When it comes to choosing a start a new business, the options can seem overwhelming.
If you need help choosing the right type of business entity, click here for a guide on Agencies, Corporations, S Corps., Limited Liability Companies, Sole Proprietorships, and Partnerships.
One option is the Limited Liability Company, or an LLC. An LLC has some distinct benefits. For example, with an LLC, the owners, which are known as members, are protected from personal responsibility of the company’s debt. This means that if someone were to sue the LLC, the member’s personal assets would be protected.
An LLC also means that the members can choose to be taxed like a Corporation or like an S Corp. In a corporation, the corporation is taxed like an entity, which means it will be taxed on a Corporations tax rate and normally is subject to double taxation on income. In a S Corp the taxation passes through to the individual and is only taxed once. This allows the taxation rate to be lower at an individual rate. An LLC can be taxed like a Corporation or can choose to use the pass-through taxation rate like an S Corp.
Also, the management structure of an LLC is very flexible. It is up to the members to choose how they want the LLC to be structured.
- How to Form an LLC:
To form an LLC, the members must first choose a name that is distinguishable from other business entities already on file. The Texas Secretary of State’s website can help check for names for availability on the SOSDirect website. Each search is $1. If the members want to reserve a name, they can do so by filing out a Form 501, available here. The form reserves the name for 120 days at a time and allows for 30-day extensions. The name must include L.L.C. or L.C. in the title. The fee to reserve a name is $40.
Next, the members will need to file a Certificate of Formation with the Texas Secretary of the State. The Certificate of Formation will give the name, the type of entity being formed, and whether or not the LLC will have managers. If the LLC will have managers, the form will need to include their names and addresses. If not, the Certificate of Formation will need the name and address of each initial member of the LLC. A form of the Certificate of Formation can be completed on the Texas Secretary of State’s website or by mail and requires a filing fee of $300.
Then, the LLC must appoint a registered agent and office in Texas. A registered agent is a person whom can be served process, notice, or demand as required by Texas law. Registered agents also must be able to be served in written or electronic form. A registered office is a physical address where the registered agent can be served during business hours. The office of the agent can be the same as the L.L.C.’s place of business but it cannot be a post office box that is part of a commercial mail service unless it is registered to the agent.
The LLC may need to get a business license or register with the Texas comptroller of Public Accounts if the business will be selling goods and collecting a sales tax. Click here if you want to learn more details on the “Who, What, When, Where, and Why of Sales Tax for the Business Owner”. Finally, if the LLC has more than one member it must register for an Employer Identification Number (EIN) with the IRS. If the LLC only has one member but has employees, the LLC will also need an EIN.
Next, the members of an LLC need to hold an organizational meeting where they: 1) appoint officers, if desired; 2) detail out the different ownership percentages of the LLC; 3) approve the form of the Company Agreement; 4) authorize the opening of a bank account, along with other matters.
The members need to have a Company Agreement prepared and signed. The Company Agreement deals with matters such as: 1) how the LLC will be managed; 2) membership rights, responsibilities, and voting powers; and 3) what happens if a member dies, wants to leave the LLC or desires to sell the member’s interest in the LLC.
Finally, it is best to have the organizer obtain a manual of the LLC as a place to retain important organizational and operational documentation and issue membership certificates which represent the ownership interest of each member in the LLC.
The Takeaway: When creating an LLC, you’ll need to create a distinguishable name, file a Certificate of Formation with the correct fees, appoint a registered agent and office, conduct an organizational meeting; and enter into a complete Company Agreement
– The Business Team
Scott | Josh | Jeremy
The Allen Firm, PC
181 S. Graham Street | Stephenville, Texas 76401
Ph: 254.965.3185 | Fax: 254.965.6539