What Is a Texas Limited Liability Company?

A Texas Limited Liability Company (LLC) is a legal business entity created under the Texas Business Organizations Code. An LLC provides business owners with a formal structure for owning and operating a business while generally providing limited liability protection to its owners. The owners of an LLC are called members, and an LLC may have one or more members. Members can be individuals or, in many circumstances, other legal entities such as corporations, partnerships or trusts.

One of the reasons the LLC has become a popular business structure is its combination of liability protection, management flexibility and tax flexibility. Unlike a traditional corporation, a Texas LLC does not have to be organized around shareholders, a board of directors and corporate officers. Instead, an LLC can generally be member-managed or manager-managed, allowing the owners to choose how the business will be operated. The selected management structure is identified in the company's Certificate of Formation.

Key Components of a Texas LLC

A properly established Texas LLC generally has several important components.

1. LLC Name

The business must have a legal name that satisfies Texas requirements for entity names. The name must be distinguishable in the records of the Texas Secretary of State from existing entities and certain other registered names. Choosing and checking an appropriate business name is an important first step in the formation process.

2. Certificate of Formation

The Certificate of Formation is the document filed with the Texas Secretary of State to create the LLC. Texas Form 205 is the standard Certificate of Formation form for a Texas LLC. The filing establishes the entity under Texas law and contains information required or permitted by the Texas Business Organizations Code.

3. Registered Agent and Registered Office

A Texas LLC must maintain a registered agent and a registered office in Texas. The registered agent is responsible for receiving service of process and certain official notices for the company. The registered office must be a physical Texas address where the registered agent can be personally served during normal business hours; it cannot consist solely of a mailbox or telephone-answering service.

4. Members

The owners of an LLC are called members. A Texas LLC can have one or multiple members, and members can be individuals or certain other legal entities. The company's governing documents establish the members' ownership and other rights and responsibilities.

5. Management Structure

A Texas LLC can generally be member-managed or manager-managed. In a member-managed LLC, the members participate in managing the business. In a manager-managed LLC, designated managers are responsible for managing the company. The management structure is identified in the Certificate of Formation.

6. Company Agreement / Operating Agreement

An LLC's internal governing document is commonly referred to as an Operating Agreement or Company Agreement. It can establish rules concerning ownership, management, voting, distributions, responsibilities of members and managers, and other aspects of the company's internal affairs. Texas law recognizes the company agreement as an important governing document of an LLC.  An Operating Agreement is particularly valuable when an LLC has multiple owners because it can help establish expectations regarding ownership, decision-making, contributions, distributions and what happens if an owner leaves the company or the ownership structure changes.

7. Federal Employer Identification Number (EIN)

Many LLCs obtain a federal Employer Identification Number (EIN) from the Internal Revenue Service. An EIN is a federal tax identification number used for purposes such as federal tax administration and, depending on the circumstances, opening business bank accounts and handling employees or other business activities. The Texas Secretary of State does not issue EINs; they are issued by the IRS.

8. Business Purpose

A Texas LLC may generally be formed for any lawful purpose that is not prohibited by law. The Certificate of Formation can state a general business purpose or, when appropriate, include more specific provisions. Certain regulated or licensed activities may have additional requirements.

9. Initial and Ongoing Business Records

Forming an LLC is the beginning of the company's legal existence, not the end of the business-organization process. Business owners should maintain appropriate company records and keep important documents, agreements, financial records and ownership information organized.  Depending on the business and its activities, an LLC may also need business licenses, permits, insurance, tax registrations, contracts, bookkeeping and other compliance-related services.

Liability Protection

One of the primary reasons business owners consider forming an LLC is the potential for limited liability protection. Generally, an LLC is a separate legal entity from its members, and members are generally not personally liable for the company's debts and obligations solely because they are members.

