proceeding (other than an action by, or in the right of the corporation) may be indemnified by a Florida nonprofit corporation by reason of the fact that such person was serving as a director or officer of the corporation against liability in connection with such proceeding, including any appeal therefrom, if such person acted in good faith and in a manner they believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe that their conduct was unlawful. Section of the Florida Not For Profit Corporation Act grants immunity from civil liability to officers and directors of corporations organized under Section 501(c)(3), 501(c)(4) or 501(c)(6) of the Internal Revenue Code of 1986, as amended, or of an agricultural or a horticultural organization recognized under Section 501(c)(5) of the Internal Revenue Code of 1986, as amended, for any statement, vote, decision, or failure to take an action, regarding organizational management or policy by an officer or director, unless: 6

7 (a) The officer or director breached or failed to perform his or her duties as an officer or director; and (b) The officer's or director's breach of, or failure to perform, his or her duties constitutes: (i) (ii) violation of the criminal law, unless the officer or director had reasonable cause to believe his or her conduct was lawful or had no reasonable cause to believe his or her conduct was unlawful. A judgment or other final adjudication against an officer or director in any criminal proceeding for violation of the criminal law estops that officer or director from contesting the fact that his or her breach, or failure to perform, constitutes a violation of the criminal law, but does not estop the officer or director from establishing that he or she had reasonable cause to believe that his or her conduct was lawful or had no reasonable cause to believe that his or her conduct was unlawful; A transaction from which the officer or director derived an improper personal benefit, directly or indirectly; or (iii) Recklessness or an act of omission that was committed in bad faith or with malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety, or property. f. Mergers, Acquisitions and Dissolution Section of the Florida Not For Profit Corporation Act provides that a nonprofit corporation organized under the laws of the State of Florida may merge with one or more other business entities only if the surviving entity of such merger is a nonprofit corporation or other business entity that has been organized as a not-for-profit entity under a governing statute or other applicable law that allows such a merger. Sections 1402 and 1403 of the Florida Not For Profit Corporation Act governs the dissolution of Florida nonprofit corporations. Section 1402 provides that a corporation desiring to dissolve and wind up its affairs must adopt a resolution to dissolve in the following manner: (a) If the corporation has members entitled to vote on a resolution to dissolve, and unless the board of directors determines that because of a conflict of interest or other substantial reason it should not make any recommendation, the board of directors must adopt a resolution recommending that the corporation be dissolved and directing that the question of such dissolution be submitted to a vote at a 7

8 meeting of members entitled to vote thereon, which may be either an annual or special meeting. Written notice stating that the purpose, or one of the purposes, of such meeting is to consider the advisability of dissolving the corporation must be given to each member entitled to vote at such meeting in accordance with the articles of incorporation or the bylaws. A resolution to dissolve the corporation shall be adopted upon receiving at least a majority of the votes which members present at such meeting or represented by proxy are entitled to cast. (b) If the corporation has no members or if its members are not entitled to vote on a resolution to dissolve, the dissolution of the corporation may be authorized at a meeting of the board of directors by a majority vote of the directors then in office. At any time after dissolution is authorized, the corporation may dissolve by delivering to the Department of State for filing articles of dissolution, which must set forth: (a) The name of the corporation; (b) If the corporation has members entitled to vote on dissolution, the date of the meeting of members at which the resolution to dissolve was adopted, a statement that the number of votes cast for dissolution was sufficient for approval, or a statement that such a resolution was adopted by written consent and executed in accordance with applicable law; and (c) If the corporation has no members or if its members are not entitled to vote on dissolution, a statement of such fact, the date of the adoption of such resolution by the board of directors, the number of directors then in office, and the vote for the resolution. A corporation is dissolved upon the effective date of its articles of dissolution. g. Recordkeeping, State Reports and State Taxes In accordance with Section 1601 of the Florida Not For Profit Corporation Act, a corporation must keep copies of the following records: (a) Its articles of incorporation or restated articles of incorporation and all amendments to them currently in effect. (b) Its bylaws or restated bylaws and all amendments to them currently in effect. (c) The minutes of all members' meetings and records of all actions taken by members without a meeting for the past 3 years. 8

