Texas LLC’s and Corporations

Several different types of business entities exist in the State of Texas. Here, I will speak to the more popular ones, the corporations and limited liability companies.

Corporation

Corporations are probably the most statutorily recognized entity. Most of the stock listed on the stock exchanges are corporations. In Texas, they carry the moniker “Inc.,” “Corporation,” “Incorporated,” “Corp.,” “Company,” or “Co.” after its trade name. The owners of a corporation are called stockholders or shareholders. The distributions of profits received by stockholders are called dividends.

The stockholders must hold meetings annually. At the annual meeting, stockholders elect a board of directors. The board of directors govern the direction of the corporation. Also, the board of directors appoint the officers of the corporation.

All corporations in Texas must have at least two officer positions, a president and secretary. The two positions may be held by the same person, whom may also be the sole member of the board of directors and the sole stockholder.

Stockholders, in their nature as a stockholder, are not typically liable for the liabilities of the corporation. However, the parties involved with a corporation need to follow the advice of their Texas attorney on how to manage the corporation to ensure the limited liability position. Corporate funds should not be commingled with personal funds. Annual meetings should be held. The corporation should be adequately capitalized. More factors exist, too, but those are some main ones.

Texas corporations require a Certificate of Formation to be filed with the Texas Secretary of State. In addition, each corporation requires bylaws and an organizational meeting (or a written consent in lieu of the organizational meeting). Further, minutes should be held for each meeting of the stockholders and directors.

Limited liability Company (LLC) – A Texas limited liability company is a bit less formal than a corporation. An LLC’s owners are called members. A Texas LLC can be governed by either members or managers (which is a sort of combination of a board of directors and officers). The filing of a certificate of formation is required to form a Texas limited liability company. In addition, the LLC needs a company agreement and organizational minutes (or a unanimous consent in lieu of an organizational meeting). Members of a Texas limited liability companies should also hold annual meetings.

The limited liability attributes of an LLC are similar to that of a corporation. So long as the rules are followed, then the members should not be held liable for the liabilities of the limited liability company. However, limited liability companies can offer a somewhat unique protection in Texas. In Texas, even if the members may be held liable, it is usually done through a charging order, which essentially means the judgment can only attach to distributions from the LLC.

From a tax perspective, limited liability companies and corporations are quite different depending upon certain tax elections. The typical corporation is a subchapter C corporation, which means that the corporation is taxed and then dividends are taxed. However, a corporation can also be classified as a subchapter S corporation. Subchapter S corporations act a bit more like partnerships and pass-through any profits directly to the stockholders’ taxes. The corporation itself does not pay income tax.

Limited liability companies are not even recognized by the internal revenue service. By default, LLC’s are classified as a partnership (if there are two or more members) or a sole proprietorship (if the LLC only has one member). However, limited liability companies may elect to be classified as a subchapter C or subchapter S corporation, as well.

Robert Newton is an attorney based in Frisco, Texas, that practices real estate law, business law, corporate law, and estate planning. This post is meant for informational purposes only and does not constitute legal advice.