However, forming an LLC does not mean that a business owner can never be held personally responsible for a debt, obligation or legal claim. Personal guarantees, individual conduct, failure to maintain appropriate separation between the business and its owners, and other circumstances can affect liability. Business owners should consult a qualified attorney regarding their particular situation.

Tax Treatment

An LLC can provide flexibility in how it is taxed for federal income-tax purposes. Depending on the number of members and elections made with the IRS, an LLC may receive different federal tax treatment. Texas LLCs are also subject to applicable Texas tax requirements, including the state's franchise-tax system. Because tax treatment can vary significantly from one business to another, business owners should consult a qualified tax professional or CPA before selecting a tax classification or making a federal tax election.

Flexibility for Different Types of Businesses

Texas LLCs can be used for many types of businesses, including service companies, professional and consulting businesses where permitted, real estate-related businesses, investment businesses, retail businesses and other lawful commercial activities.  An LLC may also be appropriate for a business with a single owner or a company with multiple owners. The appropriate structure, management arrangement and governing documents depend on the circumstances of the business.

What Is A Texas Corporation?

A Texas corporation is a legal business entity created under the Texas Business Organizations Code. A corporation is legally separate from the individuals who own it. The owners of a corporation are called shareholders, and ownership is represented by shares of stock.

Corporations provide a formal structure for owning, managing and operating a business. They can be used by businesses of many different sizes and industries and may be particularly useful when a business wants a clearly defined ownership structure, plans to have multiple owners, or anticipates raising capital through the issuance of ownership interests.

One of the defining characteristics of a corporation is the separation between ownership and management. Shareholders own the corporation, while the corporation's affairs are generally managed through a formal structure involving a board of directors and officers. This structure can provide clearly defined roles and responsibilities as the business grows.

Key Components of a Texas Corporation

A properly organized Texas corporation has several important components that establish its legal existence, ownership and management structure.

1. Corporate Name

A corporation must have a legal name that complies with Texas requirements. The name must be distinguishable from certain existing names on the records of the Texas Secretary of State. Business owners should verify name availability and ensure that the selected name satisfies applicable Texas requirements before filing the formation documents.

2. Certificate of Formation

The Certificate of Formation is the document filed with the Texas Secretary of State to create the corporation. For a Texas for-profit corporation, Form 201 is commonly used for the Certificate of Formation.

The Certificate of Formation establishes the corporation as a legal entity under Texas law and contains information required by the Texas Business Organizations Code, including information concerning the corporation's name, registered agent, governing authority and authorized shares.

3. Registered Agent and Registered Office

A Texas corporation must maintain a registered agent and a registered office in Texas. The registered agent receives service of process and certain official notices on behalf of the corporation.

The registered office must be a physical address in Texas where the registered agent can be personally served during normal business hours. A mailbox or telephone-answering service by itself generally does not satisfy the registered-office requirement.

4. Shareholders

The owners of a corporation are called shareholders. Shareholders own shares of stock representing their ownership interests in the corporation.

A corporation may have one shareholder or multiple shareholders. The corporation's records should identify its shareholders and the number and type of shares they own.

5. Authorized Shares

The Certificate of Formation establishes the number of shares the corporation is authorized to issue. Shares represent ownership interests in the corporation and can be an important component of the company's ownership and capitalization structure.

Authorized shares and issued shares are not necessarily the same thing. A corporation may be authorized to issue a certain number of shares but initially issue only a portion of those shares to its shareholders.

6. Board of Directors

The board of directors is an important part of the formal corporate management structure. Directors are responsible for overseeing the corporation and exercising the powers and responsibilities assigned to the governing authority under applicable law and the corporation's governing documents.

The board may make significant decisions concerning the corporation's direction, business affairs and management.

7. Corporate Officers

Corporations commonly designate officers to handle specific management responsibilities. Depending on the corporation, these positions may include a president, secretary, treasurer or other officers.  Officers may be responsible for managing the corporation's day-to-day operations and carrying out decisions made by the board of directors.  The specific titles and responsibilities can vary depending on the corporation and its governing documents.

