Operating a Business as a Texas LLC

Significant similarities exist between using an LLC to run a business and using a limited partnership. Using an LLC is less complicated because there is only one entity, instead of two, as when using a limited partnership (the general partner plus the limited partnership itself.

In Texas, an LLC is formed by preparing a certificate of formation and filing it with the Texas Secretary of State. The next step is organizing the LLC by holding an organizational meeting or preparing and signing a consent statement in place of the organizational meeting. The meeting or consents should authorize such actions as adopting the certificate of formation and company agreement, electing managers (for a manager-managed LLC) and officers, authorizing the ownership interests, the admission of members, capital contributions, and other administrative matters.

?LLCs are typically organized and structured much like a corporation. Its owners are called members. They may be divided into one or more classes or groups, each with different rights, powers, and duties. Classes of members may also be given different voting rights.

?An LLC is governed by its company agreement, a document similar to corporate bylaws or partnership agreements. A company agreement has provisions dealing with the regulation and management of the LLC. These can include provisions that set forth the purpose for which the LLC has been organized, the members' names and their capital contributions, how the LLC will be managed, and the powers and duties of the members, officers, and managers. The LLC’s company agreement can set out the specific rules of how the business will be run, how decisions will be made, how expenses will be incurred and paid, and how profits and losses will be allocated for tax purposes and distributed to the members. Additionally, an LLC's company agreement sets out the method and manner in which members vote and how managers, if a manager-managed LLC, meet and vote.

?The voting process and procedure for members and managers is similar to the voting rights of shareholders and directors in a corporation. Just as corporations may have more than one class of shareholders, with each class having different voting rights or even no voting rights, members of an LLC may have differing classes of ownership interests and voting rights. The company agreement should also specify how the LLC will be terminated and how cash or other assets will be distributed upon termination.

Because most LLCs are closely formed by those who know and trust one another, the company agreement can restrict the transfer of ownership interests without satisfying the company agreement's provisions. Depending on the rules of the jurisdiction, if the provisions are not satisfied, then the transfer is not effective, the proposed assignee does not become a member, and has limited rights as to the ownership interest.

One of the principal advantages of forming an LLC is to limit or reduce personal liability for business bills and debts. However, officers, members, and managers may be personally liable for the LLC's debts. For example, creditors and landlords may require the LLC members to sign a personal guaranty agreement under which they agree to be personally liable for the LLC's debts. Additionally, disregarding LLC formalities, commingling personal assets with the LLC's assets, or otherwise failing to clearly separate members from the LLC can open the door for a creditor to convince a court to "pierce the veil" and hold members personally liable for the LLC's debts. Referring to a co-owner as a partner or the LLC as a partnership could allow a creditor to argue that it was misled into thinking it was extending credit to a partnership, so the owners should be treated as partners and have personal liability for LLC debts. To ensure they do not create personal liability, all contracts and credit agreements should be reviewed carefully.

All members, managers, and members (governing persons ) should carefully read the LLC’s certificate of formation and company agreement to ensure the LLC’s operations follow the company document’s requirements. The governing persons should also determine if the LLC will be required to collect sales tax from its sale of goods or services and, if any permitting, collecting and remitting, filing, or other similar governmental requirements apply to the LLC. The LLC’s business or activity may be subject to state licensing requirements, fees, or business/occupational taxes.

?The LLC must apply to the Internal Revenue Service for an employer identification number on the required Internal Revenue Service form. It will use this number with all filings and funds collected by the LLC and paid to the IRS for FICA (social security) and withholding taxes collected from its employees and all its IRS filings. If the LLC does not collect and pay the required FICA and withholdings, those responsible for the withholding and deposits can be personally liable for the nonpayment. Texas requires all entities to file a margin tax return each year and pay the required taxes. If the tax is not timely paid, penalties and interest will accrue. If the taxes remain unpaid, the state will forfeit the LLC’s certificate of formation.

?An LLC should do business under the name exactly as specified in the formation documents. The LLC’s letterhead, invoices, receipts, business cards, signs, stationery, and all other documents should reflect the full and correct LLC name. If the LLC does business or goes by any name other than shown in its formation documents filed with the state, it must file an assumed name certificate or other similar document with the proper state or local officer.

?A manager-managed LLC should hold annual member’s meetings to elect managers and manager’s meetings to elect officers. Additionally, the meetings can be used to discuss and review the LLC’s business activities, financial statement and condition, ?prior year’s business results, and conduct and discuss other similar matters. In place of meetings, members and managers can substitute signed written consents.

The LLC should open a bank account in its correct name, ensure that all LLC revenues are deposited in it, and all LLC expenses are paid from it. The LLC account should never be used to pay personal expenses. All LLC loans and banking activities should be conducted in the name of the LLC rather than the owner’s name to avoid personal liability for those obligations. If the LLC borrows money, the managers or members should approve the loan (depending on whether the LLC is a member or manager-managed LLC). These transactions can be approved by resolutions adopted at meetings or by written consent. When a contract or other document is signed on behalf of an LLC, the contract should always show the signer’s title to make clear that the signer is acting as a representative of the LLC and not in its individual capacity.

?Likewise, all leases, contracts, and other significant transactions should be handled similarly. These would include employment contracts, buy-sell agreements, profit-sharing and pension plans, trust agreements, loans, leases, significant purchases, important decisions that could affect the capital structure or finances of the LLC, and any other matters outside the ordinary course of the LLC’s business.

?This informational article from the law offices of Thomas D. Solomon is provided as a courtesy to provide information. It is not intended to be an exhaustive treatment of its subject matter but a presentation of some elements of such transactions. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have questions, please call.

.