9 (d) Written communications to all members generally or all members of a class within the past 3 years, including the financial statements furnished for the past 3 years under s (e) A list of the names and business street, or home if there is no business street, addresses of its current directors and officers. (f) Its most recent annual report delivered to the Department of State under Section of the Act. Section 1622 requires that each nonprofit corporation organized or qualified to do business in Florida file an annual report. The annual report must set forth: (a) The name of the corporation and the state or country under the law of which it is incorporated; (b) The date of incorporation or, if a foreign corporation, the date on which it was admitted to conduct its affairs in this state; (c) The address of the principal office and the mailing address of the corporation; (d) The corporation's federal employer identification number, if any, or, if none, whether one has been applied for; (e) The names and business street addresses of its directors and principal officers; (g) The street address of its registered office in this state and the name of its registered agent at that office; and (h) Such additional information as may be necessary or appropriate to enable the Department of State to carry out the provisions of this Act. The deposit of such report, on or before May 1, in the United States mail in a sealed envelope, properly addressed with postage prepaid, constitutes compliance with the foregoing provisions. If an annual report does not contain the information required by the foregoing provisions, the Department of State shall promptly notify the reporting domestic or foreign corporation in writing and return the report to it for correction. If the report is corrected to contain the information required by the foregoing provisions and delivered to the Department of State within 30 days after the effective date of notice, it is deemed to be timely filed. 9

10 Each annual report must be executed by the corporation by an officer or director or, if the corporation is in the hands of a receiver or trustee, must be executed on behalf of the corporation by such receiver or trustee, and the signing of the annual report shall have the same legal effect as if made under oath, without the necessity of appending such oath thereto. The first annual report must be delivered to the Department of State between January 1 and May 1 of the year following the calendar year in which a domestic corporation was incorporated or a foreign corporation was authorized to conduct affairs. Subsequent annual reports must be delivered to the Department of State between January 1 and May 1 of the subsequent calendar years. Information in the annual report must be current as of the date the annual report is executed on behalf of the corporation. If an additional report is received, the Department of State shall file the document and make the information contained therein part of the official record. Any corporation that fails to file an annual report which complies with the requirements of Section 1622 may not maintain or defend any action in any court of the State of Florida until such report is filed and all fees and taxes due under this act are paid, and such corporation is subject to dissolution or cancellation of its certificate of authority to conduct its affairs as provided in the Act. The current filing fee for the annual report is $ h. Insurance Nearly every type of activity by a nonprofit corporation can become the target of some kind of a claim by a firm or an individual that alleges damage or injury by the corporation or individuals responsible for it (i.e., directors, officers or employees). Even if the claim is without merit, the costs of defending against the claim can be very substantial. To encourage qualified individuals to accept positions as directors and officers, many nonprofit corporations purchase insurance to cover director and officer (D&O) liability. In addition, most responsible nonprofit corporations purchase a basic comprehensive general liability policy that covers liability for accidents in the corporation s offices, at sponsored meetings and the like. Liability insurance for nonprofit corporations is often a very complicated matter. Consultation with an experienced and knowledgeable agent or consultant is essential in order to obtain the right coverage at the lowest premium. 10

11 i. Resources Oleck and Stewart, Nonprofit Corporations, Organizations & Associations (Prentice-Hall, 1994, Cum. Supp. 2002) Jacobs, Jerald A., Association Law Handbook (ASAE & The Center for Association Leadership 4 th ed., 2007) Nonprofit Governance and Management (American Bar Association and American Society of Corporate Secretaries, 2002) Guide to Nonprofit Corporate Governance in the Wake of Sarbanes-Oxley (American Bar Association Section of Business Law, 2005) Guidebook for Directors of Nonprofit Corporations (American Bar Association Section of Business Law 2d ed., 2002) The Florida Bar, Not For Profit Corporations in Florida (Fourth Edition, 2002) Cohn, Stuart R., Ames, Stuart D., Florida Business Laws Annotated (Thomson West) Takagi, Gene. Nonprofit Bylaws - Common Issues Nonprofit Law Blog 2. For-profit Corporations a. Using For-profit Corporations to Pursue Social Objectives The for-profit form of organization can and frequently is used as a vehicle for conducting a business that also has a social mission or objective. Although for-profit corporations are usually formed for the purpose of making money and distributing it to managers and shareholders, there is no reason why a for-profit corporation cannot include a social mission in the purposes clause of its articles of incorporation. While such a provision would authorize the corporation to pursue social objectives, it would not require the corporation to do so only the shareholders/owners have this power. And unless all shareholders agree to pursue social aims, dissenters could sue the corporation s directors and managers for failing to operate the corporation in the best economic interests of the shareholders. A shareholders agreement is probably the best way to address this problem. Such an agreement, entered into by all shareholders and the corporation, would require the corporation to be managed and operated so as to pursue specified social objectives. 11

