7.1 Corporations and LLCs in Florida

7.1 Corporations and LLCs in Florida

1. Corporate Formation Under the FBCA

The Florida Business Corporation Act (FBCA), codified in Chapter 607 of the Florida Statutes, governs the life cycle of Florida corporations. Under the FBCA, a corporation is formed by filing Articles of Incorporation with the Division of Corporations of the Florida Department of State and paying the required filing fees. Corporate existence officially begins upon the successful filing of these articles.

To be legally sufficient, the Articles of Incorporation must contain the following mandatory provisions:

• Corporate Name: The name must include "corporation," "incorporated," "company," or the abbreviations "Corp.," "Inc.," or "Co." (which may be capitalized or lowercase). The name must be distinguishable from other registered entities on the state's database and cannot contain language implying an unauthorized purpose or connection to a government agency.
• Authorized Shares: The maximum number of shares the corporation is authorized to issue. If multiple classes of shares are authorized, the articles must outline the designations, preferences, limitations, and relative rights of each class.
• Registered Agent and Office: The street address of the corporation's initial registered office and the name of its initial registered agent. The registered agent must sign a written acceptance of this appointment.
• Incorporators: The names and addresses of all incorporators.

Optional provisions may include the names of initial directors, a statement of purpose (which otherwise defaults to any lawful business), and provisions regulating the corporation's internal affairs. After incorporation, the directors or incorporators hold an organizational meeting to adopt bylaws and elect officers. The bylaws regulate the internal management of the corporation and must not conflict with the law or the articles.

2. Pre-Incorporation Activity and Promoter Liability

Promoters are individuals who act on behalf of a corporation that has not yet been formed, frequently executing contracts to secure leases, property, or intellectual property. Under Florida law:

• Promoter Liability: A promoter remains personally liable on all pre-incorporation contracts they enter into, even after the corporation is formed, unless there is a novation. A novation is a three-way agreement between the promoter, the third-party creditor, and the newly formed corporation that explicitly releases the promoter and substitutes the corporation in their place.
• Corporation Liability: The newly formed corporation is not automatically liable on pre-incorporation contracts. It only becomes liable if it adopts the contract after its formation, either expressly (e.g., via a board of directors resolution) or impliedly (e.g., by knowingly accepting the benefits of the contract). Note that adoption alone does not release the promoter from liability; a novation is required to extinguish the promoter's personal liability.
• Defective Incorporation: The FBCA imposes joint and several personal liability on all persons who knowingly act on behalf of a corporation before it is incorporated. However, the equitable doctrine of corporation by estoppel may prevent a third party who dealt with the entity as a corporation from denying its corporate existence to hold shareholders personally liable.

3. Limited Liability Company (LLC) Formation Under the FRLLCA

The Florida Revised Limited Liability Company Act (FRLLCA), codified in Chapter 605, governs Florida LLCs. An LLC is formed by filing Articles of Organization with the Department of State. The articles must include the LLC's name (which must include "limited liability company," "L.L.C.," or "LLC"), the principal and mailing address of the office, and the name and street address of the registered agent, along with their signed acceptance.

The internal affairs of the LLC are governed by the operating agreement. It can be oral, written, or implied, and its terms override the statutory defaults of the FRLLCA, except for certain non-waivable statutory duties. By default, a Florida LLC is member-managed unless the articles of organization or operating agreement explicitly state that it is manager-managed. In a member-managed LLC, management decisions require a majority-in-interest of the members, and each member has the apparent authority to bind the LLC in the ordinary course of business. In a manager-managed LLC, management authority is vested in designated managers, and members do not have individual agency power to bind the entity.

4. Piercing the Corporate and LLC Veil in Florida

The primary benefit of forming a corporation or LLC is the "corporate shield," which protects shareholders and members from personal liability for the entity's debts. However, a court may exercise its equitable powers to "pierce the corporate veil" and hold the individual owners personally liable.

Under the landmark Florida Supreme Court case Dania Jai-Alai Palace, Inc. v. Sykes, Florida enforces an exceptionally high standard for piercing the corporate veil. A plaintiff must prove three distinct prongs:

1. Alter Ego / Mere Instrumentality: The corporation was a mere instrumentality, agent, or alter ego of the shareholder(s), showing a complete lack of separate corporate identity (e.g., commingling funds, ignoring corporate formalities).
2. Improper Conduct or Active Fraud: The corporate form was used to mislead or defraud creditors, evade statutes, or perpetrate a fraud.
3. Causation: The improper conduct proximately caused injury to the plaintiff.

Crucially, Florida requires a showing of active fraud or improper conduct to pierce the veil. This is a vital Florida distinction: simple undercapitalization or failure to observe corporate formalities is insufficient on its own. There must be proof of bad faith or deliberate improper conduct. This same strict standard applies to Florida LLCs.

5. LLC Charging Orders and the Olmstead Exception

A judgment creditor of an individual LLC member cannot directly seize the assets of the LLC. Instead, the creditor's remedies are strictly regulated by Florida Statute § 605.0503.

• The Charging Order: A charging order is a court-ordered lien on the debtor-member's transferable interest. It directs the LLC to redirect any distributions (e.g., profits, dividends) that would have gone to the member to the judgment creditor instead. The charging order does not grant the creditor any voting or management rights. In a multi-member LLC, a charging order is the exclusive remedy available to the creditor.
• The Olmstead Exception: For a single-member LLC, Florida law provides a critical exception (codified following the Florida Supreme Court's ruling in Olmstead v. FTC). If a judgment creditor can show that a charging order will not satisfy the judgment within a reasonable time, the court may order the foreclosure of the debtor-member's interest or order the transfer of that interest to the creditor. Once the foreclosure or transfer is complete, the creditor becomes the sole member, acquiring all voting, management, and dissolution rights, and can liquidate the LLC to satisfy the debt.