The Nomenclature of Texas Business Entities

The Governing Hierarchy of business entities is quite confusing to many people. However, it is important to understand the difference between the positions and titles as they relate to the various types of entities available.

In Texas, the most popular types of business entities include corporations, limited liability companies (LLCs), and partnerships. Each type of business entity has its own nomenclature and types of governing documents. The governing documents are what form the rights, obligations, and duties of the investors and governing body. A separate post will address the differences in the governing documents.

Corporations

Corporations are comprised of stockholders, a board of directors, and officers. The stockholders elect the board of directors. The board of directors appoints the officers. Generally, stockholders elect the board of directors on an annual basis by a majority of stockholder interest after quorum is met at the annual stockholder meeting. Quorum typically consists of a majority of the issued and outstanding stock. The board of directors typically appoint the officers by a majority of the board of directors. Usually, neither members of the board of directors nor officers must be stockholders.

Limited Liability Companies (LLCs)

The owners of interests in an LLC are called members. Instead of a board of directors, LLC’s have managers. Most LLC’s don’t have officers, although they may. Rather, officer duties are usually reserved to the managers. A sole manager literally controls all the day-to-day operations of the LLC. Also, managers are not usually elected to terms like corporations. Instead, managers usually serve until they are removed or resign. Therefore, an allotted time to review the governing body of an LLC does not usually exist. Instead, the members must take such action upon themselves. Further, the removal of a manager often requires a supermajority or unanimous vote. Managers usually do not need to be members.

Partnerships

Texas recognizes a few forms of partnerships, but the most popular types are general partnerships and limited partnerships. The investors in a general partnership are all called general partners. In addition, each general partner usually has total control over the partnership, subject to a partnership agreement.

Investors in limited partnerships are called partners, but they are separated into two separate primary classes, general partners and limited partners. General partners control the day-to-day operations of the limited partnership. Limited partners are more like members in an LLC. They only have the right to vote on the identity of the general partner and fundamental business transactions. Also similar to LLC’s, general partners do not usually serve stated terms. Instead, general partners usually serve until they are either removed or resign. Lastly, the removal of a general partner usually requires either a supermajority or unanimous vote of the remaining partners.

The nomenclature afforded to the different types of business entities in Texas usually causes a bit of confusion among investors and entrepreneurs alike. However, the governing documents always control the rights, duties, and obligations of the parties. So, investors and entrepreneurs should meet with a business attorney to make sure the governing documents reflect a realistic and workable vision of how a business should run.

This post is for information purposes only. Robert Newton is an attorney based out of Frisco, Texas, that assists clients in business law, real property, and estate planning.