8. Corporate Bylaws

Corporate bylaws establish rules for the internal operation and governance of the corporation. Bylaws may address matters such as shareholder meetings, director meetings, officer responsibilities, voting procedures, corporate records and other internal corporate procedures.

Bylaws are an important part of establishing a clear framework for how the corporation will be governed.

9. Stock Certificates and Ownership Records

Stock certificates may be used to document ownership of shares in a corporation. Even when physical stock certificates are not used, the corporation should maintain accurate ownership records showing the shareholders and the shares issued to them.

Proper ownership records become particularly important when ownership changes, shares are transferred, new investors are brought into the company, or the corporation takes other significant actions involving its equity.

10. Organizational Actions and Initial Meeting

A newly formed corporation generally needs to take organizational actions to establish its operating structure. These actions may include appointing or confirming directors and officers, adopting bylaws, approving banking arrangements and addressing other matters necessary to begin operating the corporation.  An initial organizational meeting or written organizational actions can document these decisions and establish the corporation's initial records.

11. Federal Employer Identification Number (EIN)

A corporation generally needs a federal Employer Identification Number (EIN) issued by the Internal Revenue Service. The EIN is used for federal tax administration and may also be needed for activities such as opening a business bank account, hiring employees and conducting other business transactions.

The Texas Secretary of State does not issue EINs. EINs are issued by the IRS.

Limited Liability

One of the primary reasons business owners consider forming a corporation is the potential for limited liability protection.  Because the corporation is a separate legal entity, shareholders are generally not personally liable for the corporation's debts and obligations solely because they own shares in the corporation.

Limited liability protection, however, is not an absolute guarantee that a shareholder will never have personal liability. Personal guarantees, individual conduct, failure to maintain appropriate separation between the corporation and its owners, and other circumstances may affect liability.  Business owners should consult a qualified attorney regarding how liability protection applies to their specific circumstances.

Ownership Through Stock

A corporation's ownership structure is based on shares of stock.  This can make the corporate structure useful when ownership needs to be divided among multiple individuals or when a business anticipates bringing in additional owners or investors.

For example, a corporation could issue shares to its founders and later issue additional shares, subject to applicable law and the corporation's governing documents. The issuance and transfer of corporate shares can have legal and tax consequences and should be handled appropriately.

Separation of Ownership and Management

One of the key characteristics of a corporation is the distinction between shareholders, directors and officers.

• Shareholders own the corporation.
• Directors provide corporate governance and oversight.
• Officers generally manage the corporation's day-to-day affairs.
• Employees and contractors perform operational functions as directed by the company's management.

In a small corporation, the same individual may serve in multiple roles. For example, one person may be the sole shareholder, director and officer.  As a company grows, these roles can become increasingly distinct.

Corporate Governance

Corporations generally have a more formal governance structure than many other business entities. Maintaining appropriate corporate records can help document important decisions and demonstrate that the corporation is being operated as a separate legal entity.

Corporate records may include:

• Certificate of Formation
• Corporate bylaws
• Initial organizational actions or meeting minutes
• Shareholder records
• Stock issuance records
• Board resolutions
• Major corporate agreements
• Financial and tax records
• Other important business documents

The corporation should keep its records organized and current as the business changes.

Tax Treatment

A corporation is a separate entity for federal tax purposes, but its actual tax treatment depends on the type of corporation and elections made with the Internal Revenue Service.  For example, a corporation may be taxed as a C corporation, while certain eligible corporations may elect S corporation treatment for federal tax purposes.  S corporation status is a federal tax election and is not simply another type of Texas corporation formed by the Texas Secretary of State.

Tax considerations can be complex and may affect how profits, losses, compensation and distributions are treated. Business owners should consult a qualified CPA or tax professional before making tax elections or choosing a business structure based on tax considerations.  Texas corporations may also be subject to applicable Texas franchise-tax requirements and other state tax obligations.