What is a Limited Liability Corporation?

A Limited Liability Corporation (LLC) is a hybrid entity that combines the characteristics of a corporation and a partnership/sole proprietorship. Texas was the fourth state to adopt an LLC statute and now every state has an LLC statute.

LLC’s have the unique ability to combine the best features of various business forms in a single business organization.  LLC owners obtain both a corporate-style liability shield and the pass-through tax benefits of a partnership. All equity holders of an LLC have the limited liability of corporate shareholders even if they participate in the business of the LLC.

Let us discuss some salient features of a limited liability corporation in the following paragraphs.

Formation of a Limited Liability Corporation

A Limited Liability Corporation is formed when one or more persons file a certificate of formation with the Texas Secretary of State along with a $300 filing fee.

The initial certificate of formation must contain the following information:

1. the name of the LLC,
2. a statement that it is an LLC,
3. the period of its duration, unless such duration is perpetual,
4. its purpose, which may be any lawful purpose for which LLCs may be organized,
5. the address of its initial registered office and the name of its initial registered agent at that address,
6. if the LLC is to have a Manager or Managers, a statement to that effect and the names and addresses of the initial Manager or Managers, or if the LLC will not have Managers, a statement to that effect and the names and addresses of the initial Members,
7. the name and address of each organizer,
8. specified information if the LLC is to be a professional LLC, and
9. any other provisions not inconsistent with law.

The LLC’s existence begins when the Secretary of State files the certificate of formation unless it provides for delayed effectiveness.

The name of an LLC must contain words or an abbreviation to designate the nature of the entity. The designation may be any of the following: the words “limited liability company,” “limited company,” or an abbreviation of either phrase.

Contract – Company Agreement

Most of the provisions relating to the organization and management of a limited liability corporation and the terms governing its securities are to be contained in the LLC’s company agreement, which will typically contain provisions similar to those in limited partnership agreements and corporate bylaws. A company agreement may be oral or written, but due to the complexity of matters typically addressed in one, it is advisable to have a written company agreement.

Members and Managers

The governing authority of a Limited Liability Corporation consists of:

1. the managers of the LLC, if its certificate of formation states that it will have one or more managers; or
2. the members of the LLC, if its certificate of formation states that it will not have managers.

The owners of an LLC are called "Members" and are analogous to shareholders in a corporation or limited partners in a Limited Partnership (link to the article about LPs).

The “Managers” of an LLC are generally analogous to directors of a corporation and are elected by the Members in the same manner as corporate directors are elected by shareholders.

In Texas, an LLC may be structured so that management shall be by the Members as in the case of a close corporation or a general partnership, and in that case, the Members would be analogous to general partners in a general or limited partnership but without personal liability for the LLC’s obligations.

In Texas, any “person” may become a Member or Manager. Because of the broad definition of “person”, any individual, corporation, partnership, LLC or other person may become a Member or Manager.

Management of a Limited Liability Corporation

An LLC may be member-managed, where all of the members of the LLC participate in the management of the LLC, or manager-managed, where the members surrender management duties to one or more managers. A manager doesn’t have to be a member of the LLC.

The business and affairs of an LLC with Managers are managed under the direction of its Managers, who can function as a board of directors and may designate officers and other agents to act on behalf of the LLC. A Manager may be an individual, corporation, or other entity, and it is possible to have an LLC which has a single Manager that is a corporation or other entity.

The certification of formation or the Company Agreement, however, may provide that the management of the business and affairs of the LLC may be reserved to its Members. Thus an LLC could be organized to be run without Managers, as in the case of a close corporation, or it could be structured so that the day to day operations are run by Managers but Member approval is required for significant actions as in the case of many joint ventures and closely held corporations.

Members and Managers acting on behalf of an LLC should disclose that they are acting on behalf of the entity and that it is an LLC. Under common law agency principles, an agent can be personally liable on a contract made for an undisclosed or unnamed principal. Under Texas law, the following are agents of an LLC: (1) any officer or other agent who is vested with actual or apparent authority; (2) each Manager (to the extent that management of the LLC is vested in that Manager); and (3) each Member (to the extent that management of the LLC has been reserved to that Member).

Fiduciary Duties

The duty of Managers in a Manager-managed LLC and Members in a Member-managed LLC to the LLC is generally assumed to be fiduciary in nature, measured by reference to the fiduciary duties of corporate directors in the absence of modification in the Company Agreement. The fiduciary duties of Managers could also be measured by reference to partnership law or the law of agency.

Liability

Except as provided in the Company Agreement, a Member or Manager is not liable to third parties for the debts, obligations or liabilities of an LLC, although Members are liable for the amount of any contributions they agreed in writing to make.

Flexible Taxation Structure

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.

If properly formed, there are multiple advantages of forming an LLC in Texas, as further detailed in (link to the article on DBA v.s LLC). Please contact a business attorney to ensure your LLC is structured in a way to maximize your benefits.