Why Should I Incorporate My Business? / How Do I Start an LLC in Texas?
By: Josh Behnke - Attorney - Managing Member, Behnke Legal Consulting, PLLC
Among the first steps that most new business owners take while organizing their venture is to hire a service or law firm to create an LLC or other business entity. Some entrepreneurs take this step because they believe it legitimizes their organization in the eyes of potential customers, others because they’ve been told without explanation that’s what they should do. Others use them as devices to create an air of anonymity regarding the true owner of their business dealings. Further, while the verb incorporate implies the use of a corporation as a business entity it has become sufficiently genericized to apply to any limited liability entity.
Although the reasons stated above all have an element of truth to them, LLCs (and other limited liability business entities) have a much more important purpose and its hidden right in the name—Limited Liability. The letters LLC are an abbreviation for the term “Limited Liability Company.” Understanding the concept of Limited Liability, however, is probably best done by contrasting it with the default state of General Liability.
Sole Proprietorships and General Partnerships
Absent the creation of a business entity like an LLC, Corporation, or Limited Partnership, an individual or group of individuals carrying on a business enterprise (even if they have an assumed name or DBA) are said to be operating as a Sole Proprietorship or a General Partnership.
The owner of a Sole Proprietorship or the partners in a General Partnership are personally liable for the debts and obligations of the business. This means if the business incurs a debt or expense the owners’ own individual assets (subject to certain limited limitations) are at risk if that business fails to pay its debt. This fact is true regardless of if they do business under their own names or under a trade name or DBA.
Legislatures around the country have recognized that this structure may inhibit otherwise-entrepreneurial individuals from starting businesses and growing their respective state’s economies. Accordingly, all States have passed versions of laws which make Limited Liability entities available.
What is Limited Liability?
Contrasted with General or Personal Liability (different names for the same thing), the concept of Limited Liability, as it applies to a business entity, is one which separates the assets of the shareholder, partner, member, or other owner of a business from the debts and obligations of the business itself.
Said differently, when a business which has Limited Liability protections incurs a debt or liability, only the business is responsible for paying that debt or liability. The owners of that business are not responsible for servicing that debt or obligation out of their personal assets. Even more importantly, this protection extends to all kinds of liabilities including contractual obligations, judgment liens, and taxing obligations as well.
The importance of the Limited Liability provided by a properly organized LLC, Corporation, or other limited liability entity cannot be understated. It is the principal driving force behind the modern idea of a corporate structure and along with legislative tax incentives is one of the most motivating factors governments across the country and world have created to encourage entrepreneurs to take the risk and start a business.
While obtaining the protection afforded by the concept of Limited Liability is the top reason to operate a business through an LLC or other corporate form, there are a myriad of other incidental benefits as well. As stated above, appending “LLC” or “Inc.” or “Ltd.”, when appropriate, may add an air of legitimacy to a new venture – signaling to customers that the enterprise is not a fly-by-night operation that will be unreachable in the event of a problem.
Additionally, a properly structured LLC can provide a level of anonymity to its owners. In Texas, only the Managers and Registered Agent of Manager Managed LLCs are required to list their names publicly with the Texas Secretary of State. There is no legal requirement that the Managers have any ownership stake in the company thus keeping the names of company owners out of the public record.
Forming an LLC or other legal entity can also influence the taxes of the business owner. LLCs fall under the “check the box” category for federal income tax treatment. Depending on circumstance, this can lead to tax benefits or consequences for the new business owner and is a reason that a full suite of professionals should be involved any time a new entity is formed, including a Business Lawyer, CPA, or tax professional, and other professionals such as Bankers and Insurance Agents.
LLCs and other entities can be used to help organize assets and create “buckets” of liability. Beyond separating the personal and business assets of an entrepreneur, investors may find that their venture is well situated to utilize a Series LLC or Multi-Company structure to create Limited Liability shields between major asset groups or revenue streams.
How Do I Form an LLC?
Fortunately, forming an LLC or other Limited Liability entity like a corporation or limited partnership requires very little from the business owner outside of a choice of name, registered agent, contact and mailing addresses, and designating managers, or other key individuals depending on the type of entity. Unfortunately, many entrepreneurs fall into the trap of thinking that the initial state filings are all they need or that documents prepared and distributed on a mass basis by internet services will be sufficient for their individual needs.
It is always best practice to have a complete set of organizational documents prepared that contain specifically tailored provisions which address the limitation of liability for owners, employees, agents, and other individuals involved with the business. It’s also a good time to build out internal procedures regarding voting rights, ownership percentages, and plans regarding how to resolve disputes in management. Additionally, the law firm or professionals utilized in the formation process can advise on the best practices for utilizing the new company and avoiding the threat of a creditor “piercing the corporate veil” and disregarding the Limited Liability protections inherent to the entity.
Finally, an LLC or other corporate form must be funded with assets which will receive the Limited Liability benefits discussed above. “Funding” means taking the extra step of formally transferring title to assets via deed, bill of sale, or corporate resolution or of opening bank accounts in the name of the new entity to segregate company funds from personal funds.
This blog is intended to provide an initial overview of the reasons to incorporate or form a Texas LLC and the initial steps required of any business owner or investor desiring to do so. It is made available by Behnke Legal Consulting, PLLC for educational purposes only and does not provide specific legal advice. It does not create an attorney-relationship or constitute and adequate substitute for direct legal advice from a licensed attorney. Please feel free to reach out directly to email@example.com if you have any questions or wish to learn more.