The steps required to form a limited liability company (LLC) include:
1. Preparing the certificate of formation and filing them with the Secretary of State's office in order to obtain a certificate of filing and file number;
2. Preparing the limited liability company's company agreement;
3. Organizing the limited liability company by holding an organizational meeting, or signing a consent statement in lieu of holding the organizational meeting; and
4. Capitalizing the limited liability company, and, if the entity's ownership is to be evidenced by certificates, issuing of units of ownership interest and imposing transfer restrictions if ownership is to be limited to the original members.
It is necessary that the organizational minutes be completed in order to complete the formation of a limited liability company. If these acts are not accomplished, the formation will not be complete, and the owners may be subjected to claims of personal liability for the company’s obligations.
In addition, it is necessary to observe the necessary business responsibilities to maintain LLC status. Failure to comply with LLC formalities could result in individual liability to the members if the "veil is pierced."
Liability for Company Debts Although one of the principal advantages of forming an LLC is to limit or reduce personal liability for business bills and debts, in some situations, however, the officers, members and mangers could become personally liable for the LLC's debts. For example, when owners first begin business, many creditors may not extend credit unless they sign a personal guaranty agreement. That agreement creates an express contract which makes the signer personally liable for the company's debts.
An owner might also become liable for the company's debts if the creditor can convince a jury to ignore the company’s existence, by arguing that the owner disregarded company formalities or if the owners commingle personal assets with the company's assets. For this reason, It is important that the company is properly formed and to coordinate with the company’s accountant or tax adviser to make sure that all IRS filings have been made and that the company’s books and accounts are set up correctly.
An LLC is governed by its company agreement, a document similar to a partnership agreement or bylaws of a corporation. The company agreement is a contract between the members and the company providing the internal structural framework of the LLC.
An LLC has the characteristics and benefits of both a corporation and a limited partnership. An LLC can be described as a combination of a subchapter S corporation and a limited partnership. It can engage in any lawful business unless limited by its articles of organization or the business is governed by another corporate law which prohibits the entity from doing business as an LLC.
An LLC's owners or investors are called "members" rather than "shareholders." A membership interest is a personal property interest and may be evidenced by a membership certificate similar to a stock certificate, or the ownership may not be reflected by a certificate, depending on the company agreement. Members, like shareholders in a corporation, do not own any specific property of the LLC; rather, all of the assets in an LLC are owned by and in the name of the LLC.
An LLC can have the benefits of a Subchapter S corporation, in that an LLC can shield its members from personal liability arising from the operation of the business and have pass through income tax treatment, as if it were a partnership for federal income tax purposes. An LLC is not subject to the restrictions which limit a subchapter S corporation. An LLC that chooses to be taxed as a partnership is not subject to federal income tax as is a regular corporation, but instead is taxed as a partnership.
One of the most significant features of an LLC is its management. Many owners like the limited partnership form of business because they can invest money in a business and not be liable for the business' debts or failure. One drawback of a limited partnership is that the limited partners cannot direct the partnership's day-to-day affairs and still retain their limited liability, unless they own an interest in the general partner. Conversely, an LLC is managed by either its member or by its officers and managers, thus an owner of an LLC can be both a member and a manager. As a member or manager, a person can have direct input and manage the LLC's day-to-day affairs without assuming personal liability for the company's debts, subject to certain restrictions. In most circumstances, neither members nor managers are liable for the LLC's debts, so long as all appropriate formalities are followed and the LLC is properly formed. Further, a member of an LLC is not a proper party to a lawsuit by or against the LLC, therefore, an LLC may provide more protection than a corporation.
Managers are elected annually by the members and do not need to be residents of Texas or members of the LLC. The Texas LLC Act also provides that managers may designate one or more persons who are not managers to be officers of the LLC. These officers may be given the powers as stated in the company agreement.
LLC's are unique and provide some advantages over both corporations and partnerships. General partners, including general partners in a limited partnership, have unlimited liability, unlike members of an LLC. Owners who wanted to avoid the double taxation that can occur when doing business as a corporation, who, in the past, often chose to do business as a partnership for their tax advantages, can now do most of what was done in either a corporation or a partnership, by forming an LLC.
For more information, please see the accompanying articles: Choice of Entity, Corporations and Corporate Responsibilities, Benefits of a Limited Partnership, Registered Limited Liability Partnerships and Limited Liability Companies, Conversion of a Corporation to a Limited Partnership
This informational memorandum from the law offices of Thomas D. Solomon, P.C. is provided as a courtesy to our friends and clients to provide them with items of interest in the area of limited liability companies. It is not and is not intended to be an exhaustive treatment of its subject matter, but rather an overview of some of the pertinent elements of such subject. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have any questions, please call us.
