Forming a Limited Liability Company
The Benefits Of Forming A Limited Liability Company For A Lubbock Texas Business
When forming a new business, there is nothing more important than starting out on the right foot. I cannot count the number of times that I have been approached by a new client who is involved in a significant legal dispute that his or her business could have completely avoided, but because of skipping a crucial step early in the life of their business, they are involved in complex and costly litigation that unfortunately threatens to destroy everything that they have worked for. Forming a Limited Liability Company, or “LLC”, can protect you and your business.
One of the biggest mistakes that new business owners can make is by operating the business as a sole proprietorship or a d/b/a, rather than taking the time to form a valid legal entity. Notably, there are numerous forms of entities that a business can choose to operate as. A skilled attorney will be able to discuss your business with you to help determine which entity best meets your needs. However, one entity type that affords owners with a great degree of protection and flexibility is the Limited Liability Company, or “LLC.”
What Is A Limited Liability Company (LLC)?
A Limited Liability Company, or “LLC” is a type of business entity governed by the Texas Business Organizations Code. While the LLC bears some similarities to both a corporation and a partnership, it is a distinct type of entity.
The owners of an LLC are referred to as “members.” Membership in an LLC is flexible, allowing LLCs to be owned by natural persons, or even owned by other entities. The members can also choose to manage the entity themselves or to appoint managers.
Benefits Of A Limited Liability Company (LLC)
The primary benefit of operating a business is an LLC is that it provides personal liability protection for the owners of the business. This means that so long as the entity is properly formed and properly operated, the owners of a Texas LLC are protected from the liabilities and creditors of the LLC. Given how significant this protection is, it is highly advisable that the members of an LLC seek skilled legal counsel to make sure that the LLC formation documents are properly prepared and filed, and to advise the business on “best practices” so as to ensure that these liability protections are not inadvertently waived.
Another benefit of the LLC is its flexibility. Not only can an LLC’s operating agreement be customized to fit the needs of the business and its members, but the LLC structure provides very flexible options for dealing with taxes. By default, a Texas LLC is taxed as a “pass-through entity” (similar to a sole proprietorship or partnership) and all of the profits and losses of the LLC “pass through” the LLC to the members, who report the profits and losses on their personal tax returns. However, an LLC can elect to be taxed as an s-corporation or c-corporation instead. This flexibility allows the managers of a business to choose the best tax option for the needs of the LLC and its members.
Forming A Limited Liability Company (LLC)
The first step in forming an LLC is to choose a name for the business. Under Texas law, an LLC name must contain the words “Limited Liability Company,” or certain approved abbreviations of that term. The LLC’s name must also be distinguishable from the names of other business entities already on file with the Texas Secretary of State. Deciding on a good name for the business that is not already in use is often difficult for new business owners. However, the business name of the LLC does not necessarily have to be the name under which the business operates. Many businesses opt to form the LLC under one name and use a brand name they can trademark as a d/b/a of the LLC for marketing purposes.
Once a name is selected and approved, the business will request an EIN from the Internal Revenue Service, and file a certificate of formation with the Texas Secretary of State. The certificate of formation must include:
- the LLC’s name,
- the name and address of the LLC’s registered agent,
- whether the LLC will be member-managed or manager-managed,
- the name and address of the LLC’s governing person(s),
- the name and address of the LLC’s organizer, and
- the effective date of the certificate.
Once that document is filed (along with the filing fee) and accepted by the Texas Secretary of State, the business is deemed formed. However, many LLC’s will need additional documents prepared in order to tailor the rules and formalities of the company to the needs of the members. The most significant of these documents is the operating agreement.
An LLC operating agreement allows the members of an LLC to structure their financial and working relationships in a way that suits their needs. In the operating agreement, the members will establish each owner’s percentage of ownership in the LLC, establish how to share profits (or losses), establish the rights and responsibilities of the members, and include provisions for what will happen to the business if an owner withdraws, passes away, or otherwise becomes unable to participate in the affairs of the LLC. While this document is not required by Texas law, the ability to establish these rules and procedures through an operating agreement is one of the significant benefits of having an LLC in the first place. A skilled attorney can work with the members of an LLC to prepare an operating agreement that not only provides them with superior liability protection but also sets up the LLC to avoid both common and uncommon pitfalls that would otherwise be significant issues in the absence of an operating agreement.
A Skilled Attorney Can Help Form Your LLC
The information outlined above is merely a basic summary of Texas Limited Liability Companies and does not cover the full breadth of Texas LLC characteristics, nor the specific considerations required to determine whether an LLC is the best entity choice for a particular business. However, LLC’s are a great entity choice for a number of businesses due to their inherent flexibility. A skilled attorney can discuss your business with you to advise if an LLC is your best option, and tailor the entity to fit the specific needs of your business through the LLC formation, and the drafting of a personalized operating agreement.
While new businesses specifically can benefit from operating as an entity from day one, if your business is already running, it is not too late to reorganize under a new entity to make sure that you are protected in the future.
Please feel free to make a call today to schedule a free consultation with me to discuss your businesses’ needs.
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