What is an LLC?

A limited liability company (LLC) is a hybrid business organization that blends the limited liability advantages of a corporation with the tax and management benefits of a partnership or sole proprietorship. An LLC can be owned by an unlimited amount of owners, called members. These members can be any entity including individuals, partnerships, trusts, estates, corporations, or even other LLCs. In Texas LLCs must be registered with the state. A certificate of formation must be filed with the Secretary of State. Generally a member of the LLC is limited in liability to the amount of their investment.
LLCs are pass through tax entities, which means that the entity itself is not taxed on income but the members are required to report and pay taxes on their share of the income (or losses). LLCs are subject to filing and sometimes paying the franchise tax in Texas. See our article What is the Corporate Tax Rate in Texas? for more information.

A Texas LLC also is not required to follow all of the statutory formalities of a corporation and has a greater range of management structures. Profit and losses may be allocated however the LLC members choose, as opposed to by percentage of ownership as in a corporation.

To form an LLC in Texas you must choose and register a business name, file a certificate of formation, create an operating agreement, and obtain your appropriate state and local licenses or permits. You choose and register your business name in Form 205 found here, at the secretary of state’s website. You will need to provide whether there is a manager of the LLC or not as well as name the organizer and determine the registered agent. All of these are required as Form 205 indicates.

Texas does not require an operating agreement to be filed with the Secretary of State, but this is a very important and highly recommended step in creating an LLC. The operating agreement structures your LLC’s finances and organization. The operating agreement puts to paper what members agree to before organization: allocation of profit and losses, member’s rights and responsibilities, and any other important governing provisions.
After registering and creating an operating agreement, be sure to get your state and/or local licenses needed to properly operate. This can include: sales tax certificates, occupancy permits, or safety/occupational licenses.

A limited liability company is one of the best business structures for Texas small businesses. It allows the flexibility needed for small businesses to compete in the modern marketplace and provides the members protection with limited liability. For more information on Texas LLCs and how to structure your Texas small business fill out the contact form at the bottom of the page or call Reidel Law Firm at 832-510-3292.