Benefits of a Texas LLC
A very popular entity choice in the state of Texas
The Texas LLC is a very popular entity choice. In fact, there were 192,284 LLCs filed in Texas in 2018 compared to only 24,135 corporations filed. The primary reason for forming an LLC is to obtain the personal liability protection for the owners of the business. The liability protection is a major benefit, but there are many other benefits as well, including:
- Limited Personal Liability: The owners of a Texas LLC are protected from the liabilities and creditors of the LLC as long as the LLC is formed properly with the proper documentation and operated properly. As attorneys who routinely handle Texas business formations, you can be confident that we will ensure that your LLC is formed properly. In addition, we will provide written guidance on how to operate the LLC properly so that the liability protection is not compromised.
- Perpetual Existence: Unlike a sole proprietorship, an LLC can survive the death of its owner(s). This is important because your clients, vendors, and employees want to know that the business will survive even if its owner(s) do not.
- Added Credibility & Professionalism: Whether you are forming alliances with business partners, hiring employees, or signing contracts with vendors, a business with "LLC" or "Inc." at the end of its name can have a significantly positive affect on perception.
- Tax Savings: A c-corporation is subject to double taxation (profits are taxed at the corporate level and again at the shareholder level when the corporation declares a dividend or distributed profits to the shareholders). As with any business entity, you can deduct or write off your legitimate business expenses from your LLC’s income, which can greatly lower the profits reported to the IRS.
Advantages of an LLC over other entity choices
- Tax Flexibility: An LLC can elect to be taxed as a sole proprietorship, partnership, or corporation (s-corporation or c-corporation). By default, a Texas LLC is taxed as "pass-through entity" (i.e. sole proprietorship or partnership) and all of the profits and losses of the LLC "pass through" the LLC to the members, who report the profits and losses on their personal tax returns. The LLC itself does not pay federal income taxes.
- Management Flexibility: An LLC can elect to be managed by the members or by a separate manager or managers.
- Minimal Formalities: Although the rules regarding corporate formalities have been relaxed over the years, the LLC was designed to be less formal than a corporation with less upkeep and requirements.
- Protection from Other Member’s Creditors: Another advantage of forming an LLC in Texas over a corporation is protection against outside liabilities (i.e. the liabilities of the other members). For example, if a husband and wife own an LLC 50/50 and the husband is sued for a personal obligation, the creditor (assuming they get a judgment and the judgment is not paid by the husband or his insurance) can seize the husband’s non-exempt assets, including the 50% ownership interest in the LLC. If the LLC’s operating agreement is NOT drafted properly, the husband’s creditors would own the LLC with the wife 50/50 and would be entitled to call meetings, vote at meetings, force the sale of LLC assets or the LLC itself. With a properly drafted operating agreement, the husband’s creditor in this situation would only be allowed to take whatever actual cash distributions are authorized by the remaining members of the LLC (which may be zero). The typical corporation does not have this protection from the owner’s creditors.
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