Texas Limited Liability Companies - Formation and Benefits
The steps required to form a limited liability company (LLC) include:
- Preparing the certificate of formation for the LLC and filing it with the Texas Secretary of State to obtain a certificate of filing and file number.
- Preparing the LLC's company agreement (sometimes called an operating agreement).
- Organizing the limited liability company by holding an organizational meeting or signing a consent statement instead of holding the organizational meeting.
In addition, it is necessary to observe the necessary business responsibilities to maintain LLC status. Failure to follow LLC formalities could result in individual liability to the members if the "veil is pierced." Keeping timely and accurate company records and following LLC formalities is important.
Although one of the principal advantages of forming an LLC is to limit or reduce personal liability for business bills and debts, sometimes, however, the officers, members, and managers could be personally liable for the LLC's debts. For example, when owners first begin a business, many creditors may not extend credit unless they sign a personal guaranty agreement. That agreement creates an express contract that makes the signer personally liable for the company's debts.
An owner can also become liable for the company's debts if company formalities are not followed, or the owners commingle personal assets with the company's assets.
It is important that the owners/management coordinate with the company's accountant or tax adviser to make sure that all IRS filings have been made that are necessary to preserve the election to be taxed as a partnership and that the company's books and accounts are set up correctly.
An LLC has characteristics and benefits similar to those of a corporation and a limited partnership. An LLC has been described as a combination of a subchapter S corporation and a limited partnership. It can engage in any lawful business unless limited by its certificate of formation or the laws governing the business the LLC will conduct. An LLC's owners or investors are called "members" rather than "shareholders." Members, like shareholders in a corporation, own no specific property of the LLC; instead, 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 it can shield its members from personal liability arising from the operation of the business. An LLC can be treated as a partnership for federal income tax purposes. An LLC does not have the restrictions which limit a subchapter S corporation. An LLC may choose to be taxed as a partnership and 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 without being liable for its debts or failure. One drawback of a limited partnership is that the limited partners, in that capacity, cannot direct the partnership's day-to-day affairs and still keep their limited liability status. A person can be an LLC owner and an officer or manager. As an officer or manager, the owner 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. Usually, neither members, managers, nor officers 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.
An LLC is managed by its members or officers and managers. An LLC uses its company agreement to provide its rules, much like a corporation is governed by its bylaws, and a limited or general partnership is governed by its partnership or limited partnership agreement. Although a company s may be similar to corporate bylaws, they are more like a partnership agreement. The members elect Managers yearly, and they need not be Texas residents or LLC members. The Texas Business Organizations Code 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.
LLCs are unique and provide 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 double taxation when doing business as a corporation, who formerly did business as a partnership for their tax advantages, can now do most of what was done in a corporation or a partnership by forming an LLC.
This informational memorandum from the law offices of Thomas D. Solomon is provided as a courtesy to readers to provide them with items of interest regarding limited liability companies. It is not intended to be an exhaustive treatment of its subject matter but an overview of some 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.