12 But even the most skillfully drafted shareholders agreement is not a perfect solution because agreements can always be abrogated and amended and the owners of the shares can change via sale, gift or inheritance. Moreover, a tightly drafted shareholders agreement which makes it difficult to respond to business changes over time would tend to render the for-profit corporation much less attractive to investors (potential new shareholders). b. Formation The Florida Business Corporation Act governs the formation, operation and dissolution of for-profit corporations in the State of Florida. In Florida, one or more persons may act as the incorporator or incorporators of a corporation by delivering articles of incorporation to the Department of State for filing. The articles of incorporation must set forth the following: (a) The corporate name; (b) The street address of the initial principal office and, if different, the mailing address of the corporation; (c) The number of shares the corporation is authorized to issue; (d) If any preemptive rights are to be granted to shareholders, the provision therefor; (e) The street address of the corporation's initial registered office and the name of its initial registered agent at that office together with a written acceptance; and (f) The name and address of each incorporator. The articles of incorporation may also set forth: (a) The names and addresses of the individuals who are to serve as the initial directors; (b) Provisions not inconsistent with law regarding: (i) (ii) The purpose or purposes for which the corporation is organized; Managing the business and regulating the affairs of the corporation; (iii) Defining, limiting, and regulating the powers of the corporation and its board of directors and shareholders; (iv) A par value for authorized shares or classes of shares; 12

13 (v) The imposition of personal liability on shareholders for the debts of the corporation to a specified extent and upon specified conditions; and (vi) Any provision that is required or permitted to be set forth in the bylaws. The articles of incorporation need not set forth any of the corporate powers enumerated under the Florida Business Corporation Act. The articles of incorporation must be in writing, in English, and executed by the incorporator. The Articles may, but need not. contain the corporate seal, an attestation by the secretary or assistant secretary, or an acknowledgement, verification or proof. The Articles of Incorporation must be delivered to the Florida Department of State in Tallahassee, Florida. The website is The current filing fee is $ A link to a form of Articles of Incorporation may be found at c. Management and Control A for-profit corporation has a hierarchical control structure. It is managed by or under the direction of a board of directors and its officers, although its shareholders vote on important corporate issues, such as election of directors, mergers, sale of all assets and dissolution. Similar to a nonprofit corporation, once the for-profit corporation has been established, the initial board of directors meets (in person or by consent), ratifies the acts in connection with initial formation of the corporation and adopts bylaws, which set forth the rules and procedures governing the operation and management of the corporation consistent with the applicable statutes of Florida and the articles of incorporation. In general, the bylaws of a for-profit corporation contain provisions governing director and officer qualifications, powers and duties; voting; meetings of shareholders, directors and officers; filling of vacancies; committees; indemnification of directors and officers; bank accounts; fiscal year audits and financial reports; and amendment procedures. d. Liability of Shareholders, Directors and Officers Section of the Florida Business Corporation Act sets forth the general standards for directors for corporate entities. The statute basically codifies the common law requirement that directors act with the fiduciary duty of good faith and care on behalf of the corporation. Under the statute, and in line with the business judgement rule, "[a] director is not liable for any action taken as a director, or any failure to take any action, if 13

14 he or she performed the duties of his or her office in compliance with this section. As in other jurisdictions, under the business judgment rule, a court will not second-guess the business decisions of the board, nor impose liability on directors for decisions that in hindsight appear to have been wrong, if the decision was made in good faith and in a manner the director reasonably believes to be in the best interests of the corporation This presumption will be rebutted, however, if the directors are shown to have breached their fiduciary duties (legal or ethical relationships of confidence or trust). Florida law substantially restricts the grounds for asserting personal liability against a director by providing that they are not personally liable for monetary damages to the corporation or any other person, including a shareholder or third party, unless, among other things, the director breached or failed to perform his or her duties as a director; and the director's breach of, or failure to perform, those duties constituted a violation of the criminal law; a transaction from which the director derived an improper personal benefit, either directly or indirectly; or an unlawful distribution In addition, Florida law permits a corporation to indemnify a director, officer, employee or agent who may be party to any third party action if the person acted in good faith and in a manner reasonably believed not to be opposed to the best interests of the corporation. In a derivative action, indemnification may not be made if the person is found liable, unless a court determined that the person is fairly entitled to indemnification. Any determination of indemnification must be made in light of the statutory requirements and standards by a majority vote of a quorum of disinterested directors, by independent legal counsel, or by a majority of the disinterested shareholders. Because a Florida corporation is generally considered to be a distinct legal entity that is separate and apart from its shareholders, the shareholders of a Florida corporation are generally not personally liable for the actions, liabilities or obligations of the corporation. However, there are instances where a Florida court may disregard the separate legal existence of a corporation and hold the corporation's shareholders (rather than the corporation itself) liable for the corporation's actions (i.e., piercing the corporate veil). Typically these situations exist where the corporate entity is a sham and is significantly under-capitalized. e. Raising Capital For-profit corporations (and LLCs) offer the most flexibility in raising capital, ranging from various kinds of equity (common stock, preferred stock, options, warrants) to numerous types of debt instruments (convertible notes, subordinated notes, bonds, commercial paper). 14

