Law Office of Stephen Boyd Moon, PLLC Blog

January 5, 2010

A Primer on Limited Liability Companies (LLC) in the State of Texas

Filed under: Uncategorized — admin @ 9:05 PM

A brief history and introduction of the basic entity spectrum.

A limited liability company (LLC) is a statutorily created business entity.  There are several options across the business entity spectrum.  In particular, there are corporations (C-Corporations and S-Corporations), limited partnerships, limited liability partnerships and LLCs.  Each and every entity choice has its benefits and its drawbacks, and when choosing an entity for one’s business, one must choose the entity that can satisfy one’s liability concerns as well as taxation issues.  My experience has led me to the conclusion that the LLC can often satisfy both of these concerns.

Historically, LLCs have been around for only a short period of time.  LLCs were first authorized in Europe and found their way to the United States in the early 1980’s.  Wyoming was the first state to acknowledge their existence under statute in 1982.  Other states quickly followed suit.

Before LLCs became common business vehicles in the United States, choices were limited to partnerships and corporations.  Corporations were fantastic because they allowed entrepreneurs to engage in business and incur only limited liability.  The problem with corporations initially were that corporations are subject to “double taxation”.  That is, the corporation is assessed with an income tax, and the shareholders are hit again with an income tax on their shares and dividends.  For this reason, corporations are not a popular choice for most small businesses.

On the other side of the business entity spectrum is the general partnership.  General partnerships can avoid double taxation, but they do not enjoy any limited liability protection.  In a general partnership, each general partner is unlimitedly liable for the debts and obligations of the partnership.  Furthermore, each partner is liable for the debts and obligations made by the other partner in the pursuit of the business enterprise.

Initially there were two general entity types.  One provided limited liability protection, but was hampered by double taxation – the other avoided double taxation, but offered no limited liability protection.  In order to solve this problem, the IRS acknowledged the creation of S-Corporations (S-Corps).  S-Corps do not experience double taxation like their C-Corp brethren; however, they do share in the limited liability offered by C-Corps.  In order to regulate these new entities, the IRS established strict guidelines for S-Corps.  Failure to meet these guidelines can cause an S-Corp to lose its double taxation exemption.  It is important to stay abreast of these requirements since they can frequently change.

S-Corps are wonderful business vehicles.  However, like any corporation, meticulous attention to detail and strict adherence to corporate by-laws are essential.  Corporations must have a board of directors, shareholders and officers, and must follow strict corporate protocol.  Failure to adhere to the by-laws can cause a corporation to be stripped of its limited liability protection.  Often business owners can become mired in these complexities and may find themselves focused more on corporate formalities rather than the day to day business.

Because of all of the foregoing issues (double taxation and the difficulty of operating corporations), the various states enacted legislation to permit the formation of LLCs.  LLCs share all of the flexibility of a general partnership, the pass-through taxation of an S-Corp (and partnership) and the limited liability of corporations.  Indeed a S-Corp can accomplish much the same goals as a LLC – but, if you are speaking in a strictly utilitarian sense, a Model T can accomplish many of the same purposes of a Lamborghini.

How to form an LLC

As stated above, LLCs are statutorily created entities.  They cannot be formed under the common law and must be “chartered” or certified by the state government.  In Texas, the Secretary of State handles the certification of LLCs.  The formation is relatively basic – the member or members (owners of LLCs are called members) pay a filing fee and file the Certificate of Formation.  The Certificate of Formation contains the identifying information of the company (i.e., names of member[s], addresses, registered agent and the purpose and duration of the business).  If the Certificate meets the formal requirements, the Secretary of State will acknowledge the legal existence of the entity.  This Certificate of Formation puts the public on notice that the company is only limitedly liable for its debts.

While one can legally form an LLC by simply filing the Certificate of Formation, there are many more issues that must be addressed.  Regardless of whether there is one member or fifty members, the company must have a Company Agreement.  The Company Agreement is synonymous with the by-laws of a corporation and sets forth the contractual relationship between the members, the duties of members and officers, company protocol, protection against creditors and a litany of other issues.

Members must also determine how the company is to be funded.  If the company is going to own real property, the members must make contributions of real property.  The same goes for funding with cash and personal property.  Bank accounts must be opened in the name of the company and day to day business affairs must be handled in the name of the company.  Meetings also must be held in compliance with state law and the company agreement.

How much does it cost to form an LLC?

The cost to form an LLC varies.  The filing fee is typically set by the state on a year to year basis and can be ascertained by visiting (in Texas) the Secretary of State’s website.  Some private online services will “draft” the forms for you; however, in my practice I have seen clients spend far more in legal fees in cleaning up the messes created by trying to form their LLC on the cheap.  Most attorneys are going to charge in the neighborhood of $500 to $1,200.  Attorneys’ fees are dependent on the complexity of the structure and the amount of time involved.  Most of the time, attorneys will include funding instruments in the fee paid to create the LLC.

Is an LLC right for my business?

More likely than not, an LLC will serve your needs; however, there is a chance that another type of entity might be better.  As discussed above, there are many different types of entities (C-Corps, S-Corps, Limited Liability Partnerships, Limited Partnerships and General Partnerships ) as well as combinations of different entities, and each has its pros and cons.  In my experience, the LLC is usually a catchall and can be used in most situations.  Only an experienced attorney should advise you as to the proper vehicle for your business.  Please feel free to post a question or contact me by email or phone.  I would be more than happy to discuss your options.  The foregoing is not intended, nor should it be taken, to be legal advice.  You should consult an experienced attorney before forming any legal entity.

Law Office of Stephen Boyd Moon, PLLC – www.sbmoonlaw.com

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