Texas LLCs – Preferred Entity of Choice

If you’re wondering why everyone (and their mother) have hopped onto the LLC bandwagon as their preferred liability-free entity of choice in Texas, you don’t have to look too far back in time beyond 2006. While LLCs have been in existence since the early 1980’s, LLCs, like many of there sister liability-free entities, suffered from the dreaded Texas Franchise Tax. Except, that is, for limited partnerships, who inexplicably (well, not really . . . can you say: “oil & gas lobby”) were exempt from the Texas Franchise Tax. That was until 2006, when the Texas legislature got wise and threw all liability-free entities, including limited partnerships, into the franchise tax pot. Once that happened, most new ventures grew weary of the old “having to form a separate corporation to act as the general partner” trick associated with limited partnerships, and went directly to the much, much simpler and equally risk-free choice of forming limited liability companies. Truly, I can’t remember the last time a client asked me to form a limited partnership!

So, as a refresher, why are LLCs so awesome? For starters, LLCs can have as many Members (owners) as you like (as opposed to S-Corps, which are limited to 100 shareholders who must all be U.S. citizens); of course, everyone loves the pass-thru feature for income and losses, especially losses, which would be trapped by a traditional corporation; and one of my favorites, LLCs can distribute profit and losses in any manner they want (provided there’s a business purpose) as opposed to their stated ownership percentages. I have many clients ask me if profits can be allocated differently even though they and their partner own the company “50/50”. This happens a lot when one partner contributes most of the upfront capital and demands the profits upfront until their capital contribution plus a preferred return are paid back. Finally, another favorite of mine is that single-member LLCs don’t need to file a tax return! Nope, the IRS allows these single-member entities to instead file a Schedule C together with the owner’s Form 1040. This makes the tax filing process much simpler, and obviously makes LLCs super attractive. If you need help forming a new Texas LLC, feel free to call me. My standard package can’t be beat and once I have your information, I can normally get it all done within 48 hours.

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