15 f. Recordkeeping and State Reports Section 1601 of the Florida Business Corporation Act requires that each corporation keep the following records: its articles or restated articles of incorporation and all amendments to them currently in effect; its bylaws or restated bylaws and all amendments to them currently in effect; resolutions adopted by its board of directors creating one or more classes or series of shares and fixing their relative rights, preferences, and limitations, if shares issued pursuant to those resolutions are outstanding; the minutes of all shareholders' meetings and records of all action taken by shareholders without a meeting for the past 3 years; written communications to all shareholders generally or all shareholders of a class or series within the past 3 years, including the financial statements furnished for the past 3 years; a list of the names and business street addresses of its current directors and officers; and its most recent annual report delivered to the Department of State. Florida law also requires that unless modified by resolution of the shareholders within 120 days of the close of the corporation's fiscal year, a corporation shall mail to its shareholders an annual financial statement within 120 days after the end of the fiscal year (or within such additional time thereafter as is reasonably necessary). Each corporation is also required to file an annual report with the Florida Department of State prior to May 1 st of the subsequent calendar year. The annual report is on a prescribed form, contains basis corporate information (name, address, names and addresses of directors and principal officers). No financial information is required. Currently, the annual report fee, if filed timely, is $150. The form may be filed electronically with the Florida Department of State See g. Taxation Florida does not currently have a state income tax. The corporation, however, will be required to pay federal tax on the income it earns and its shareholders pay federal taxes on dividends distributed by the corporation. S corporations, however, are not subject to double taxation; their income is not taxed, but the income and losses of the S corporation are passed through to the shareholders in relation to their ownership interests. To be eligible for this tax treatment, S corporations must meet certain requirements including, but not limited to, having only one class of stock, and no more than 100 shareholders. h. Resources The Florida Bar, Florida Corporate Practice (Fifth Edition, 2008) Cohn, Stuart R., Ames, Stuart D., Florida Business Laws Annotated (Thomson West) 15

16 3. Limited Liability Companies (LLCs) a. Using LLCs to Pursue Social Change The Florida Limited Liability Company Act governs the formation, operation and dissolution of LLCs in the State of Florida. Combining certain characteristics of both partnerships and corporations, LLCs are legal entities that can be formed for the purpose of earning profits, pursuing a social mission, or both, although some states require an LLC to be formed only for a business purpose. LLCs differ from for-profit corporations because they are formed and owned by members rather than shareholders; however, like S corporations and partnerships, LLCs are eligible for pass-through income tax treatment. This means that income and expenses are reported as though the members incurred them directly, and profits or losses are taxed at the ownership (member) level, rather than the entity (company) level. Members of LLCs can be individual investors as well as for-profit corporations and taxexempt nonprofit corporations. For this reason and also because of pass-through taxation which eliminates double taxation (the effect of taxing income at the corporate level and again when it is included in the owner s income), LLCs are preferred over for-profit corporations as vehicles for social enterprise, especially for joint ventures between a taxexempt nonprofit with a social change mission and a for-profit business. LLCs are akin to partnerships because the members have broad discretion to allocate profit and loss and management powers among themselves (via an operating agreement ). On the other hand, as with the shareholders of corporations, the members of an LLC can be divided into classes, each with its own economic rights, and members have limited personal liability (discussed below). Two states, Tennessee and Kentucky, specifically authorize the formation of nonprofit limited liability companies (nonprofit LLCs). The statutes of numerous states, including California, have language that permits nonprofit LLCs to exist. Assuming state laws permit formation of nonprofit LLCs, the IRS will recognize such an LLC as exempt under Section 501(c)(3) if it elects to be treated as a separate legal entity for tax purposes and its operating agreement includes the language mandated by the organizational test (purposes, distribution of assets upon dissolution, etc.) and it meets numerous requirements largely designed to guard against inurement and private benefit. These conditions will be discussed in the Nonprofit Taxation section. b. Formation To form and organize an LLC under the Florida Limited Liability Act, articles of organization must be filed with the Department of State of Florida. The articles of 16

