Thinking of forming a Texas limited liability company (“LLC”)? In this first part of our five-part series about Texas LLCs, we discuss a few things you should know about this popular option.
- Flexible Ownership. An LLC’s may have one or more owners called “members.” The members may consist of entities, individuals and/or trusts.
- Flexible Management. An LLC’s members may manage the LLC, or outsource management of the company to appointed managers who take care of the company’s day-to-day business.
- You can form an LLC in a just a few days. Getting set up with the Texas Secretary of State (SOS) requires filing a Certificate of Formation and paying the filing fee ($300.00 as of the date of this article).
- A registered agent and registered office are required. The appointed registered agent receives service of process, notice or demand. Domestic entities, foreign entities registered to do business in Texas, or an individual residents of Texas may serve as registered agents. The LLC cannot act as its own registered agent. The registered agent must consent (written or electronic) to serving as registered agent and the name of the registered agent is listed in the public records. The LLC must also have a street address where service of process may be personally served on the entity’s registered agent during normal business hours. This is a “brick and mortar” location, and not a PO box or mailbox service.
- LLCs provide structural flexibility and often favorable tax treatment. Provided necessary formalities are followed, an LLC limits liability of its member(s), reduces formalities and provides management flexibility while allowing members to enjoy the pass-through tax treatment afforded to partners in a partnership.
- However, an LLC is flexible when it comes to tax treatment. Starting to see a pattern? Provided certain conditions are met, if the members prefer that the LLC be taxed as a corporation rather than a partnership, the LLC may file an S-Corp election. In certain circumstances, the IRS may categorize the LLC as a disregarded entity.
- The Texas Business Organizations Code (“TBOC”) governs management of the LLC. If you do not have a company agreement, or if a specific matter is not addressed in your company agreement, the TBOC governs the internal affairs of the company. When you hire an attorney to form an LLC, the attorney’s most crucial piece of work is the company agreement. A company agreement allows the members to determine and customize how they want to manage the company and govern the relationships between members, managers, officers, assignees of membership interests in the company. The agreement also allows the members to waive or modify certain default provisions in the TBOC governing LLCs.
- LLCs are subject to the Texas franchise tax. Upon formation, the Texas Secretary of State provides the new LLC’s information the Texas Comptroller. The Texas Comptroller imposes franchise tax on each taxable entity formed or organized in the State of Texas. Even if the LLC falls below the minimum revenue for imposition of franchise tax (i.e., $1,130,000 in 2018), it must file a Texas franchise tax return by May 15 of each year. In some circumstances, you may need to apply for other tax permits (e.g., sales and use, mixed beverage, etc.). For more information, speak with a tax professional and visit https://comptroller.texas.gov/taxes/franchise/.
- A LLC has a perpetual existence. An LLC exists perpetually unless provided otherwise in the certificate of formation. The TBOC and/or company agreement have provisions regarding winding up and termination of the LLC.
- An LLC may be voluntarily or involuntarily terminated. The owners, managers or governing authority may determine that the existence of the LLC should terminate, or an event may occur that requires the winding up or termination of the entity. If either of these occurs, the LLC winds up its affairs in accordance with the company agreement and/or the TBOC. Once wind-up is completed, the LLC files a Certificate of Termination with the SOS.
Disclaimer: This article is not a substitute for tax or legal advice. Every situation is different; you should not rely or act upon the contents of this article without seeking advice from your own attorney. Use and access to this article or any materials or information provided herein do not create an attorney-client relationship between you and Christine Stroud, PLLC d/b/a Fincher Stroud Law, PLLC (the “Firm”). By providing public access to this article, the Firm is not purporting to solicit or render legal or other professional advice or opinions on specific facts or matters, and the Firm is not creating or intending to solicit or create an attorney-client relationship between you and the Firm.