What Type of Business Entity Should You Choose? A Limited Liability Company or LLC (Part 4 of 4)

8315315264_13942104e1_zThis is the last installment of a 4 part series entitled “What Type of Business Entity should I choose?”.

In Parts 1, 2, and 3, respectively, I discussed the various aspects of starting a business as a sole proprietorship,  important considerations when forming a business partnership, and the different aspects and steps to take when forming a corporation.

In this Part 4, I will explain the different aspects and steps to take when forming a limited liability company, and why this option is most the popular choice for small business owners when forming your business entity.

Once more, I think it’s important to go back to why people decide to operate under the umbrella of a business entity in the first place. People use, or should use, the protection of a business entity to avoid their personal assets being exposed to liability. Under Texas Law, only some of your personal assets are automatically exempt from liability if you get sued in the course of doing business. Choose wisely, and seek proper legal counsel in your business formation to make sure you get the job done right the first time.

At Romano & Sumner, a big part of our mission is thoroughly educating our clients, and potential clients, on all of the aspects of their situation, and the options they have available to them. Before you decide on a business entity, you should be aware of the pros and cons of each choice regarding the entity you choose to operate under. Our recommendations will vary depending on each client’s circumstances. If you have further questions about making this crucial decision in starting your business, please don’t hesitate to contact us.

Now, onto the Limited Liability Company, AKA LLC:

“So, what is a Limited Liability Company?”

Let’s begin with a definition of the LLC

A Limited Liability Company is the United States-specific form of a private limited company. It is an ideal business hybrid of a few other business entities previously discussed in the other installments of this series. By far, this is going to be the vehicle of choice for most people beginning a small business or “start-up”. These entities are relatively new and combine the best attributes from partnerships and corporations. In form and function, an LLC means a business structure that combines the benefits of pass-through taxation, like a partnership or sole proprietorship, with the limited liability and individual asset protection of a corporation.

To illustrate the various aspects of LLC formation, let’s see what our hero’s from this ongoing series, Clark Kent and Bruce Wayne, are up to now. Clark and Bruce have yet again concocted a great idea for a business called Superheroes League. They have decided that the best business entity to form this new endeavor under is an LLC.

They don’t know where to start though, so Clark and Bruce might should ask proper legal counsel the following questions:

“How do I form an LLC?”

LLC’s are governed by the Texas Business Organization Code, so there are certain steps they must follow when forming their Limited Liability Company:

  • Clark and Bruce must file a Certificate of Formation with the Texas Secretary of State
    • It must include the name – Superheroes League with a designation Limited Liability Company or LLC
    • Include the Business Address
    • List the Governing Authority
    • LLC’s are managed either by manager-members or member-managed.
    • State the purpose of the Company – typically “to conduct all legal business” is sufficient
    • Sign and date it.
    • Pay the filing fee of $300.
  • Clark and Bruce must have a registered agent
    • The registered agent is a person who receives notices on behalf of the company.
    • The individual or company must be a resident of Texas and they must have consented to be registered agent.
  • Clark and Bruce must have a Company Agreement
    • A written agreement is preferred, but in the absence of a written agreement there are certain “default” provisions under the Texas Business Organizations Code.

“Why is an LLC designation typically the best option for a start-up company?”

cydcorHere are 5 simple advantages for Clark and Bruce to choose to form their new business, Superheroes League, as a Limited Liability Company:

  1. A Limited Liability Company allows for many members (think shareholders) but has the ability to vest control in one of them (the manager) – so Clark and Bruce can both put in money, but Clark can keep control solely in his hands.
  2. An LLC allows for tax flow through– no double taxation, like a partnership.
  3. A Limited Liability Company designation provides asset protection.
  4. An LLC is relatively inexpensive to form.
  5. LLC’s are not as complicated as maintaining the corporate formalities of a Corporation.

“Are my assets protected under an LLC?”

Yes, personal assets are protected by an LLC designation similar to the protections provided by a corporation.

“What are the tax implications imposed by the IRS for Limited Liability Companies in Texas?”

While there is no double taxation imposed on LLC’s by the IRS, Texas LLCs are now subject to franchise (margin) tax for active income. The franchise tax is imposed by the state comptroller’s office. However, there are minimum revenue levels your LLC will have to reach before these franchise taxes are applicable. Clark and Bruce will still have to file as an LLC with the IRS in order to receive an EIN for the Superheroes League, LLC.

Clark Kent and Bruce Wayne’s fictional journey to create a business enterprise ends here. I have provided a brief wrap up and some closing thoughts on forming your business entity below:

Common formation of a business entity

Throughout this 4 part series, I have discussed in detail the different aspects, advantages, and specifics of the different types of business entities you can choose when forming your business. A structure that we routinely use in practice is the Limited Partnership entity with an LLC as the General Partner.  There are more costs associated as you are forming two separate entities, but the asset protection and flexibility are greatly enhanced.  You could also have a Limited Partnership with a corporation as a general partner. Different situations require different strategies, so it is always best to consult a small business attorney before you make your decision.

Financing for a Small Business

If you are trying to raise money, then you need to be aware that certain interests are securities and require registration at both the state and federal level, depending on a variety of factors.  A complete discussion of securities laws is outside the scope of this 4 part series.

If you are trying to raise money, consider whether or not a loan versus the sale of any interests would be a better option.  Be aware of state usury laws, and that loans cannot exceed a maximum rate of interest, or the borrower has a cause of action against the lender.

As always, we are here to help clients navigate through the sometimes complicated legal aspects of forming and building their businesses. Contact us today and let us know how we can help you.

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