17 organization must set forth: the name of the LLC, which must contain the words "limited liability company" or the abbreviation "L.L.C." or the designation "LLC;" and the mailing address and the street address of the principal office of the LLC; the name and address of the initial registered agent for service of process in Florida for the LLC. The articles of organization shall be filed by one or more members or authorized representatives of the LLC. One or more persons may form an LLC in the State of Florida, and the purpose of the LLC may be for any lawful purpose. Currently, the filing fee is $125. A Florida LLC is deemed to have been formed at the time of the filing of the articles of organization, unless the certificate of formation provides for a future effective date or time. A form of certificate of formation for a Delaware limited liability company may be found at c. Management and Control Typically, an LLC operating agreement among the members governs the management of an LLC. The operating agreement which is like the articles of incorporation, bylaws and a shareholder agreement all in a single document may contain provisions requiring adherence to a social purpose and such purpose and the values it embodies may be interwoven throughout the operating agreement. In Florida, members of an LLC may enter into an operating agreement, which does not have to be in writing, before, after, or at the time the articles of organization are filed, and the operating agreement takes effect on the date of formation or on any other date provided in such agreement. The operating agreement may not unreasonably restrict a right to information or access to records; may not eliminate the duty of loyalty owed by managers and managing members to the LLC under Florida law; unreasonably reduce the duty of care; eliminate the obligations of good faith and fair dealing; vary the requirement to wind up the LLC's business; or restrict rights of a person, other than a manager, member or transferee of a member's distributional interest, under Florida law. Unless otherwise provided in the LLC's articles of organization or operating agreement, the LLC will be member-managed; the members' respective management rights will be based on their then current percentage interest in the LLC's profits; profits and losses will be shared based upon the contributions made by the members; members may not resign or withdraw prior to the dissolution or winding up of the LLC; the LLC may merge with other business entities; members interests are transferable without restriction; transferees may not become members unless all members so consent to the admission of the transferee as a member; and the LLC will be dissolved if all members so agree. 17

18 d. Limited Liability of Members and Managers Section of the Florida Limited Liability Act provides, in part, that a member or manager of an LLC is not liable to the LLC solely by reason of being a member or serving as a manager. In addition, any member who acts in good faith under the articles of organization or operating agreement is not liable to the LLC, any manager, or any other member. e. Merger, Dissolution and Term of Existence Subject to compliance with applicable law and unless otherwise provided in the articles of organization or the operating agreement, an LLC may merge with or into one or more limited liability companies or other business entities formed, organized, or incorporated under the laws of the State of Florida or any other state, the United States, foreign country, or other foreign jurisdiction. In Florida, an LLC shall have a perpetual existence except as specified in the articles of organization or in the operating agreement. An LLC shall be dissolved in accordance with an event specified in the articles of organization or operating agreement, the consent of all the members, or at any time when there are no members, or the entry of a court order of dissolution. f. Raising Capital An LLC offers the same flexibility in raising capital as a for-profit corporation. g. Recordkeeping and state reports LLC's must file an annual report each year with the Department of State of Florida by May 1st of the subsequent year. The annual report is filed on a prescribed form, and must contain, among other things, the name and address of the LLC, the names and addresses of the managers or the managing members and the name of the Florida registered agent. No financial information is required. Currently, the annual filing fee, if the report is filed timely is $ Late reports currently require a filing fee of $ See h. Taxation Unless it elects to be treated for federal and state purposes as a corporation, an LLC is generally not subject to separate entity-level taxation of its income under federal tax laws, although it is required to file an informational return. Unless a member is exempt from federal income taxation, usually its distributive share of membership income and loss is treated as income or loss to the member and reported on his/her/its return, regardless of whether the member actually receives the income. 18

