The State of Texas generates many small businesses each year. One reason is that it is a friendly state for entrepreneurs. One example is the Texas Limited Liability Company Act which allows a business to be run through an asset protection entity known as a Texas limited liability company. This vehicle offers many advantages and benefits for business which are helpful to every person operating a business in Texas. The most important benefit of a Texas LLC is that owners are not personally liable for the business debts and liabilities of the company merely because they are owners. This is not the case if you do not use an entity like this and run your business as a sole proprietor. Sole proprietors are 100% personally liable for whatever happens in their business. And, as recent lawsuits reveal, many lose their homes, savings and assets because of this. But the Texas LLC protection takes this sole proprietor risk away as long as your Texas LLC is properly formed and used to operate a business. This is a huge advantage and makes it a no brainer if you are deciding whether to use one. The costs to form and maintain one is so low compared to the potential value you can measure of keeping your personal assets protected. In today's world where people sue for anything and small business lawsuits are an epidemic, this is an essential protection you need for business. A second benefit of using this kind of vehicle for your business is that the Texas LLC is an official entity and the use of one automatically distinguishes you from all the non-legal entity businesses out there. Potential customers view official legal entity businesses as more trustworthy and professional so this can help with getting your business started and obtaining customers. Federal income tax choices is the thir benefit of a Texas LLC. The IRS allows a limited liability company in Texas to only be subject to a single layer of taxation automatically. This is a tremendous advantage over C corporation taxation which involves profits being subject to taxation twice (double taxation). You do not have to worry about qualifying or meeting the requirements of S corporation taxation either. With a Texas LLC, you get pass through taxation period. Or, if your accountant finds that your business will be better off under a corporation taxation structure, the Texas LLC is eligible to change its structure by making an election. Another benefit is that a Texas LLC is very simple to manage and operate. Unlike corporations, there are no legally mandated formalities or structures when it comes to management and operations. In fact, the law allows for the owners to decide what rules and processes will apply to their business. Flexibility becomes a real benefit in an actual business setting. This is because every business is different and this allows a business to structure itself in accordance with its own needs and concerns versus having to fit in to a one size fits all structure. Simple and small businesses can have an extremely simple management structure while more complicated LLC businesses can adopt the necessary governance processes and rules to meet their needs. In summary every business owner in Texas should form a Texas LLC as the first step when it comes to starting a business.
The Texas Secretary of State significantly revamped the regulations applicable to the Texas LLC in 2003 when it enacted the Business Organizations Code. This Code did not become effective until 2006. From 2006 on, the TX limited liability company is governed by Title 3 which covers the Texas Limited Liability Company Law.
LIABILITY PROTECTION
The biggest reason to form a Texas LLC is protection against personal liability. A business run as a sole proprietorship without a legal entity places the owner entirely at risk for personal liability. Given our litigious society and its growing number of plaintiff attorneys looking for cases, every business should operate with a legal shield.
The legal shield states that members (who are owners) are not liable for the business obligations, lawsuits and other liabilities of the business merely because they are owners. This protection is a tremendous benefit that becomes more significant as your business becomes more successful and thus becomes a larger target for lawsuits.
EASE OF EQUITY CAPITAL RAISING
Many new businesses need access to capital when starting. While borrowing money is the most common option, many business owners opt to raise equity capital by raising money in exchange for issuing ownership interests in the business.
Because the Texas LLC has an ownership structure where members can own defined ownership interests similar to the stock of a corporation, the raising of capital is much easier to structure and document as compared to a sole proprietorship. Plus, most investors will require a legal entity structure for their investments.
MORE TRUSTWORTHY AND PROFESSIONAL IMAGE
Customers are very skeptical today and with reason. After all, there are so many scam and pretend businesses out there trying to take money from customers. It is so easy to say you are a business because anyone can just come up with a business name and call themselves a business.
By taking the time to form a Texas LLC for your business, you are evidencing a significant business planning step which is a sign of a serious and legitimate business. Customers will see the LLC designation after business name and perceive more trust. You can get more customers faster with a TX limited liability company.
FLEXIBLE AND EVOLVING BUSINESS STRUCTURE
Most businesses start out needing a very simple and straightforward ownership and operational structure. The Texas LLC meets these needs because it requires a lesser number of formalities and maintenance requirements than a corporation. The LLC can be set up fairly quickly.
However, any successful business will evolve over time and as it grows, there may be a need to alter the LL structure to account for growth or more complexity. For example, the LLC may hire more employees or managers later or it may need to issue more ownership as new members are admitted to help with the business.
A Texas LLC allows a business to define for themselves, matters of relative rights, powers, duties and voting rights among members or managers. This prevents having a one size fits all management structure that may not be appropriate for your particular business.
CHOICE OF FEDERAL INCOME TAX STRUCTURE
One of the main reasons the TX limited liability company is so popular is because the Internal Revenue Service allows for an LLC to choose its choice of tax structure. Unlike the period prior to 1997, there are no longer any additional requirements to qualify for a single layer of pass through taxation.
When you form a Texas LLC, the default taxation rule is a single layer of pass through taxation. For a single member entity, it is called disregarded entity taxation and for a multi-member entity, it is called partnership taxation. This type of taxation avoids the potentially significant double taxation effect of corporate taxation.
However, in some circumstances, your accountant may deem a corporation tax structure as more appropriate for your business. In these cases, a Texas LLC can elect to be taxed as a C corporation or an S corporation (if it meets the S corporation requirements). No other legal entity has this many choices when it comes to how it will be taxed.
In order to gain all these benefits and not place your liability at risk, insist on a complete and proper Texas LLC formation using a reputable attorney or a Texas experienced LLC formation service provider.
Both Christine Snook & are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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