An LLC stands for the words limited liability, and is essentially a business structure that combines features of a corporation with those of a partnership, allowing you to get pass-through taxation as well as limited liability; it’s the simplest way of structuring your business in order to protect your personal assets in the event your business ever gets sued. LLCs can be owned by more than one person, with the owners known as ‘members’ of the LLC, and are the fastest growing business type in the U.S. because of the special quirks you get.
LLCs are very, very popular
Texas LLCs are a very popular entity choice. In 2018, there were 192,284 LLCs filed in Texas, while only 24,135 corporations were filed for – a stark contrast. There is one main reason most business owners gave for this, and that is the personal liability protection for owners. But this wasn’t the only reason – there are many, many other advantages to having an LLC.
You can risk piercing the corporate veil
As having limited liability is the most popular reason why people pick LLCs as a business structure, you obviously want to keep this intact. However, a lot of people make some mistakes and end up losing this limited liability, which is called piercing the corporate veil. This is when your personal and business assets get mixed accidentally and now you’ve lost the liability. Now everything in your home is at risk. There are a few things you can do to avoid this.
Opening a business bank account is the main thing. It will separate your business assets from personal ones, so you won’t ever get confused between them and it has the added benefit of making tax filings easier. With a business bank account you’re also advised to get a business credit card – this way your spending expenses for home and business are separate too.
You should also have your important company documents signed by a representative, like a registered agent, instead of you or other members. This will help to separate you from being liable.
There’s a lot of tax flexibility
Having an LLC in Texas is great from a tax point of view. There is flexible tax treatment, which means an LLC can choose how it would like to be taxed. An LLC can elect to be taxed as a sole proprietorship, partnership, s-corp or a c-corp.
By default all Texas LLCs are taxed as pass-through entities, so all profits and losses pass through to the members, who then report profits and losses on their personal tax returns. The LLC itself does not have to pay federal income taxes (unless it chooses to be taxed like a corporation).
You get protection from other members’ creditors
Forming an LLC in Texas over a corporation provides you with even more protection against outside liabilities i.e. the liabilities of other members. If one of the members is sued for a personal obligation, the creditor can seize that member’s assets that don’t have limited liability protection on them, including the part of the LLC that they had.
Operating Agreements are very, very important
In Texas you aren’t legally obligated to have an operating agreement. But this is important for so many things. If, like above, one of the members’ assets and rights in the LLC are seized, the creditors who claimed them would own that part of the LLC and would have a right to call meetings and vote at them, forcing the sale of the LLC and ruining all your work. If you have a properly drafted operating agreement, the creditors may not be allowed to have this power – instead only taking the cash distributions. Typically corporations don’t have this type of protection.
TRUiC has a great deal on how to form an LLC in Texas, as well as more useful tips. Visit their site to learn more.