19 i. Resources Humphreys, Thomas, Limited Liability Companies and Limited Liability Partnerships (Incisive Media, 2009) The Florida Bar, Limited Liability Companies in Florida (First Edition, 2004) Cohn, Stuart R., Ames, Stuart D., Florida Business Laws Annotated (Thomson West) 4. Low-profit Limited Liability Companies (L3Cs) a. Overview The L3C, or Low-Profit Limited Liability Company, is a new type of corporate entity that is a cross between a nonprofit and a for-profit corporation. L3Cs are not eligible for taxexempt treatment by the IRS. Rather, they are intended to be profit-generating entities with charitable and educational (including positive social change) missions as their primary objectives. Building upon the LLC structure, the L3C has thus far been enacted in Vermont (May 2008), Michigan (January 2009), Utah (March 2009), Wyoming (July 2009) and Illinois (Jan 2010). L3C legislation is also being considered in several other states, including Georgia, Louisiana, Maine and Missouri. For more information about the status of L3C legislation please visit: Florida has not yet passed legislation to authorize the formation of L3Cs. However, all states must recognize LLCs formed in other states and the L3C is a variant form of an LLC. L3Cs are similar to LLCs in that they have the liability protection of a corporation, the flexibility of a partnership and membership shares can be sold to raise capital just like common stock. However, unlike the LLC, the L3C must be formed for a charitable or educational purpose, it cannot have a significant goal of producing income or capital appreciation and it may not accomplish political or legislative objectives. L3Cs are intended to be vehicles which can both attract capital investment from for-profit enterprises and investment by foundations. Nontraditional for-profit investors who are willing to sacrifice market-level returns in exchange for social impact are prime candidates to provide capital investments or loans to L3Cs. Similarly, private foundations that wish to provide support in the form of a loan or equity rather than a grant may find an L3C to be attractive because the enabling legislation is written in such a way as to comply with the IRS program related investment or PRI regulations, thus eliminating the need for private letter rulings or legal opinions for such investments. PRIs can be attractive to foundations because they count toward its 5% minimum payout requirement, 19

20 just as if they were grants. But if the investment is successful, the foundation could recapture the full amount of the investment, plus a reasonable rate of return, which it then must pay out again in the form of grants or more PRIs. Existing nonprofit corporations can utilize the L3C structure in at least two ways. First, if the nonprofit generates enough earned income to qualify as low profit, it could reincorporate as a stand-alone L3C. Second, it could establish a subsidiary as an L3C to conduct low-profit earned income activities. It is too early to tell whether L3Cs will proliferate and whether they will attract significant investments from non-traditional investors and foundations. Some experts have predicted that since PRIs comprise a relatively small amount of foundation grants and capital, the L3C will not succeed in attracting significant funds from foundations and thus this form of organization will not become the preferred vehicle. b. Resources Lang, Robert. Overview. Americans for Community Development. Peeler, Heather, The L3C: A New Tool for Social Enterprise, Community Wealth Vanguard, Aug. 2007, Tozzi, John, Turning Nonprofits into For-Profits, Business Week: Small Business Financing (June 15, 2009), How-to: An Insider s Look at the L3C and What it Could Mean for you and your Social Enterprise. Social Earth. slook-at-the-l3c-and-what-it-could-mean-for-you-and-your-social-enterprise Chang, Emily, L3C-Developments & Resource, Nonprofit Law Blog,, available at 5. Joint Ventures A joint venture is not a statutory entity or form of doing business in the State of Florida. Rather, it is a contractual arrangement whereby more than one person or entity join forces to operate a venture. Many joint ventures operate by agreement only; the participants do not have to create a separate entity as the vehicle for a joint venture. However, nonprofit corporations, for-profit corporations and LLCs can each function as the entity vehicle for 20

21 joint ventures. When liability protection and maximum flexibility are required and the number of participants/investors is small, the LLC is the preferred entity/vehicle for the joint venture. Thus, for example, a tax-exempt nonprofit corporation pursuing a social mission and a forprofit corporation operating a business can join together and form a joint venture using an LLC as the vehicle for the enterprise. The operating agreement would spell out the rights and obligations of each member. However, each member would be bound by the laws and rules governing its own existence, so that the nonprofit may not confer an undue economic benefit on the for-profit co-venturer, nor may the business corporation use the joint venture to do something that it could not do directly. The IRS has addressed the circumstances in which tax-exempt social and charitable enterprises may engage in joint ventures with for-profit entities, and has adopted rules that govern the kinds of benefits that tax-exempt enterprises can confer on for-profit entities in the context of joint ventures. The IRS rules are extremely complicated. A tax-exempt social enterprise should not enter into a joint venture with a for-profit entity without first seeking advice from expert counsel. Sanders, Michael I., Joint Ventures Involving Tax-Exempt Organizations (3d revised ed 2007) 6. Partnerships and Limited Partnerships a. Overview Partnerships, limited partnerships and limited liability partnerships are forms of organization that can be used to pursue social objectives and are recognized as statutory entities under the laws of the State of Florida. Until the advent of LLCs in Florida in 1982 and the repeal in Florida of the corporate tax in 1998 (and the repeal of treating LLC's as corporations for Florida tax purposes,), partnerships were the most oft-used alternative to a nonprofit corporation. Partnerships provide almost unlimited flexibility in governance and management. Profits and losses are allocated according to the capital contributions of each partner but unlike LLCs and nonprofit corporations, the total assets of each partner in a general partnership are at risk, not just the capital that has been put into the enterprise. Limited partnerships changed this by permitting the creation of a special class of partners, known as limited partners, who provide capital but do not participate in management. In limited partnerships, the limited partners are shielded from liability beyond their capital contributions, but the general partner who manages the affairs of the limited partnership does not have this liability protection. Limited partnerships are often used 21

