Welcome to entry #7 of our business formation series—Selecting a Business Structure. Long time readers will remember that some business structures offer more protection that others from personal liability.
If you will recall from Selecting a Business Structure, a Limited Liability Company (“LLC”) is created by filing a certificate of formation with the Texas Secretary of State. The LLC is a distinct type of entity that has the powers of both a corporation and a partnership.
What are the basics of a Limited Liability Company?
Limited Liability Company means an entity governed as a limited liability company under Title 3 or 7 of the Texas Business Organizations Code. Title 3 is applicable to limited liability companies, while Title 7 applies to professional limited liability companies.
—See Definitions—Tex. Bus. Org. Code §1.002(46)
A Limited Liability Company can have Members and Managers. It is required to have at least one Member. It is not required to have Managers. The number of Members and Managers should be specified in the LLC’s company agreement.
—See Members Required—Tex. Bus. Org. Code §101.101(a)
A company agreement is any agreement, written or oral, of the members concerning the affairs and or the conduct of the business of a Limited Liability Company. A company agreement of an LLC having only one member is not unenforceable because only one person is a party to the company agreement.
—See Definitions—Tex. Bus. Org. Code §101.001(1)
What is a Member?
A member is a person who has been admitted as a member in the Limited Liability Company under its governing documents.
—See Definitions—Tex. Bus. Org. Code §1.002(51)
A person may be a member of an LLC unless she lacks capacity (i.e., incompetent, minor, etc.). A person is not required to make a contribution to the company, pay cash or transfer property to the company, or assume an obligation to make a contribution to the company, as a condition to becoming a member.
—See Qualification for Membership—Tex. Bus. Org. Code §101.102
A member of a Limited Liability Company may not withdraw or be expelled from the company. His Membership interest may be wholly or partly assigned, though an assignment does not entitle the assignee to any management authority.
In order to obtain management authority, the person would need to become a member pursuant to the company agreement, and with the approval of the other members.
—See Withdrawal or Expulsion of Member Prohibited—Tex. Bus. Org. Code §101.107; —See Assignment of Membership Interest—Tex. Bus. Org. Code §101.108; &Rights and Liabilities of Assignee of Membership Interest after Becoming Member—Tex. Bus. Org. Code §101.110
What is a Manager?
A manger is a person designated as a manger of an LLC that is not managed by members of the company. The managers of an LLC may consist of one or more persons. A manager of an LLC is not required to be a Texas resident or a member of the company.
—See Definitions—Tex. Bus. Org. Code §1.002(51) & Number and Qualifications—Tex. Bus. Org. Code §101.302
The governing authority of an LLC consists of either the managers or the members, depending upon the company’s certificate of formation. The governing authority of an LLC manages the business and affairs of the company.
—See Governing Authority—Tex. Bus. Org. Code §101.251 & Management by Governing Authority—Tex. Bus. Org. Code §101.252
Basically, the LLC’s governing authority, whether members or managers, acts as a board of directors would in a Corporation.
Why Choose an LLC?
The LLC formation has quickly gained popularity in the last decade, and is one of the newest forms. Business owners like the flexibility of an LLC in the management style, and the limited liability protection afforded to the members.
Except as and to the extent the company agreement specifically provides otherwise, a member or manager is not liable for a debt, obligation, or liability of an LLC, including a debt, obligation, or liability under a judgment, decree, or order of a court.
—See Liability for Obligations—Tex. Bus. Org. Code §101.114
Additionally, a member of an LLC may not be named as a party in an action by or against the LLC unless it is brought to enforce her right against or liability to the company. Business owners are more often choosing the LLC because it can be managed like a partnership or a corporation, it can elect S-Corp or C-Corp status, and the liability protection is broad.
—See Parties to Actions—Tex. Bus. Org. Code §101.113
Why Should I Avoid LLCs?
LLCs can be more expensive and time-consuming than the non-filing entities in the initial set up. Though Texas law allows for an unwritten company agreement, it is highly recommended that you speak with your business law attorney regarding how you would like your LLC to be managed.
Also, you must diligently follow the rules in your company agreement and Texas law to avoid the imposition of personal liability.
What Else Should I Know?
This series has been a limited overview of the more common types of entities in Texas. Each form has many other questions and nuances that must be considered before formation.
If you are looking at opening a business of any kind (including your grandmother’s quilt sales), speak with your Business Law Attorney to ensure you are complying with all city, state, and federal laws regarding employment regulations, taxation, and other laws applicable to your particular business.
–Authored by Carrie A. Harris, Esq.,
Matthew Harris Law, PLLC – Business Law Division
1101 Broadway, Lubbock, Texas, 79401-3303
Tel: (806) 702-4852 | Fax: (800) 985-9479