For Texas LLC prices and State fees, please visit the costs page for forming an LLC in Texas.
Forming a Texas Limited Liability Company (“LLC”) can be a beneficial formation option for your company, especially if you intend to have multiple members and are looking for partnership-type taxation and management qualities, with corporation-like limited liability. As the name implies, a Limited Liability Company offers members limited liability protection from debts and lawsuits. Although Texas does not provide a pure “pass through” entity status for LLCs because it has a business tax for any business formation, the associated franchise fees are minimal in comparison with the benefits offered by a Texas LLC.
Factors to Consider
Establishing your LLC in Texas will allow your company the flexibility to add members, benefit from decreased taxation (by avoiding the “double taxation pitfall” of a standard corporation), and will give your company unparalleled flexibility with respect to how it is organized, how distributions are handled, and how it is run. In effect, your business can reap the benefits and flexibility of a partnership while enjoying the same protections from liability and debt that a corporation provides.
In addition to the limited liability protection, there are also substantial tax benefits to be garnered from the formation of an LLC. The LLC has the “check box method” of taxation available to it, wherein it can choose to be taxed as a “standard” corporation, with the LLC being taxed at the company level, then the members for individual distributions. Or, the LLC can elect to be taxed as a partnership, with “pass through” taxation, with no tax at the LLC level (with the exception of the franchise fee). This garners great flexibility with respect to business and taxation strategies, and can amount to a substantial savings.
Once the election to form an LLC is made, it is imperative that a well-written Operating Agreement be drafted that specifically outlines the distribution methods, rights and benefits of members and the managing member, capitalization, and any other rights, duties, assignments and responsibilities necessary for the proper operation of the LLC. The Operating Agreement can be compared to the bylaws of a corporation, wherein a properly written one, and strict adherence to it, helps to ensure the “corporate veil” protection of the LLC.
Another often-cited benefit of an LLC is that it is not subject to the same, stringent corporate formalities that a C or S corporation is subject to. It can be simpler to establish and run an LLC, provided that a quality, well written Operating Agreement is in place.
A Texas LLC allows for as few as one member or as many members as your company is willing to have, with no limitations on numbers, and no limitations with respect to types of stock. The company must select a managing member who is typically the figure head of the organization and is responsible for it’s management. The profits or losses of the business organization pass directly through to the Member's personal income tax return (“pass through taxation”), with no taxation at the LLC level. The net profit of the LLC is not considered to be income earned by the Members (though it can be for the Managing Member as a special “fringe benefit” treatment--see below), and thus is not subject to self-employment tax.
And it is especially important to consider that Texas does not recognize sub-chapter S corporations and as such, establishing an LLC may be the only way to enjoy the dual benefits of partnership-like flexibility with corporation-type limited liability protection.
Advantages and Benefits of Forming a Texas LLC
- Texas LLC members enjoy Limited Liability protection, which means they are mostly personally protected from any liability of the LLC and successful judgments, as well as from the LLC itself.
- A Texas LLC allows for “multi-tiered” ownership wherein an S or C corporation can be a member (bearing in mind that S Corporations are not recognized in Texas) with no residency restrictions--this can allow for substantial tax benefits, and increased liability protection.
- Texas allows for “single member” LLCs.
- The LLC allows for the "special allocation" of profits--the disproportionate splitting of Member profits and losses (in different percentages than their respective percentages of ownership). This means that Members can enjoy the benefits of receiving profits (and writing off losses) in excess of their individual ownership percentage, so long as it is clearly delineated in the Operating Agreement.
- Managing Members' share of net profit is considered earned income because the Managing Member is considered to be an active owner--therefore qualifying the Managing Member for special "fringe benefit" treatment.
- The Members' share of the bottom-line (“net”) profit of an LLC is not considered earned income, and therefore is not subject to self-employment tax.
- Members are compensated using either distributions of profit or guaranteed payments. A distribution of profit allows each member to pay themselves by merely writing checks--whenever they need the money (provided the business has the available cash). Guaranteed payments represent earned income to the members, thereby qualifying them to enjoy the benefits of tax-favored “fringe benefits.”
- The Managing Member of an LLC can deduct 100% of the health insurance premiums he or she pays, up to the extent of their pro-rata share of the LLC's net profit, because the profit is considered earned income. Note: If a member has earned income, he or she will also qualify.
- As a Member, you can contribute capital or other assets to the LLC, or loan the LLC money to put dollars or value into the business. You can take dollars out by taking a repayment of your loan (plus interest), a distribution of profit or a guaranteed payment. If any of the members die, the LLC can continue to exist--subject to the unanimous positive vote on the part of all remaining members or a proviso in the Operating Agreement.
- Credibility. Having the “LLC” after your company’s name will go a long way towards establishing it as a credible company, or enhancing its current credibility, and would be an excellent way to attract potential investors looking for opportunities aligned with good organization and limited liability.
- Management Flexibility. Texas corporations are only required to list one Director position in the articles of incorporation. There are no residency requirements for the director, though he or she must be at least 18 years of age.
- Confidentiality. Only the director and the resident agents are disclosed as a matter of public record in Texas. Stockholders’ names are not a matter of public record. Further, depending on the type of formation (LLC, etc.), a corporation can hold shares of stock. There are, of course, rules requiring that any business formation (LLCs included) keep accurate records reflecting names, tax status, etc., or members, officers, stockholders, etc.
- Tax Advantages. Texas Franchise tax is computed at the rate of .25% of net taxable capital and 4.5% of net taxable earned surplus. If the amount computed under either part of the basis formula is zero or less, the tax is zero.
Texas LLC Fees and Costs
In addition to the low initial filing fee, businesses formed in Texas are subject to a minimal state franchise tax. The franchise tax is computed at the rate of: (1) .25% of net taxable capital and (2) 4.5% of net taxable earned surplus. If the amount computed under either part of the basis formula is zero or less, the tax is zero. If the amount of tax computed is less than $100, the corporation is not required to pay such amount and is not considered to owe any franchise tax for the period.
If a judgment is awarded against the LLC itself, it may be levied, and LLC’s property seized or sold in payment, much in the same manner that a corporation would be treated. Conversely, if a judgment is awarded against a particular member, and with a properly written operating agreement stating as such, distribution usually cannot be compelled to satisfy a member’s judgment debt (this is why it is critical to have a well crafted operating agreement, you’re your protection be mitigated). Creditors or judgment debtors have to satisfy themselves with a “Charging Order” that grants them rights to distributions made by an LLC to a particular member named in the judgment. This gives them the rights to that distribution, but does not affect the rights, assets, or distributions of other members or of the LLC as a whole. These types of protections characterize the attraction to LLCs by potential investors.
Forming your LLC in Texas can offer you, its members and potential investors the peace of mind that investing in your company formed as an LLC can provide a substantial shield from liability, protection for members’ assets, and superb confidentiality. Having the “LLC” after your company’s name will go a long way towards establishing it as a credible company, or enhancing its current credibility, and would be an excellent way to attract potential investors looking for opportunities aligned with good organization and limited liability. With a diligent implementation and business development strategy, you can build your business into a highly competitive, investment-attracting entity.