22 as financing vehicles and are most useful when investors are to have no role in management and a simple or flexible governance structure is needed. Limited liability partnerships (LLPs) function like general partnerships but provide extra protections for the general partners. Such protections include personal immunity for liability arising from the negligence and wrongful acts of other partners, unless the other partners were under their direct supervision. Thus, a partner s loss with respect to the LLP is usually limited to his/her investment in the partnership. b. General Partnerships The Florida Revised Uniform Partnership Act (FRUPA) governs the formation, operations and dissolution of Florida general partnerships. A general partnership is formed when there is an association of two or more persons (which term is broadly defined under FRUPA) to carry on as co-owners a business for profit, whether or not the persons intend to form a partnership. An association formed under a statute other than (i) FRUPA, (ii) a predecessor statute or (iii) a comparable statute of another jurisdiction, is not a general partnership under FRUPA. No filings are required in order to form a general partnership. A general partnership may, however, file a statement of partnership registration with the Department of State of Florida. If a statement of partnership registration is filed, then such statement must contain the name of the general partnership, the address of the chief executive officer of the partnership and the principal office of the partnership, the name and mailing address of all of the partners or the name and address of an agent who shall maintain a list of the names and mailing addresses of all of the partners. The current filing fee for a statement of partnership registration is $ See Once formed, as a general matter, a partnership agreement governs the relations among the partners and between the partners and the partnership. The partnership agreement may be written or oral. To the extent the partnership agreement does not otherwise provide, FRUPA will govern the relations among partners and the partnership. Under Florida law, the partnership agreement may not, among other things, restrict a partner's or former partner's access to books and records; and may not generally eliminate the fiduciary duties of loyalty or care, nor the obligation of good faith and fair dealing. The partners should decide how to keep and maintain the books and records of the general partnership. FRUPA contains no specific record keeping requirements, however, FRUPA, as a general matter, establishes that a partner have access to certain information and therefore the general partnership should, at a minimum, keep records of such information. 22

23 c. Limited Partnerships The Florida Revised Uniform Limited Partnership Act. ("FRULPA") governs Florida limited partnerships. In Florida, a limited partnership may be formed for any lawful purpose, including for not for profit purposes. A Florida limited partnership is formed when at least two persons determine to form and operate a limited partnership with at least one being a general partner and at least one being a limited partner, and a certificate of limited partnership is filed with the Florida Department of State. The certificate of limited partnership must contain the name of the limited partnership, the address of the limited partnership's office and the name and address of the initial registered agent in the State of Florida, the names and addresses of the general partners, and a statement as to whether the limited partnership is a limited liability limited partnership. The name of the limited partnership must contain the words "Limited Partnership" or "Limited" or the abbreviation "L.P." or "Ltd." or the designation "LP". The filing fee for a limited partnership is $1,000. See An annual report must be filed annually by May 1 st of the subsequent year. The current filing fee for the annual report is $500, if filed timely and $900 if filed late. Once formed, the limited partnership's partnership agreement and FRULPA govern the operation and management of the limited partnership. The partnership agreement may be written or oral. Under Florida law, the partnership agreement may not, among other things, generally eliminate the fiduciary duties of loyalty or care, nor the obligation of good faith and fair dealing. Typically, the general partner manages the business and activities of the limited partnership. Unless otherwise provided in the partnership agreement, the general partner has the authority to delegate its rights and powers to manage the limited partnership. Subject to the partnership agreement, the general partner maintains the books and records of the limited partnership. FRULPA sets forth the rights of limited partners to certain information, including financial information, regarding the limited partnership. FRULPA also describes the liabilities of the partners. In Florida, an obligation of a limited partnership, whether arising in contract, tort, or otherwise, is not the obligation of a limited partner. A limited partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for an obligation of the limited partnership solely by reason of being a limited partner, even if the limited partner participates in the management and control of the limited partnership. The general partner, however, has liability for all obligations of the limited partnership, unless otherwise agreed to by the claimant or provided by law. 23

