The most common type of business entity formed last year in Texas was the limited liability company, or LLC. But what is a LLC? A limited liability company is a type of entity that combines characteristics of both partnerships and corporations.
First, LLCs allow for pass-through tax status for income generated. This means any LLCs profits are accounted for on the owners (called a member in LLC terms) federal income tax report filed every year. Unlike a corporation, where the profits are first taxed by a corporate tax, and then the owners will be taxed again on the income they receive from their business through disbursements. This provides an immediate benefit compared to corporations.
Second, LLCs provide the same level of liability protection for its owners as a corporation. Unlike partnerships, where a general partner is liable personally for any and all debts of the partnership, a member of an LLC is provided protection from company liabilties, so long as it cannot be proven that the business itself was for the personal benefit of a member (called piercing the corporate veil.) With these two characteristics, it's no wonder that this type of entity is fast becoming the preferred structure of businesses in Texas.
What does it take to file (and get the best protection of) an LLC? First, a person must check the Secretary of State's website to ensure the name of their potential business is available. You can also call the Secretary of State's office to check this as well. Once you have your name, a Certificate of Formation must be filed with the Secretary of State. This states the name of your company, your registered agent, the organizer of the LLC, and the rules for your company (the operating agreement): who the members are, the amount of ownership each person has, and so on. These rules are important, as they spell out exactly how your company will operate and what will happen if certain events occur, like death, sale, transfer of assets, etc.
Second, once the paperwork is filed and the LLC is formed, it is time to have your first meeting. At this first meeting, all the members (owners) of the LLC will adopt the rules stated in the Certificate of Formation. These minutes should be recorded and kept with the Certificate of Formation.
Third, make sure to run your business like a business. Do not use your business account for personal items, and do not use business capital to pay down personal debt. Do not comingle funds between your personal and business bank accounts. The better you keep these financials separate, the better chance you will have of not being held personally liable.
Charlton M. Messer, Attorney at Law
This is for information and educational purposes only, and is not intended to solicit business. If you have any questions about this topic, please contact your attorney.