24 d. Limited Liability Partnerships (LLPs) The Florida Revised Uniform Partnership Act ("FRUPA") governs Florida LLPs. An LLP is a general partnership that has elected to become an LLP. A general partnership may be formed as, or may become, an LLP pursuant to Section of FRUPA. In order for an existing general partnership to become an LLP, the terms and conditions by which the partnership becomes the LLP must be approved by the vote necessary to amend the partnership agreement; and by the filing of a statement of qualification with the Florida Department of State. In order for a general partnership to form initially as an LLP, the general partnership must file a statement of qualification in accordance with FRUPA. The statement of qualification must contain among other things: the name of the partnership; the address of the partnership's chief executive officer and, if different, the street address of the partnership's office in Florida, if any; the name and address of the registered agent for service of process in the State of Florida; the future effective date or time of the statement of qualification if it is not to be effective upon the filing of the statement of qualification; and a statement that the partnership elects to be a limited liability partnership. The name of the LLP must contain as the last words or letters of its name the words "registered Limited Liability Partnership," "Limited Liability Partnership," the abbreviations "R.L.L.P.", "L.L.P., "RLLP" or "LLP." The filing fees for filing a statement of qualification are currently $25. An LLP must also file an annual report with the Florida Department of State by May 1 st of the succeeding year. The current filing fees for the annual report are $25. See In general, an LLP is managed and operated the same as a general partnership. The partnership agreement governs relations among the partners and between the partners and the LLP. The partnership agreement may be written or oral. Partners of an LLP have different liabilities then partners of a general partnership. An obligation of an LLP, whether arising in contract, tort or otherwise, is solely the obligation of the LLP and a partner is not liable, for such obligation of the LLP solely by reason of being or acting as a partner. e. Resources Cohn, Stuart R., Ames, Stuart D., Florida Business Laws Annotated (Thomson West) 24

25 7. Sole Proprietorships Persons conducting a social enterprise alone in the State of Florida without the protections afforded by incorporation are called sole proprietors. A sole proprietorship has no legal existence apart from its owner and may be formed without any expense or formality. Profits and losses are borne directly by the proprietor. The proprietor may operate under a fictitious name that is registered with the Florida Department of State. See Such registration provides limited protection for exclusive use of the name, absent trademark or service mark registrations. The main disadvantage of forming a sole proprietorship is that the owner is wholly liable for all debts and obligations of the enterprise. All of the personal assets and assets devoted to the social enterprise can be seized to make payments. A sole proprietorship itself cannot be sold since there is complete unity between the enterprise and its owner, but the assets used in the enterprise can be sold. A sole proprietorship generally terminates upon the death of its owner. 8. New Forms of Hybrid Organizations Leading thinkers in business, philanthropy and academia are studying the rapid growth of social enterprise which is taking root in the space between the for-profit corporate world, which is constrained by the duty to generate profits for shareholders, and the nonprofit world, which lacks the market efficiencies of commercial enterprise and does not have ready access to invested capital. A major legal question that has emerged from these studies is whether new laws and tax regulations are needed in order to nurture and support the growth of this new generation of hybrid organizations. Starting with a meeting in 2007 titled Exploring New Legal Forms and Tax Structures for Social Enterprise Organizations, the Aspen Institute s Nonprofit Sector and Philanthropy Program has been bringing legal scholars and practitioners together to grapple with this question and related issues. Under the auspices of the Fourth Sector Network, many of the same individuals are also working on this question. As of this writing, these groups have not achieved a consensus as to whether new or revised organizational and tax laws are needed to encourage and incentivize the growth of social enterprise. Indeed, some participants have suggested that existing legal and tax regimes already allow nonprofit social enterprise to operate broadly at the intersection of philanthropy and business and they express skepticism that any legal reform is needed. On the other hand, many participants advocate broad change, including revisions in federal tax and state corporate laws to accommodate new forms of social enterprise such as the Charitable LLC, B Corporations and the Socially Responsible Corporation. LawForChange will follow these groups and report significant developments as they emerge. 25

26 9. Resources Austin, James E., et. al., Capitalizing on Convergence, Stanford Social Innovation Review, Winter Billiteri, Thomas J., Mixing Mission and Business: Does Social Enterprise Need a New Legal Approach? The Aspen Institute, January Searing, Jane M., Capital With a Conscience, Journal of Accountancy Online, July Wolk, Andrew, Social Entrepreneurship & Government: A New Breed of Entrepreneurs Developing Solutions to Social Problems, Root Cause, Structures at the Seam: The Architecture of Charities Commercial Activities, New York University School of Law and National Center on Philanthropy and the Law, conference materials, October